Hooker Furnishings Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Welcome to EQB's Earnings Call for the Q2 of 2023 on Wednesday, August 2, 2023. At this time, you are in a listen only mode. Later, we'll conduct a Q and A session for analysts. Instructions will be provided at that time. It's now my pleasure to turn the call over to David Lee, Senior Manager of Investor Relations for EQB, please go ahead.

Speaker 1

Thanks, Colin. Your hosts today are Andrew Moore, President and Chief Executive Officer and Chadwick Westlake, Chief Financial Officer. For those on the phone lines only, we encourage you to log on to our webcast as well to review our company's quarterly investor presentation. Presentation includes on Slide 2 EQB's caution regarding forward looking statements as well as the use of non IFRS measures on this call. All figures referenced today are adjusted or applicable or otherwise noted.

Speaker 1

Now my pleasure to turn the call over to Andrew.

Speaker 2

Thanks, David, and good morning, everyone. As this year and decade proved, Equitable was consistently Putting great numbers on the Board. Through effective execution of long term strategies, those numbers include Q2 earnings of $115,500,000 an all time quarterly record and ROE of 18.3%, which adds to EQB's status as the Canadian Banking Industry's leader Shareholder value creation. We regularly assess the 10 year total shareholder return of all Canadian and S and P 500 Banks. This week EQB is on top and it certainly is nice to see us outperforming all of the leaders on Wall Street and Canada's largest banks on this important outcome for shareholders.

Speaker 2

We do not take this performance for granted. This also comes while we firmly believe a wide discount remains in the value of our bank for investors. Reminds us that we must stay true to our capital allocation, Broadridge's business model and Challenger Bank approach and all fronts where it can be positioned to continue this return trend for the next 10 years and beyond, outperforming our industry in a very meaningful way. Another figure that delights me is 543,000, the number of Canadians now relying on Canada's Challenger Bank to deliver our mission of changing banking to enrich people's lives. We're making a concerted effort to grow and engage our customer base through innovative value enhancing services.

Speaker 2

Those efforts are working. We're also an institution that responds to challenges. During this time of higher interest rates, our processes and monitoring activities are keeping our credit book in good shape. Chadwick will speak to results and the progress of our Concentra Bank integration plan. For my part, I'll discuss conditions in our priority markets, updated increased 2023 earnings guidance, Innovations to Watch For and a comment on our regulatory development.

Speaker 2

1st, market conditions. As expected, the 10 bank of care and policy interest rate increases totaling 4.75% since March of 2022. And the resulting slowdown in the housing market reduced single family mortgage application volumes compared to prior periods. At the same time, loans are staying on our books for longer and renewals are stronger as more customers opt to remain in their homes. The housing market has gone through a correction and prices are now showing signs of improvement.

Speaker 2

At the very least, there seems to be a floor under house prices That gives us more confidence in our credit outlook for that part of the book. With growth of 3% through June, we now expect the Bank's Conventional personal lending portfolio to grow 5% to 8% for the 10 months ended October 31. We will provide our 2024 outlook when we report our Q4 results in December. Now I can share that we expect higher growth next year, a reasonable assumption given the housing markets fundamentals fueled by population growth, some pent up demand caused by current housing market conditions and presumably by then more stability in interest rates. In commercial, our priority market is multifamily, including affordable housing, where demand for CMHC Insured products is strong.

Speaker 2

From a risk perspective, we like our positioning as over 2 thirds of our commercial loans under management are CMHC insured. I encourage you to review past disclosures, which will help you get very comfortable with our commercial lending activities. With growth of 5% through the first half of twenty twenty three, we now expect the conventional commercial portfolio to expand 8% to 12% for the 10 month fiscal reporting period without degradation in our risk profile. Both will be faster in a short lending where we are protected from credit loss by the Government of Canada. Turning to liquidity and funding market, it appears the fallout from U.

Speaker 2

S. Bank failures earlier in

Speaker 3

the year continues to be contained.

Speaker 2

Structurally, it's evident that Canada enjoys an advantage over the U. S. While U. S. Money market funds have mechanisms to deposit funds directly with the Federal Reserve, Taking liquidity out of the banking system.

Speaker 2

In Canada, money really only moves between banks, an important difference. For our bank, total deposit growth was 37% year over year with ample liquidity on the balance sheet, a well positioned liability structure and access to liquidity to fund the operations of the bank. Our foundation is strong. Moving to earnings guidance, We are aligning our financial results calendar to improve our reporting comparisons to Canadian Bank peers. 2023 fiscal year will end on October 31, covering only 10 months on a one time basis.

Speaker 2

To make it easier to track progress, in the Q2 MD and A, we provide guidance for the 10 month reporting period ending with a 4 month Q4 as well as 12 months guidance as a relative checkpoint if we had not been changing fiscal years. Not to be lost in the recap, we raised guidance for EPS, ROE and book value per share growth. As a slide in our deck and the table in our MD and A show, through June, we are performing well ahead of original guidance, including adjusted EPS Growth of 20 7 percent year to date versus original calendar guidance of 10% to 15%. This momentum gives us confidence to increase expectations. Our next quarterly report is set for December 7 and we'll publish our regular detailed annual guidance for next year at that time.

Speaker 2

I believe we are the Canadian bank with the most upside in the industry and we're investing in ways that are adding value for our customers and momentum for Equitable. The recent introduction of the EQ Bank card now in the hands of 75,000 Canadians I've used it in 140 countries. Last month's addition of the mobile wallet to hold back card and benefits from the launch of EQ Bank Services in Quebec are all having their desired effect on customer expansion and engagement. At the end of the quarter, customer growth had increased 31% year over year. As of today, over 375,000 Canadians now have EQ Bank accounts.

Speaker 2

As a result of adding the value and functionality to make the EQ Bank platform capable of serving Canadians' everyday banking needs, we experienced a good increase in essential customers who deposit payroll into EQ Bank, a sign of trust and belief that's evidenced by our customer satisfaction measures. Daily transactions also illustrate that customers increasingly see EQ Bank as a sound alternative to traditional bank checking accounts. In late July, we had another reason to make bank with Equitable by introducing the market's first all digital first home savings account The EQ FHSA savings account is a tax deductible way for customers to accumulate a down payment for a home purchase much faster than rival banks because of our high everyday deposit rates and 0 fees. The EQ FHSA is completely free and there's no need to visit a branch to start an account. In just 2 weeks since launch, Customers have opened more than 2,400 EQ Bank FHSAs.

Speaker 2

All marks to the EQ team for working through CRA reporting requirements to get this product to market and to the Concentra team for introducing it to credit unions through our Concentra Bank partner portal. AD Credit Unions have already signed up to participate, a great start. Well, generally, we're working hard to increase EQB's presence The credit union system through outreach activities, including our attendance at the World Credit Union Conference in Vancouver. At the conference last week, I came away with a reinforced view that there is tremendous opportunity to work closely with credit unions to build value for all. And we're actively pursuing a number of initiatives to make that happen.

Speaker 2

Progress in our reverse mortgage business also has been positive. This fall, you will see a more permanent advertising message to drive enhanced consumer awareness of our differentiated reverse mortgage solutions. Around the world, we see the difficulties large banks have in serving small business effectively, with Canada being no exception to that general reality. We're on the cusp of changing that too as we put the final touches on our first EQ Bank Small Business Account. To start, this will be a minimum viable product on desktop and then a mobile app.

Speaker 2

It promises to be a game changer for business owners due to the digital experience, elimination of bank fees and good interest on deposits in the accounts. I'm really excited about this one. A final thought on a regulatory development. Osgood recently proposed changes to capital To address risks related to variable rate mortgages, EQB has no exposure to these increased capital requirements because we stopped offering berms 12 years ago and moved to adjustable rate mortgages or ARMs, which can adjust payment to keep amortization of the original terms. Financial institutions are always risks to address and we are diligently ensuring that our bank prudently managed to navigate the challenging economic environment.

Speaker 2

We are feeling confident and I think justifiably so in EQ's positioning as Canada's Challenger Bank. 23% year over year dividend increase we announced is delivering on the commitment we have made to shareholders and a reflection of the confidence,

Speaker 3

The bank's place in the market.

Speaker 2

Now over to you, Chadwick.

Speaker 4

Thanks, Andrew.

Speaker 3

I'll be

Speaker 4

brief as Q2 year to date results demonstrate how well EQB is performing to guidance despite the economic backdrop. With year to date ROE now at 17.5%, Our outlook for the rest of 2023, we're well positioned to achieve our goals with momentum into fiscal 2024. Q2 reflects the 2nd consecutive quarter of full results from Concentra Bank. In this short time, what we believe to be true about the value we could create with this acquisition Translating well. We set a target to achieve annualized cost savings of $30,000,000 within 18 months to 24 months post closing.

Speaker 4

This has been achieved ahead of schedule. This progress is reflected in our strong earnings momentum ahead of guidance year to date and our efficiency ratio closer to historical trending at 42.8%, a 2.6 percentage point improvement from Q1. This is also particularly strong given the prior efficiency ratio of Concentra was nearly 70%. We continue to invest in the Concentra technology migration, but the adjustments in the quarter further narrowed, which you see between reported and adjusted figures. In general, I would call primary financial metrics for this integration complete.

Speaker 4

We are winning in service delivered to our new customers from Concentra and the credit union partners we serve. And the technology work will continue in the year ahead. In Q2, the most notable adjustments to our reported results included 3,400,000 pre tax related to integration costs, down from $4,700,000 last quarter. We also made a couple other adjustments, including removing the one time $28,000,000 non interest revenue benefit from a strategic investment that I'll speak more about in a moment. Today, I'll complement Andrew's comments with a few key focus areas: margin and funding, non interest revenue, credit performance and lastly, ratting out 2023 guidance.

Speaker 4

First margin, this remains a distinct competitive advantage that was proven again in Q2. At 1.99%, NIM expanded 7 bps from Q118bps year over year. This trended even higher than target with growth across our conventional loan portfolios and yields on those portfolios growing at a faster rate than our diverse funding costs, plus higher sequential prepayment income. You'll recall that prepayment income accelerated during the pandemic and dropped off when rates started climbing. Over the past couple of quarters, we're trending back towards a more normalized level.

Speaker 4

The strong net interest margin led to a 6% increase in net interest income over Q1 and a 50% expansion year over year including the benefit of Concentra. We're getting the expected lift from our long term efforts to diversify and strengthen sources of low cost funding. Retail and securitization funding markets continued to be liquid and efficient for our strategy. In terms of stability, 95% of our deposits continue to either be term or insured. Our match funding focus and approach to hedging are serving us well.

Speaker 4

Beyond direct deposits, our funding stack contains a variety of wholesale options, including $1,700,000,000 of covered bonds, dollars 1,900,000,000 of deposit notes, dollars 2,200,000,000 of credit union deposits and $102,000,000 of strategic corporate and institutional partnerships. Credit union deposits declined sequentially aligned to seasonal expectations for the segment, consistent with past patterns at Concentra Bank. I said last quarter that you should expect to see us in the market for a 4th covered bond issuance in Europe, and we delivered that in Q2 with a successful €300,000,000 offering at 52 bps over the euro mid swap rate, which translates to SEDAR plus 68 bps. We will remain a regular issue of covered bonds in Europe as we see opportunity to add margin tailwind with this strategically important funding source. Our capacity for issuance expanded with Concentra Bank, another synergy.

Speaker 4

We've talked in the past about the low deposit beta largely attributed to EQ Bank. This continues to translate on our margins while giving our customers a great deal, including competitive everyday savings rates and a host of no fee banking services. Sequential growth of 9% in EQ customer accounts, 35% growth in transactions and its steady record high 51% engagement score through the 1st 6 months of the year demonstrate our expanding franchise value. We are focused in particular on growing EQ Bank customers And this is trending extremely well on a daily basis. The closets are below our prior targets, but that's the outcome of steering away from short term competitor promotions and instead focusing on leveraging all of our various funding levers, while building the long term value of the bank with a customer lifetime value acquisition cost ratio of at least 7 to 10 times.

Speaker 4

We now expect EQ deposit growth of 5% to 10% for the 10 month period ending in October with an uplift from our new FHSA and more to come after small business launches in EQ Bank. To complete the revenue picture,

Speaker 5

non

Speaker 4

interest revenue increased 18% over Q1 and more than doubled

Speaker 6

year over year.

Speaker 4

Reflecting our strategy, non interest revenue accounted for 12% of total revenue compared to more mid to high single digit historical trending. The way to think about this deliberate non interest revenue growth anchors back to our 2022 Investor Day when we outlined our plan to increase this to at least 12% to 15%, which is well on track. If anything, we'll be targeting a higher amount over time. This quarter you can see strength in fee based income that increased 7% compared to Q1 and 84% over last year due to the addition of Concentra as well as strength in securitization income, which increased another 12% sequentially. We had a sharp increase year over year with higher activity in our insured multiunit residential business.

Speaker 4

Now in terms of the one time gain of 28,000,000 We started separating out a line for strategic investments with non interest revenue in our MD and A back in 2021 to isolate non core gains. These are proprietary investments that from time to time include FinTech related mark to market changes and also at times special dividends from common share based investments. To ensure a more consistent revenue line comparison, we remove this revenue from adjusted results. Net of credit risk trending. PCL was $13,000,000 an increase of $7,000,000 from Q1 when we had a $2,300,000 recovery from 1 commercial loan.

Speaker 4

The increase reflected portfolio growth, modest changes in macro forecasts and normal course loss recognition. Net ACL was 20 bps compared to 19 bps at March 31, 2023. This is in line with our expectations given lending portfolio growth and economic conditions. The way to think about the one basis point net ACL increase quarter over quarter is that about 2 thirds is related to shifting macroeconomic variables and 1 third is due to an increase in our gross impaired assets. Changes in macroeconomic forecasts really impacted our stage 1 and stage 2 allowances where we deploy complex risk models to forecast future losses on our performing loans.

Speaker 4

These losses may or may not materialize depending on whether customers behave as expected and economic forecasts unfold as anticipated. The $2,300,000 increase in Stage 3 allowances is where a credit event such as a loan not making a payment in 90 days has triggered a need for a specific allowance that's determined on a loan by loan basis. Of the $13,000,000 PCL booked in the quarter, just over 50% is related to equipment financing where the high loan yields reflect this risk. And as a reminder on our lending portfolios, nearly 100% is secured, over 51% is insured. The average LTV for our single family uninsured portfolio was 63% in Q2 compared to 65% in Q1.

Speaker 4

We don't offer single family variable rate mortgages. Commercial office represents less than 1% of our total lending and over 2 thirds of all commercial lending is insured against credit losses. We are holding to our consistent risk management framework. As expected and communicated previously, impaired loans have continued to increase, but we continue to not expect to lose money on these impaireds. Due to growth of the portfolio and the fact that we are at a different point in the credit cycle, our gross impaired loans increased 76,400,000 49% quarter over quarter to $233,300,000 But about 2 thirds of that amount relates to 2 commercial loans and we are fully provisioned for any expected losses.

Speaker 4

Moving on, and as Andrew said, we presented guidance for the 10 months ending October 31st and for what would have been 12 months if we were not changing to our fiscal 2024 reporting year as of November 1 this year. Our refined and higher guidance reflects excellent performance for the 1st 2 quarters. I'll repeat that we will not be reporting Q3 results with this change. Our next reporting will be for the 4 months ending October 31. As every month is different, we needed to recut guidance to account for November December this year moving into our 2024 fiscal reporting calendar.

Speaker 4

The change from a calendar to a fiscal year will make EQB more directly comparable to publicly traded Canadian bank peers. For the relative 12 month period, In the MD and A, we outlined that we would have expected diluted EPS growth to increase to 18% to 21%, up from 12% to 15%, Pre provision pretax growth of 30% to 35% fell from 25% to 35% and book value per share growth of 14% to 16%, up from 12% to 15%. The corresponding 10 month period measures are also in the MD and A. We expect CET1 for the 10 months to remain in line with our original guidance of 13% plus and no change in our 20% to 25% dividend growth guidance. We expect stability in our net interest margin.

Speaker 4

Guidance for the 10 months also reflects our expectations for expense levels. Now that we're achieving cost synergies with Concentra and planned investments in people, process and technology. While we plan to increase investment spending related to exciting new campaigns in the works, we expect efficiency within this range, but we're going to rank ROE as the North Star priority metric. To sum up, our best quarter ever, more great and purpose driven solutions introduced for Canadians with the best service of all banks and a lot of momentum ahead for our Challenger story as we aim to continue to reduce the significant discount in our share price, while at the same time expand our track record of delivering the best long term shareholder return of all peers. Now we'd be pleased to take your questions.

Speaker 2

Colin, if

Speaker 4

you can please open

Speaker 7

the line for our analysts.

Operator

Thank you. Ladies and gentlemen, we'll now conduct a question and answer session. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay.

Operator

And your first question comes from Benny Gruenman from Scotiabank. Benny, please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my questions. First question, maybe on credit. Chadwick, you highlighted the equipment finance Business as a source of some of the impaired loan provisions this quarter. I'm just Hoping you could give us a little bit more color in terms of what's going on there.

Speaker 5

Is it a few specific loans? Anything you can give us in terms of What's driving the increase that we're seeing this quarter in that portfolio specifically?

Speaker 3

Yes. Thanks, Manny for the question. So I think as we've always talked before, where we would expect to see credit losses and we price the credit losses is in our equipment finance business. I generally think about our real estate businesses as lending that we lend to not lose money effectively. The odd time we get an idiosyncratic loss, but that's why over the last 12 or 15 years, I think our average losses in our real estate businesses is about 1 basis point per annum, so Extraordinary low.

Speaker 3

We do end up with the odd, I always tell the story in front of investors. A house slid down a cliff, so we Change our policies and stop lending on houses that might fall down cliffs and that's to an effort to reduce that one basis point. But to get back to your question on equipment finance, we do price for loss. We're lending on to a faster depreciating asset, lending to start up businesses, which is goes right to our purpose of helping people kind of build wealth. But what I mean to people say starting up a trucking company, I might have 2 or 3 trucks, but they're looking to buy another truck.

Speaker 3

Over the last couple of years, Frankly, we've done much better than we would expect in this business. This is a business we've only been in since 2018. And over the last couple of years, We're running roughly speaking, the earnings on this business was like 2 times our purchase sorry, a PE of 2 basically on a purchase price. So we are seeing credit losses go back to more normalized levels. I'd say what you're observing in that area are Falling secondhand equipment values as supply chains get straightened out.

Speaker 3

So a year or 2 ago, the price of secondhand Trucks and trailers were high and a shortage of supply chains were constrained. So freight lines were able to charge Charge higher rates and to the extent we had defaults, we could get very good recovery values. Clearly, that situation has normalized. Now the good news is we actually tightened our credit Starts about 12 months ago. And the typical lease goes into full after about 20 months to 25 months.

Speaker 3

It looks like we actually kind of got ahead of this issue and it is diversified across sort of large pool of whatever Mostly transportation equipment is really where we're seeing these defaults and losses. But I do think that they're I don't know when they peaked, but they certainly I don't expect to see in future quarters an increasing trend in a meaningful way of this kind of loss Increasing. And if you sort of take a standalone view even with these costs running through the P and L of the lease the equipment leasing business is still a very attractive business for us.

Speaker 2

Thanks.

Speaker 3

Long answer to a short question there, I mean, I apologize, but

Speaker 2

I think it's important to have the background there.

Speaker 5

That's helpful. I wanted to switch gears. Andrew, in your remarks, you gave us a little bit of insight into Yes, I'll look for growth or loan growth next year. And I think you referenced it, but I just wanted to clarify in terms of What kind of rate outlook is that based on? Is that assuming the Bank of Canada stays at 5%, what's the rate assumption as you look ahead into next year?

Speaker 3

As we've always been consistent, we don't Think we have any insight in forecasting rates, so we just use what's the implied market implied rates from the forward market curve. So I think the jury is out as to whether the bank goes 1 more 25 bps move. I think we would probably My comments are not particularly sensitive to that one more move, but that would if we start to see more than one rate increase upwards, that might Take my comments off the table a bit. I'm starting to see the Bank of Canada move into an easing cycle perhaps into the first, Q2 of next year. I think that

Speaker 5

Got it. And I wanted to ask about the revised guidance, Specifically the ROE, so year to date ROE 17.5%. So it makes sense that you're taking the guidance up. But If the question is, so you're taking it from 15% plus to 16% plus. Given year to date performance, There's room presumably to take that guidance up even higher.

Speaker 5

So I'm just trying to understand your thinking there. Is there any sort of message we can read into that In the context of 17.5% year to date, potentially signaling that You do expect a little bit of a moderation here in terms of the ROE going forward.

Speaker 4

Yes. No, we'd expect a consistent trend. I mean, it's sort of the nuances of where we're at year over year. You got the Concentra portfolio. We had a different earnings picture, Obviously, last year as well in Q1 and Q2.

Speaker 4

But for ROE, I think we're just being thoughtful about where the market goes really over the next 4 months. And I'd still expect us to see us at the higher end of the range. But at a minimum, we want to move up the floor to provide some comfort, but I would expect some consistency.

Speaker 3

I think just to add on to that, I think our approach is generally to be sort of relatively conservative in our approach and stance, whether it's 1% difference, A few things can move to change the IP either way. Obviously, a 16% plus ROE is a very credible outcome by any standard.

Speaker 4

That was kind of the as you see that consistently too, right? And that's part of why, I think you might have seen in our guidance as well. So we've obviously given that 12 month 10 month view to the guidance. But it's also just the nature, remember, for some of these pictures of 10 months versus 12 months. So EPS on a relative basis may look a little lower, But that's just again, we can't earn as much in 10 months.

Speaker 4

And again, if you look at the year over year, what happened in Q2 last year. So the earnings picture is very different now on a year over year basis and Concentra kind of changes the delta. So I think net net, you should see the guidance is quite positive across the board.

Speaker 5

Got it. That's it for me. Thank you very much.

Speaker 4

Thanks, Manny.

Operator

Your next question comes from Jeff Kwan from RBC Capital Markets. Jeff, please go ahead.

Speaker 7

Hi, good morning. I had a question on On the Alta part of your business, it appears that despite having the higher mortgage rates that we've seen And also relative to prime borrowers and also a perceived higher credit risk profile, How would you explain why your alternative borrowers so far haven't seem to have issues renewing the mortgages at these significantly higher mortgage rates?

Speaker 3

Certainly, the very encouraging thing

Speaker 2

is when you look at

Speaker 3

the performance of those borrowers within our book that are self employed. So they seem to be a pretty resourceful bunch. I mean, that's certainly my high degree of respect for that kind of Part of that part of the economy. And I think it's fair to say that they probably still got they've got more reserves and more capital available to support mortgage payments, then probably it's even clear to us in the underwriting. And Look at the typical self employed person, if they're having increased mortgage payment shock, This kind of environment, they're able to take on extra contract or whatever it is to get that extra income, work an extra day in the week to get that extra income.

Speaker 3

And so I think that's what we're seeing observing. The entrepreneurial community is pretty good at adapting to these changes in the economy. And That's what I would mostly put it down to.

Speaker 4

If I may just add to Jeff. So remember again, we don't label these as Altair. Again, these are single family uninsured with And you can think about a residential mortgage underwriting policy is pretty consistent with the DCIPS, but we are underwriting, right? We're investing more to underwrite and understand these customers in a different way, They're bores and that's why we've also framed that very carefully and then hence the quality of that borrower is higher and you see that consistency in our Beacon scores, the LTVs, the markets So again, just the framing and how to think about these bores, they are our quality.

Speaker 3

I think the other dimension is sort of the character element of the 5 Cs Credit that we really think about, which is many of our customers are 1st generation Canadians who are out in Utica and The pride of home ownership and the effort that people go to maintain that home to bring up their family and so on is very Hi. So we see that as a big aligned with our values is helping keep the mortgage current and so we're much aligned with them in that world.

Speaker 7

Okay. And just my second question was the adjusted efficiency ratio was just under 43% in Q2. Just Wondering bigger picture as you proceed your growth as we get through the Concentra integration, Where do you see that adjusted efficiency ratio going over the medium term?

Speaker 4

Yes, I'd say again, I'll say it again, I don't want to be But the main one we're going to focus on is ROHF every day of the week. And efficiency, the way to think about it is it's probably within this ballpark, but it's going to be plusminus on the As we particularly think of some of our investments in EQ Bank and this inflection point that we're at. But in general, if we were historically in that kind of 42% range, It's still in that ballpark, plus minus, but our priority will be ROE, to be honest.

Speaker 3

Yes. And just to sort of follow on that, so certainly one area that I'm very interested and believe we've underinvested in the past is marketing. So running at the first was during the hockey playoffs really seem to change the mindsets of consumers about the proper EQ Bank proposition. We're working on something that I find really compelling in that area, so So it changed the mindset with a different demographic. So we may choose, assuming that comes to fruition, I think we're not there yet.

Speaker 3

We haven't got lined up what we want to do yet, but I'm hopeful that we would have a good opportunity, good NPV in terms of Advertising and marketing in the upcoming quarter and then probably through the next quarter end. That really could change our brand proposition, but that will create some short term expenses that would have a negative impact on efficiency ratio.

Speaker 4

Yes. Kind of the other way to think about it, Jeff. We'll continue we've said in the past, we'll continue to think about it in an annualized trend around trying to keep that operating leverage flat to positive. But to Andrew's point, right, it doesn't mean you won't see a quarter at say 44, you won't see a quarter at 42 plus minus as we make some of these smart investments That will pay off in the top line too.

Speaker 2

Okay, great. Thank you.

Operator

Your next question comes from Lamar Persaud from Cormark. Lamar, please go ahead.

Speaker 8

Yes, thanks. I want to turn to Concentra here. You achieved those synergies well ahead of target. So the velocity was faster than expected. But what about the magnitude of the cost savings?

Speaker 8

So can you maybe talk about any additional synergies you may have identified above and beyond? I think it was the $30,000,000 you referenced.

Speaker 3

Why don't we excuse the big picture and then Chad will give you the numbers. But I think generally we're feeling good about having achieved Our sales faster than they are likely to be better than we had hoped. But I would say there's more complexity under the hood around sort of unwinding Systems, that kind of thing. So fully resolving all those issues will take a little longer than we might have Going in, I think we did great diligence on that. So I feel really good about the big picture, but there's a lot of complexity in these technical stacks and banks, as you all know.

Speaker 3

And That will probably take a little bit more take more effort on the part of our team, probably not so meaningfully to your outside investors, but certainly if I have an energy required just to solve that alone.

Speaker 4

Yes. I'd say, if you think back to the as we look to this as a business case investment, How do we deploy capital? I'd say the top line is coming in stronger than expected. So we've retained more business and we're growing more business, as Andrew noted, with our credit union partners. That includes loan syndication opportunities, more credit union services and there's some more referral business including as you think about even financing and how we're partnering with that distribution channel and offering our products.

Speaker 4

So those have been positive upsides, including the how we've retained those funding sources. And then you think of an additional synergy level, for example, even the credit rating increase that we received that had positive tailwind as well for our interest expenses. And then you think of the covered bond issuance we just did that we were able to also pursue this year because of the additional capacity because of Concentrix that's another plus side. And then when you Look at the cost side in general, Lamar, if we were saying $30,000,000 I won't necessarily give a precise figure, but we I would say we well over delivered that on an annualized basis, and by over I'd say comfortably stand by well over 10% that we over delivered on an annualized basis. So all that with the way we're going as these numbers become more integrated, all that's reflected and our updated guidance.

Speaker 4

And that's why our guidance has also increased in addition to the other core portfolio

Speaker 2

growth. Okay. That answer the question. Yes. Are you

Speaker 4

answering it?

Speaker 7

Yes, yes, it does. I mean, the Concentra is

Speaker 8

clearly evolving better than I think any of us were expecting.

Speaker 2

So I'm

Speaker 8

just to really kind of Understand all the moving parts here. Some of them are easier to understand than others to be honest with you. Just moving along then, just on Non interest revenues, Chadwick, I think you might have mentioned this in your opening remarks that I probably missed it. But why are we excluding the gain on strategic investments in your adjusted results? Like we don't usually see those kind of reverse out of adjusted.

Speaker 8

So wondering why that was the case this quarter and then what can we expect that moving forward?

Speaker 4

Yes, it was the magnitude of it. So we you're right, you have seen those in the strategic investment line in the past, plus minus a couple of million here and there. But when we think of consistency and transparency on the core business for our investors, we didn't think it was appropriate to show that through the adjusted results, especially when you look forward a year and It could be a little bit confusing. So it's certainly there and reported. Importantly, for our investors, it's there in the book value either way.

Speaker 4

But for cleanliness of reporting on a go forward basis. We made the prudent choice, I think, to exclude that from the adjusted side as an encore game. It's not that simple to be honest.

Speaker 2

Those are kind of a

Speaker 7

hurdle rate, like let's say it's over $10,000,000 we're going

Speaker 8

to see it adjusted, but It's less than it will be included in the adjusted results, but is there like a hard line in the sand on that or no?

Speaker 2

But it's the hard line.

Speaker 3

It may be something we need to think about to actually sort of set the expectations with you because otherwise it can get a bit noisy.

Speaker 2

Okay. I think that's actually a good suggestion

Speaker 3

that you have there and we might choose to adopt.

Speaker 2

Okay. And then yes, that'd

Speaker 8

be helpful if you could just communicate that to me. And then just sticking with non interest income, that's 7% sequential loan growth in fees and other incomes. It seems that there's some reclass benefits in there from gains on loans and investments. So maybe could you talk a little about what the let's call it the core underlying growth figure would have been because that's 7% sequential And fees and other income seems a bit higher than I would expect. I typically think of that line as being more stable.

Speaker 8

So maybe you could help me understand that a little better.

Speaker 2

That would be the

Speaker 4

fees would be core. So we've had so it's that remember there's a lot of things built into fees though, right? So we have Credit Union Services, we have Concentra Trust, we have EQ Bank Payment Solutions. We have actually quite a few categories that come in there. So a lot of that is core where you could see sometimes in some quarters you could see some very light, volatilities depending on Even on our trust business, when you see certain estate fall ins, some of those businesses, the newer businesses for us can be a little bit more lumpy.

Speaker 4

But I'd say that is core fee based growth, including even New things we offer, including on the payment side and EQ Bank and some of the prepaid solutions and including what we do with Blackhawk, but there are some great new solutions.

Speaker 8

So let me try this. With that 14.5 this quarter, is that an appropriate Starting point to think about the fees and other income line, like going forward?

Speaker 2

I I think, I mean, don't forget

Speaker 3

there is securitization income in that number, right? So that's It's

Speaker 4

all part of the 60.1. So it's kind of plus minus. Yes, that's a fair starting point, Lamar, and I know it's you're trying to get to a new clean baseline because this is only the 2nd full quarter with Concentra, but kind of plus minus for the fee side.

Speaker 8

Okay. That's helpful. Thanks again for the time, guys.

Operator

Your next question comes from Ittai Raghkar from BMO Capital Markets. Please go ahead.

Speaker 8

Thank you and good morning. On EQ Bank, you're expecting deposit growth to be in the high single digits this year, Which essentially implies that EQ Bank as a percentage of your mix should stay relatively flat. Now I understand it's a balancing act. On one hand, you're offering the attractive rates and growing deposits, but on the other hand, also leveraging that platform for NIM expansion. Looking forward, how do you think about balancing those 2, given we're in a higher end, Arguably more competitive deposit market today relative to a year or maybe 2 years ago.

Speaker 3

Yes. I'm not convinced we're in a higher comparative scenario, frankly. Our proposition is very clear. You get a great rate with EQ Bank every day, every year, and we're consistent on that. Our competitors, The primary 2 compares we think of in that space tend to come out with the short term rate specials that today because the inverted yield curve There's other factors that are coming out with some pretty high rates.

Speaker 3

They only get that money for you only get that high rate for 90 days or whatever the particular promotion is. We're not really interested in chasing and competing with that, but that was no real way for us to do that other than to break our brand promise to our existing customers. So it is a subtle thing. What we're trying to what we believe we're doing and where we're having, we believe, fantastic success It's showing that the innovation we're bringing to Canadian Banking is really makes EQ Bank the place to deposit your money. For example, if you take your EQ Bank card on Europe to Europe with you to draw money at the ATM, you're likely to end up with 3% more cash in your jeans After drawing money out of an ATM than you would otherwise.

Speaker 3

So it's these kinds of value added compared to any other bank account, if I could stand here, Correct. If I challenge anybody, the Yikki Bank card is the magic card to take on vacation. So That's where we're trying to drive the value prop. And as we say, if we sneak up rates, we will see faster deposit growth, A little bit of the expense of NIM, but also potentially kind of eroding our brand promise. So really, we're trying to present the full value of the platform.

Speaker 3

I think you will see over the next little while some enhancement in rate for those people that are super engaged with us. And of course, And from a risk management perspective, we want this to be we believe, first of all, there is huge value in the account for this being somebody's everyday banking account, I mean, that bank account, but clearly from a risk perspective to the extent that we're part of a household's kind of key financial metrics, it reduces the liquidity risk To us and the risk of runoff, which is an important part of our consideration set. So clearly, we could grow EQ Bank faster if we increase rates and so on. And it would be a huge source of liquidity if we did that. I see a huge safety valve that option is always open to us as a management team.

Speaker 3

But I think we're sort of going picking our way through quite nicely right now kind of growing at a good clip, but not choosing to participate in some activity in the market.

Speaker 4

And if I may say too, just again, Ajay, I'll bring it back to what we said Earlier, the one key metric we're tracking is customer growth, right? So what we still believe to be true, we're making a difference and we're growing the franchise value and you see that in the 31% Customer growth year over year and the amount of growth sequentially. We're literally still adding 100 a day. So as we think about the right environment, the products and services coming on, we do believe We could increase the deposit levels with those customers that we're bringing on as time is right and as we add more products and services. And then again, you see the momentum to points like the Yes, I should say and as we add small business.

Speaker 4

So it's how you think about the overall economics of the business are evolving and maturing?

Speaker 3

Yes, I'm just we seem to be long winded on our answers today. But the other thing to think about is the value of the term deposits inside EQ Bank. So you do get great rates on term deposits in general. You You should deal with EQ Bank rather than deal with the deposit brokers to get a term deposit, which are generally going to always beat the term deposit market. So It's an extremely attractive platform to come in from that perspective.

Speaker 3

Even then, because we're able to not pay as much in commissions for the deposit brokers, This represents a funding cost saving compared to going through brokered deposits that really only plays out over Multi year period. So if somebody buys a 5 year GIC through EQ Bank today, we might be saving 20 basis points a year over the next 5 years And that will show up as increased NIM over that 5 year horizon compared to raising a broker deposit.

Speaker 8

Well, Andrew, that was my next question actually. What do you see as the optimal balance between term and demand deposits At EQ Bank and how should investors think about the resulting economics?

Speaker 3

Certainly, the resulting economics are much higher to the extent we have demand deposits, but of course, there's an offsetting riskiness around demand deposits, which I understand and don't worry about. Just to reiterate, we only allowed deposit up to $200,000 in that platform. That's why we've been lobbying for higher CDSC rates. We want those are very those are in the Airbus game things we believe we're out of very stable Demand deposits. I mean, this fifty-fifty split between demand and term is something I feel very comfortable.

Speaker 3

Frank, I don't think we've cracked the marketing lot of people coming to us just to buy GICs. We don't I think most people come into us Looking for the savings account and then we're able to cross sell out some deposit to them. I do believe that Our message around this is the best patient care in the Bio GIC is something we need to get out there more as a louder voice. And if we were able to do that, then I'd be certainly very comfortable if

Speaker 8

Thank you very much.

Operator

Your next question comes from Graham Ryding from TD Securities. Graham, please go ahead.

Speaker 9

Hi, good morning. Just wanted to start with Your guidance and maybe what's implied for NIM with your revised guidance, is it fair to say Then if NIM stays at this level that there's upside to your guidance or are there some other offsets perhaps baked into your outlook?

Speaker 4

Yes. No, it's fair, Graham. We would expect some consistency in the margin to achieve that guidance. So that's I'd say it's We're not implying

Speaker 6

a lot of expansion

Speaker 4

in the NIM from there. It's a fair way to think about it.

Speaker 9

Okay. So NIM has the expansion this year has been very strong. What would you be expecting As we sort of look into 2024, even 2025, if we do see interest rates start to come back in line with sort of consensus forecasts. What does that do to your NIM going forward?

Speaker 3

It's hard to know, Graham, because the market sort of dynamic and how we have to compete and change mortgage rates It's unknown to see how competitors behave. In general, I would say that what I've observed over the last 20 years in the industry is that If anything is rates in a falling rate environment, NIMs tend to expand a little bit with mortgage books, with mortgage lenders. When rates are going up, people are somewhat reluctant to increase lenders. These are managed rates up here. We will post our rates every we think about every week or 2.

Speaker 3

As rates go up, people are reluctant to increase rates for fear of losing market share. Similarly, when rates are dropping, People don't feel the incentive to be the sort of market leader to drop rates to maintain their market share. So You do tend to see a slight sort of stickiness in that environment and the NIMs expanding. But I would add to provide that all depends on sort of competitor Response and exactly what's happening in the market and a whole bunch of things, but in general, dropping rates are good for those.

Speaker 8

Yes.

Speaker 4

Yes, it's just it's kind of

Speaker 2

you get that consistency at

Speaker 4

the product level, right? And the NIM changes at the or as the product mix changes. So Hopefully that

Speaker 9

helps. But we haven't been seeing that dynamic this year for your NIM. So what is it? Is it the Evolving portfolio mix as in higher prepayment income, one of the key factors that are driving your NIM expansion this year as rates are going up?

Speaker 2

I think it's 2 things. I mean, to think on the mortgage books, you

Speaker 3

are seeing that repayment income normalizing. So an increasing rate environment then where you've got low coupon mortgages As rates increase, you tend to see the prepayment on the individual loan will be reduced because it's done on an interest rate differential basis. So that interest rate differential falls in a rising rate environment and therefore the prepayment probably is lower as the mortgages reset to higher rates, As soon as the mortgage on prepayment becomes higher again, so that you'll see that normalize. I think the other big factor for us is The deposit beta on EQ Bank, frankly. So it's not really related to mortgage pricing.

Speaker 3

It's really more related So EQ Bank and frankly the skills in our treasury team is setting up the balance sheet to go through this kind of environment.

Speaker 9

Okay. And then my last question would just be around the Some color around the increase in the arrears that you saw this quarter. In particular, I guess, on the commercial side, I noticed that Your Stage 3 provisioning had very little in there for commercial specifically. Maybe just some color on why You feel like your allowances, I think around $30,000,000 in commercial are sufficient for the current level of arrears?

Speaker 3

Yes, I mean, it's really a matter of looking at them loan by loan basis. Last thing about commercial is you can take a very actually for single family too, frankly, but I'm not sure you can look at these larger loans and then analyze where you are on an LTV basis, what's your resolution plan. And certainly 2 of them I booked out in detail and they're pretty low to LTVs. The resolution might be messy and so it takes some time. I think in both cases, the 2 larger loans were involved with the Old Bank and some of the same borrowers.

Speaker 3

And I think that we will resolve attractively, but they are the asset coverage is pretty good.

Speaker 9

Okay. That's it for me. Thank you.

Speaker 8

Thank you, Graham.

Operator

Your next question comes from Jamie Coyne from National Bank Financial. Jamie, please go ahead.

Speaker 6

Yes, thanks. Good morning.

Speaker 3

Good morning, James. We do know how your name is pronounced.

Speaker 9

Thank you. Appreciate that.

Speaker 6

Speaking with the NIM theme, just wanted to get a bit of an update, I guess, on the covered bond programs and success This quarter, what type of cadence would you be expecting in size? Like I assume that Demand remains strong from investors on that front. So just wanted to get a sense as to how you see that funding Structure building over the next several quarters.

Speaker 4

Yes, sure. Thanks for the question, Jim. It's That certainly remains our lowest source cost of wholesale funding. We believe in the strategic value of the program, especially having gone into Europe for that program. We would we have, I'd say, plenty of capacity left.

Speaker 4

At a minimum, we'd want to be in the market once a year. You could still even see at some point of reopening trade moving some moving say one of our other issuances to euro benchmark at €500,000,000 But going forward, consistency at least once a year And growing to probably more like a CAD 3,000,000,000 plus Canadian program as our assets grow. And then the last issue, Joel, we had But 7 new investors, great investor appetite, really healthy marketing, and the overall program continues to grow.

Speaker 6

I guess, why not more than once a year?

Speaker 4

It's how you manage your capacity, right? So we are still capped at 5.5% of assets. We would hope that that changes at some point to reflect the balance sheet growth. So you have to be thoughtful about how issuance could come up for renewal. So they're often 3 year term.

Speaker 4

How they come up for renewal and how you manage your balance sheet and your issuance capability, because it is important to be in the market at least once a year.

Speaker 3

I think the other thing, James, just again, is this whole risk management The covered bond market seems to be it's been resilient for the last 400 years. So hopefully, it will be resilient for Time to support everybody on this call. And so to have some covered bond capacity available in a tight The tight squeeze market is something that I see as a very valuable thing to kind of have sitting on the shelf. So we would never want to be kind of completing max. We would want to have a level of pull there

Speaker 2

Okay. And

Speaker 6

As I think about the NIM going forward, I hear the guidance is consistent or I guess flat For the rest of this year into next year. I'm wondering why there wouldn't be more NIM upside to be expected In the upcoming quarters, at least this expanded Q4 quarter as mortgage prices or mortgage yields that are rolling off or repricing now Still at significantly higher rates, I would assume. So my view is that there would still be some NIM upside here in the next couple of quarters as that mortgage Yield repricing is higher and faster than deposit costs or overall funding costs are. So I'm just Want to get a little bit more color from you guys as to why you wouldn't expect more NIM upside here near term?

Speaker 4

Well, there could be. So what we're saying, we Expect for some consistency, but you got to even think of the nuances, right, when you think of margin. We said this last quarter too. So things like normalization of prepayment income, as rates Change will that prepayment pattern continue or not. And every million there is about a basis point you can almost assume as well.

Speaker 4

And then there's a lot of variables here. So we're saying, yes, Should expect consistency, but it could expand from here. Vancher, how you think?

Speaker 3

Yes. The other thing cost is just mix. I don't think we Pretty hard to communicate the impact of NIM mix of aggregate NIM. So our NIMs at the business line level are very consistent. But as we see mix change because we have lower risk weights on residential mortgages, We have lower NIM on them and they still produce great ROEs.

Speaker 3

So as we see the single family mortgage single family market Expanded a faster rate, which is our expectation. That puts a little bit of pressure on NIM at the top of the house, At the business unit level, that's great. So I think we always try to have a little bit of reserve to kind of think about the impact of Product mix and clearly we don't want to make the guidance so complicated sort of assuming this product mix and then we'll do this or that. So there is room, I think, the general sense that we have an optimism, we'll be able to at least deliver on what we promised to perhaps some upside, I think, is the right way to think about it.

Speaker 6

Okay. And I mean conventional loans growing faster than residential loans or personal loans should support That NIM upside as well. At least that's what the guidance for the rest of this year looks

Speaker 3

Exactly, Jamie. I mean, I'm not expecting much in the way of not expect See insured single family, for example, expand faster than other fast books, that actually helps them. So you're right on. That's exactly you're thinking about it right for sure.

Speaker 6

Okay, good. Shifting to the credit side of the story, someone touched On the commercial side, but I wanted to focus more on the personal loan side and delinquency rates jumping up, still low levels, obviously, when Talking about these delinquency rates, but the direction is obviously unfavorable. So and we're kind of at a level now on personal loan delinquency rates that are higher than 2019. So I just wanted to get a little bit more color from you guys What you're seeing with those delinquency rates, is there any characteristics or themes in those personal loans that you're seeing that is driving higher

Speaker 3

Not really. I'm still pretty relaxed about it frankly. I do think you end up you do end up sometimes with this kind of I suspect that mortgage shock is encouraging some people to sell the house and preserve the equity and move to different types of accommodation and so on. So So there might be a little bit of churn in the book as a result of that. And sometimes I've observed in the past, and I don't know whether this is true this time, is that People sort of actually sold the house now they're going to pay the mortgage off out of the house proceeds.

Speaker 3

They tend to maybe not make that last month or 2 payments, though it's going to quickly resolve. So I think that could be one of the underlying pieces because order end was exactly when people would most likely be active in the housing market moving lots of kids are out of school. So there may be a little bit of that there. I mean, these as you say, that was still very much within kind of historical norms. So but Yes, it's definitely some challenges to some people for sure, interest rate shock and what the bank has done and How people might even be listening to the Chairman of the Fed a year or 2 ago and not being concerned of interest rate rises and then we've The market to change the perspective is causing some interest rate shock for people.

Speaker 3

But I would say the general big picture is it's amazing the other way how well people

Speaker 6

Okay. And just sort of following on that Interest rate shock, I guess, if I look at the remeasurement of allowance for credit losses, Pretty big driver of, let's say, stage 1 and stage 2 increases. Normally, I would attribute that to Deteriorating macro assumptions, but it seems your macro assumptions are actually improving. And so that would indicate that this is being driven by changes in credit risk. And so is it that interest rate shock that You're baking in and overlaying some more risk attached to that or are there some other factors here that are playing into that increase in remeasurement in Stage 1 and Stage 2 allowances.

Speaker 3

I mean, there's a bunch to our pack there. Maybe probably Chad could give you more color offline, frankly, that The impact of the models are not just sort of instantaneous changes in forecasts. There's some time effects about How those changes flow through the models. So that's creating a little bit of even though the forecasts are changing in a positive way, So putting a bit the models lead us to put more away going forward. I'm sure we can get into the nuances of that.

Speaker 3

It's pretty technically complicated. But I think that's probably a big driver. And then we are we do play expert judgment to put some overlays in place here. And so that's Kind of how we the overlays are done with the technical driver. And again, Chadwick can give you more feelings on that.

Speaker 2

Okay. Thank you. Thanks, Jaeme. And follow-up, not on this call. Yes.

Operator

Okay. There are no further questions at this time. I'll turn it back to Ms. Moore for closing remarks.

Speaker 2

Thank you, Collin. That's a great voice to conclude the call on. Before we leave you today, I

Speaker 3

want to thank my fellow challengers for living our purpose Driving change

Speaker 2

in Canadian Banking to enrich people's lives. More than ever, Canadians being a bank that works for them and ours does. We look forward to our next analyst call in early December. In the meantime, please keep

Speaker 3

an eye out for new innovations coming your

Speaker 2

way from Canada's Challenger Bank. Be sure

Speaker 3

to avail yourself of the opportunity

Speaker 2

to have less take and more make. And if any of you traveling to Europe in the next A few weeks, I would encourage you to take the EQ Bank card with you. Enjoy your summer.

Speaker 3

Thank you for participating and have a great day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Hooker Furnishings Q2 2023
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