EQB Inc.

Welcome to EQB's second quarter analyst call and webcast on August 10th, 2022. It's now my pleasure to turn the call over to Richard Gill, Vice President, Corporate Development and Investor Relations at EQB. Please go ahead, Mr. Gill.

Thanks, ma'am, and good morning. Your hosts today are Andrew Moore, President and Chief Executive Officer, Chadwick Westlake, Chief Financial Officer, and Ron Trach, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our webcast as well to see our accompanying slide deck, including slide two containing EQB's caution regarding forward-looking statements, and slide three concerning non-IFRS measures. All figures today are adjusted for applicable or otherwise noted. It's now my pleasure to turn the call over to Andrew.

Thanks, Richard, and good morning, everyone. This is our first earnings call under our new EQB umbrella reflecting our shareholder-approved name change from Equitable Group. EQB is a name that we think dovetails perfectly with our challenger bank image, and we look forward to socializing it with our shareholders. For our core operations, Q2 performance was one for the record books. Conventional loan growth increased 36% year-over-year. Net interest income was up 18% compared to last year. Thanks to effective margin management by our Treasury team, NIM was strong and consistent with our own guidance. We performed in line with our own industry-leading track record on credit, and we added thousands of new EQ Bank customers. In short, all the things you've come to expect from Canada's Challenger Bank. And yet this was a tough quarter report. Despite taking a by-the-book approach to achieve and ultimately deliver strong core earnings growth, our efforts within Q2 were offset by mark-to-market declines, primarily in our strategic investment portfolios, due to a downdraft in North American equity markets. What we've learned by participating alongside really smart fintech entrepreneurs since our first strategic investments over five years ago is incredibly valuable to the advancement of our challenger bank approach and our all-digital platform. As part of this capital allocation, we invest in fintechs for knowledge and access, not for investment gains. While not the focus, we have had the benefit of positive mark-to-market P&L gains on some of these investments, over the past few years, and continues to generate a very strong ROE on our portfolio. For strategic investments in Q1 2022, we booked a gain of $15.9 million. But in the second quarter, we had a partial reversal of some of those gains, lowering revenue overall for Q2. Chad will have more to say about these fair value and mark-to-market adjustments. He'll touch on some of the six-month year-to-date highlights, including North Star ROE performance of 15.6%, and the benefits of funding diversification, including our now nearly $900 million European covered bond program. For my part, I'm going to share thoughts on what you can expect from a performance stability perspective for the balance of the year. Lots of positives in my estimation. And talk about the tactical adjustments made to respond to heightened economic and market risk. For our Q&A, Ron will contribute his subject matter expertise, as he did in our investor day, a recording of which is available on our website and worth referencing for more information on mature and proven risk management strategies. Turning to our outlook, I will say that performance, including conventional asset growth of 36% year-over-year across our core personal and commercial lines, puts us on track to achieve our earnings guidance for 2022. This guidance envisions consistent NIM, 8% to 10% adjusted EPS growth over 2021, and adjusted ROE of 15% plus. Asset growth in one quarter creates natural earnings momentum in ensuing quarters. We're confident in confirming our guidance because when we published it, we assumed that market activity would moderate during our forecasting horizon. And because our conventional asset growth was well ahead of guidance, over the first half of 2022 in virtually all parts of the bank. To get deeper into our outlook, we do expect the four increases in the Bank of Canada's overnight rates since March, with more to follow as early as September. We'll reduce activity in property markets in the second half of 2022. Like you, we've seen a variety of market forecasts. All point to sales volume declines of varying proportions. While those forecasts and our own risk appetite suggest that origination in our personal and commercial bank segments will most likely reduce from last year, I think context is important. We expect a reduction compared to the very strong originations posted in the past few quarters in both segments. But even with that, we expect to achieve on-guidance conventional portfolio growth by the time our books close on December 31st. As a reminder, that guidance is for 10 to 15% growth in conventional commercial loans and 12 to 15% growth in conventional personal loans compared to December 2021. In my view, this is all doable in the context of the outlook for the housing markets supported by our team's performance in the first half of the year. Looking at recent performance, our alternative single-family business certainly set a high bar. We've bested annual guidance so far with portfolio growth of 35% year-over-year. These results included a 6% increase in Q2 alone, was driven by higher originations, and a decline in loan attrition. With respect to our market share position in the broker channel, supported by a fundamental focus on good service, augmented by our new equitable connect broker portal, will also play to our advantage in securing the high-quality origination opportunities that we covered in the target market. Getting to a period of greater housing market stability will challenge today's homeowners with a mortgage, but a case can certainly be made that strong employment opportunities for Gen Y and Z cohorts, rising immigration, and shortages of housing stock in our regions of focus will provide the support the market needs to be healthy in future years. As Ron told you in Invest Today, our risk appetite is designed for the long term, and we are prudent bankers in risk-on and risk-off environments alike. The risks we see today include the Bank of Canada's response to elevated inflation and our expectations of changing collateral values. Accordingly, the assets we put on the books in recent quarters adjudicated such that the average LTV on the bank's uninsured residential mortgage portfolio was 57% at the end of June. While health price declines would naturally cause that ratio to increase, we still have plenty of protection. That said, and to be prudent, we ratcheted back on LTBs in certain suburban areas in Ontario, adjusted debt service coverage ratios on certain mortgage products, and we're taking a more cautious view to refinance things. To be clear, these are tactical moves consistent with our past practice, not wholesale changes in our already sound approach. A fundamental factor that works in our favor in a down market is that we lend in large urban areas which are buttressed by forces such as population growth and diversified sources of employment. The outlook for our decumulation business is very positive. We continue to gain profile, market share, and assets. Year over year, our reverse mortgage portfolio grew nearly two and a half times to $421 million and 38% in the second quarter alone. with June being our best month for originations yet. While this business is not as closely correlated to housing market trends as single family, we also made tactical moves to tighten up our reverse mortgage lending approaches. Portfolio growth in insurance lending amounts to 95% year-over-year and a very solid 24% in Q2 itself. While trending a little below our 100% 2022 growth guidance, We believe we can end 2022 on or above target as we gain strength from partnerships with nine leading life insurers. On the commercial bank side, total asset growth year-over-year was 25% and 11% in the quarter, which puts us well ahead of annual guidance. Every part of our commercial business expanded year-over-year and sequentially. I'm particularly pleased with recent growth in our commercial finance group, specialized finance, and equipment leasing portfolios. Looking ahead, we do expect the pace of conventional commercial originations to slow in the second half, but we also anticipate lower loan attrition than we've seen in recent quarters. We expect to meet annual guidance for asset growth. When we think of the many positives of running a diversified commercial bank, a top consideration is our strong position in apartment lending. Apartments are an attractive source of housing for many Canadians and will continue to be in the event of a recession. This asset class has also experienced rapid rent appreciation and low vacancies. Another positive is our multi-unit insured mortgage business. Year-to-date, you will have seen that we have grown the portfolio by 15%. Our pace and guidance for the fall year is 0% to 5%. We expect our performance to continue in the final half of 2022. Some technical dynamics in the marketplace will act as strong tailwinds. From a risk management perspective, the commercial team and, frankly, our own customers dialed back on constructing lending and demand for such products earlier this year in order to be prudent while there is greater uncertainty around the cost of finished products and in the underlying collateral values. In equipment leasing, we continue to shift the portfolio in favor of higher credit quality business. Two-thirds of new assets in our Bennington book are comprised of prime leases, and we are focused on more economically resilient business sectors with overall excellent margins and ROE well above our 15% target. Canada's Challenger Bank has committed to long-term growth and proactively makes moves to adjust its risk appetite. These changes are fundamental to our reputation as an institution with much lower loan losses than our peers. A reputation that was reinforced over the first half of 2022 with real estate losses of just $2.4 million on a portfolio of $40 billion plus. The levels of arrears are the lowest in my entire 15 years as CEO of Equitable. An important reminder also is that under IFS 9 rules, when a bank originates new business, we book new provisions. With our high growth and originations at $4.5 billion in Q2, these provisions were also naturally higher in Q2, even though losses may not ultimately be realized. The majority of the small losses that we actually did incur were within our leasing portfolio, which is where we expect to see them with the offset the returns are much higher with this form of lending. As you heard in Investor Day, we never sacrifice loan quality or compromise risk management for growth. Each and every transaction must meet our stringent lending criteria. While preparing for new market realities has been an obvious priority, we have not lost a single step in moving forward on all the exciting initiatives you heard about in Investor Day. I'll mention just a couple as they relate to EQ Bank. We're introducing our payments card this fall, a move that will invite our customers to use our all-digital platform as their primary bank as well as a great place to save. The difference between these two realities is a whole lot more functionality for EQ customers who will be able to pay wherever MasterCard is accepted. We're also looking forward to the full launch of EQ Bank in Quebec, a move that will leverage our proven technology to bring a differentiated value proposition to a large digitally savvy population. Equitable Bank has a really good customer following Quebec through our broker deposit and broker mortgage businesses. Our presence there for over a decade should give our early marketing efforts a boost. These two advancements will allow us to build on EQBank's recent momentum, which features year-over-year growth in our customer base of 26%, including over 13,000 new customers in the second quarter. Another 5,000 Canadians joined us during July alone. Of equal importance, the now more than 285,000 Canadians at the end of July who entrust their banking news to EQ are using the platform more than ever. Digital transactions increased 7% in the second quarter. We saw continued growth in products held by each customer. While growing great value to EQ customers, EQB has benefited from improved economics as customer lifetime value grows while customer acquisition costs remain stable. Thinking about the deposit market generally, rising interest rates should act as a catalyst for continual growth and demand for savings solutions, particularly those offered by Canada's Challenger Bank through EQ Bank, but also within the rest of our now 15.9 billion deposit business. Rising interest rates have caused investors to take a much more active interest in GICs with issuances through the major broker platform, up more than two and a half times in June 2022 compared to the same month last year. The significant increase in liquidity in GIC markets is certainly encouraging for our approach to business. Our outlook would, of course, not be complete without mentioning how much we look forward to completing the acquisition of Consentra Bank. As you saw in the quarter, we received unconditional clearance from the Competition Bureau of Canada, so a good check mark there in terms of ongoing regulatory review. As that process proceeds, our Transformation Management Office continues its important work with the Health Concentras team to ensure that we hit the ground running quickly in bringing our two organizations together. The scale impacts and opportunity benefits are significant, so we're excited by what we can do together to deliver value for customers, including credit unions and all EQB stakeholders. While it's important for you to know that our performance prospects remain strong and that we are managing for heightened risks in the housing market, you should also know that all eyes remain on tasks with respect to producing industry-leading returns on equity. As a result of our risk-managed approach, we will continue to lend with confidence in this rising interest rate environment and achieve our traditional 15% plus ROE when the books close on the year, adjusted for conceptual costs, closing, and integration costs. It's too early to put a pin in the wall on 2023 guidance, but as with last year, we will offer initial guidance to gather our Q3 results in November. I'm also pleased to note that EQB shareholders can now look forward to a third dividend increase of 2022. This latest increase of 7% sequentially, or 68% year-over-year, is in keeping with our long-term commitment to grow our dividend while reinvesting an attractive ROE. As CEO, I see one of my major accountabilities being to ensure that we reach our longer-term goals by allocating capital in a disciplined manner, such that EPS and book value per share grow at a compound rate of over 15% annually. Though not every year, we'll always be consistent towards our five-year average targets. We shared our economic value, a model at our recent investor day, but to reinforce what I said, 15% annual compounding takes us towards an EPS of $1820 in 2027, a book value of $127.98, and a dividend of around $4 using 2022 consensus estimates as the baseline. The recent quarterly results give me more confidence than ever that this is achievable, although we're going to have to hustle hard and work hard to get there. To summarize, I'm confident in our ability to build value for our shareholders in the as we're able to reinvest it on many businesses to create consistent compounding capital. Now over to Chadwick.