EQB Inc.

Good morning ladies and gentlemen welcome to EQB's earnings call for the first quarter of 2023 being held on Wednesday May the 3rd 2023 at this time all your lines are in listen-only mode later we will conduct a question-and-answer session for analysts and instructions will be provided at that time on how to queue up It is now my pleasure to turn the call over to Richard Gill, Vice President of Corporate Development and Investor Relations at EQB. Please go ahead, sir.

Thanks, Michelle. Good morning, everyone. 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 review our accompanying quarterly investor presentation. The presentation includes on slide two, 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, were applicable or otherwise noted. It's now my pleasure to turn the call over to Andrew.

Thanks, Richard, and good morning, everyone. This was a milestone quarter for EQB. Our direct customer relationships surpassed half a million. We achieved more than $100 million in quarterly earnings for the first time. Performance allows us to see how strong we've become as a bank. We marked our first quarter of results with Concentra, which is already proving to make Equitable an even better bank. We are particularly enthused by our engagements with credit union partners with whom we share a core customer service and challenger philosophy. And EQ Bank was named best bank in Canada by Forbes on their annual ranking of world's best banks for the third straight year. You would expect me to attribute performance, including ROE of 16.9%, to our differentiated value creation approach, long-term strategies, and award-winning digital capabilities, and I will. But these accomplishments are rooted in the hard work of our team across Canada in keeping customer service at the very forefront, while very effectively managing risks and opportunities. Thank you all. Understandably, our business outlook remains positive, and I will speak to it shortly. But before that, I want to acknowledge the continued strain on some banks outside Canada over the past couple of months. We manage our risks well and have made additional disclosures in this quarter's MD&A to help investors understand why that statement is true. On credit, I want to offer additional context on our commercial real estate lending. With approximately $26 billion in loans under management, I am proud of our commercial loan portfolio and the team driving its diversified business. Here we prioritize lending against multifamily rental properties, including affordable housing, where demand is strong and resilient. We're the largest securitizer of CMHC multi-unit mortgages in Canada, and over two-thirds of our commercial loans under management are insured by CMHC. On uninsured commercial loans, we require strong personal and corporate guarantees and restrict LTVs. With heightened focus on the risks in the office property market, you should also take comfort that less than 1% of total bank assets are loans to office properties. Of that small portfolio, the average LTV is 59%, and even more protection comes from our focus on vocational offices occupied by dentists, doctors, and other service providers. These offices are vital to the delivery of patient care and the generation of income for their tenants who cannot displace physical space by working from home. Our exposure to hotel, shopping malls, and big box retail is negligible, not a lending priority, and far less than 1% of assets. Commercial banking represents about half our earnings and is a proven business worthy of shareholder confidence. When it comes to liquidity management, we always operate prudently and well above regulatory guidelines, and even higher than bank peers from our review of their disclosures. Great execution of our multi-year strategy to diversify our sources of funding has added further strength and stability. If you're aware of the growth of EQ bank deposits, What you might not know is that we generally limit EQ bank deposits to $200,000 per account. Our approach effectively reduces concentration exposure and runoff risks, while giving our customers confidence a large part of their money is protected by CDIC. We believe strongly the importance of CDIC-insured deposits, and we've taken a public stand advocating for higher coverage limits. I'm pleased to see others take up this cause in the past few weeks, 95% of our deposits are term or insured. I can assure you the positive trends in deposit growth and stability continue today, recognizing our quarter ended March 31st, and April continued to reflect strain on some banks locally. What I'm saying is, bring you out to date, you would see no deterioration on liquidity. Chadwick will add more context on liquidity and funding in his remarks. The last point I want to touch on is interest rate risk. This has been a deep well of troubles at some U.S. regional banks. Our advantage is derived from how our Treasury team manages interest rate risk in the banking book, in alignment with our low appetite for market risk. We operate with a target duration of equity of approximately one year as a means of tightly controlling exposure to interest rate interest movements. Another way to look at it, we don't take a view on rates. We consider the sensitivity of changes in economic value equity to be the most important measure. Table 19 of Q1 MD&A shows our sensitivity modeling to immediate and sustained interest rate increases and decreases. Here you will see that 100 basis point increase in interest rates, the EV impact of the percentage of common shareholders' equity would only be 1%. This demonstrates very well-managed interest rate exposure. Turning now to our perspective on the Canadian housing market. With the Bank of Canada holding its policy rate steady, we're already seeing signs of price stabilization and increased activity in the housing market. We expect this to continue. In fact, it was very encouraging data from the Toronto Real Estate Board just yesterday confirming this view. In Q1, uninsured single-family origination volumes were $1.1 billion, and the portfolio grew 1% over Q4, or 33% year-over-year, to $19.2 billion, assisted by lower attrition, aligned with our expectations for the first half of 2023. Certainly, Alberta and British Columbia have been brighter spots in the national picture. We had an excellent quarter in multi-unit and continue to see stable growth within the conventional commercial. In short, multi-unit mortgages under management increased by $992 million this to $17 billion, although the on-balance sheet amount was lower due to higher securitization under CMHC's programs and derecognition in the quarter. All in, we are holding to our overall commercial portfolio growth guidance. For EQ Bank, it's particularly exciting to see breakthrough progress unfold in customer engagement with our EQ Bank payment card, now in the hands of more than 40,000 It's already been used in over 115 countries. Our successful Quebec launch and the continued success of our MakeBank campaign. Hopefully you've had the chance to see our marketing investments at work. Our MakeBank campaign brings to life just how fed up Canadians are with all the takes and happens in the world, from surge prices to bank fees, and shows how eQBank is here to help them. MakeBank. with no fees and high interest on everyday banking. It's really working. Millions of Canadians have seen it at key moments from the NHL playoffs to riding the streetcar to work. We are building franchise value and phenomenal brand recognition, creating demand with great early payback. Forbes once again named EQ Bank Best Bank in Canada on its curated list of the world's best banks for the third year running, with customers ratings especially highly for digital service. driving home the point that we have something very special going on. We're consistently adding hundreds of new accounts every day, such that EQ Bank's customer count is now reaching 350,000. This growth in customer reach and public profile has been coupled with customer engagement at a record high of 51%, and transactions increasing 54% year over year. Giving customers a physical EQ Bank to hold in their hands and wallets is reassuring and provides tactile proof that we are real and substantial. This is helping us drive the effectiveness of rabitizing. We're also seeing more Canadians doing direct payroll deposits, another tangible sign of growing confidence and awareness that this is the very best digital bank in Canada. Next up is the launch of Reiki Bank mobile wallet for the card, which we plan to have in customers' hands this summer. I'll profile the value of that development on our next call. I can assure you that when it comes to credit, liquidity, and interest rate management, we are as prudent as they come, and we have been for years. Exceeding $100 million in quarterly earnings is a special milestone to me, as I remember reporting earnings of $8 million in Q1 of 2007, and as the newly appointed CEO, thinking that was pretty damn good. But what's even better is that the more we've grown, the more evident it is that the bank's approach to both managing risk and bringing new forms of value to our customers works. We plan to keep following this philosophy. And now Chadwick.

Thanks, Andrew. We set out to make 2023 our best year yet, and Q1 put us firmly on track. This quarter was another display of our return on equity value creation strategy in motion. across all key earnings metrics. Before I get started, some items of note for Q1 disclosures. This quarter includes three months of results from Concentra versus two months in Q4, following our deal closing November 1st. Concentra's integration plan and synergies are on track, producing earnings accretion, I'd say, ahead of early targets. There was a lot less noise in our numbers than in Q4 when we booked large one-time items as required under IFRS. particularly to account for credit loss provisions once we close the acquisition. Q1 adjustments included $4.8 million related to integration costs, down from $36.9 million in Q4, $3.2 million in net fair value-related amortization, and $1.5 million for intangible asset amortization. Our integration spending is in line with guidance, and the difference between reported and adjusted expenses will continue to narrow in the next couple quarters. Effective for Q1, you will see a change in how we present our single-family mortgages, The term alternative as a representation of our single-family lending does not appropriately capture the high quality of our broken borrowers, and we have removed this reference. We focus on B20 lending to specific higher growth segments of customers frequently underserved by the largest banks by working with thousands of deeply valued mortgage broker partners across Canada, and we invest more in underwriting and leveraging our many years of experience here. The outcome is reflected in our margins and lowest credit losses among peers. You will see two categories in our disclosures go forward, single family insured and single family uninsured. These adjustments will be even more relevant when we become an ARAB bank. I want to hit five key themes now before we move on to questions from our analysts. First, margin and revenue. Second, our funding profile. Third, credit risk management. Fourth, expense trending. And finally, some points on 2023 guidance. Jumping right in, our proven approach to pricing all lending with our ROE calculator. Continued tailwind from our funding diversification, plus many other treasury considerations, generated solid sequential and year-over-year top-line growth. Net interest margin expanded five basis points over Q4, with growing asset yields, as you see in our MD&A, better-than-expected prepayment income, and payback on our funding strategy, including the benefit of a lower deposit beta anchored in EQ bank deposits. This margin expansion was ahead of expectations and also reflects strong momentum of our concentra integration. As an outcome, net interest income increased 8% over Q4 and 45% year-over-year. And then non-interest revenue increased 71% over Q4 to 11% of total EQB revenue for the quarter. The sequential increase in non-interest revenue has a couple key components. One, growth in fee-based revenue of 33%. reflecting the full benefit of a full three months contribution by Concentra. And two, gains on sale and securitization income up 55% over the last quarter, with momentum we believe can be sustained in 2023 and reflects both volume and margin growth. We recorded a lower loss on strategic investments in the quarter sequentially, but the mark-to-market accounting loss of $2.6 million compares to nearly $16 million in gains in Q1 2022. which at that time reflected significant one-time mark-to-market benefits. Combining NII and NIR, total revenue increased 13% quarter-per-quarter and 40% year-over-year to a record $265 million. Now, some points on funding. The diversification of our funding stack has expanded materially over the past several years across direct and wholesale options, combined with a maturing credit profile and ratings. We can dial these funding stack levers based on availability and pricing. We have de-risked the bank well without an over-reliance on any single key funding source. As we avoid interest rate misalignment with a matched funding focus and sticking to our duration target, as Andrew outlined. We're not only well covered from a liquidity perspective, but strategically, we are positioned to have more tailwind in our funding costs as we focus on additional diversification plus credit rating expansion. The most significant reminder is EQ Bank, which again is the anchor for our lower deposit beta. We continue to believe in the value of this franchise and why customers choose EQ Bank for much more than rate. This adds resilience to these stable and growing deposits that are primarily term and or CDIC insured. Compared to last quarter, EQ Bank customers increased by another 9%, deposits by 2%, transactions 34%, and engagement up to a record 51% with an average of two products per customer. As a reminder, engagement includes active customers with more than one non-zero balanced product and multiple transactions over the past 30 days. Other sources of funding continue to grow, and there's much more to launch that I'll speak to in coming quarters. You could likely expect to see us in the covered bond market in Europe in the near future. To expand this low-cost source of wholesale funding, with capacity that's expanded as an outcome of our growing assets, including Concentra. As a reminder, we're the only bank in Canada outside of the largest six banks with a European covered bond program. Now to credit risk. Q1 PCL was $6.2 million, while $1.5 million lower than Q4 and higher than the net P&L benefit of $125,000 in Q1 2022, which at that time was a result of reversing provisions taken during the COVID-19 pandemic Our allowance for credit losses, or ACL, net of cash reserves increased one basis point over Q4 to 19 basis points. A positive for Q1 was a $2.3 million PCL recovery from one commercial loan. Other changes in PCL reflect portfolio growth, shifts in macroeconomic forecasts that were more positive than anticipated, and a Stage 3 provision that was $1.2 million higher than Q4. The increase in Stage 3 is not part of a trend we're seeing in delinquency. This mainly relates to a provision on a couple commercial loans. The outcome of the ACL change was an increase of 5% to $87 million over Q4 in total net ACL net of cash reserves. The change looks larger on a year-over-year basis because of the addition of concentra bank allowances in Q4. I mentioned on our last call that we were expecting to see an increase in impaired loans, and we did. our gross impaired loans increased $18.3 million, or 13% quarter-over-quarter, to $156.9 million. We remain of the view that we will experience an uptick in impaired loans over the next couple quarters, which is natural at this point in the credit cycle, but we do not expect these will result in losses because of the way we manage credit and recoveries. It's important to also remember that for single-family uninsured lending in the personal bank, the average Beacon score for new originations is about 732, The average LTV on the portfolio is 65%. We only conduct B20 lending, and we continue to focus on lending in key urban areas with favorable population and economic growth trends, where job creation opportunities are significantly diversified. An outcome of this design is our loss rate remains at the lowest of all peers, which is a function of a deeply embedded risk management culture. EQB remains well-reserved for credit losses. We always actively manage to our principle of lending to not lose money. Overall, our credit book remains in good shape despite the economic backdrop. Now to non-interest expenses, which increased 18% over Q4, you can attribute a lot of this to Q4 only including two months of concentra expenses. The benefits from concentra synergies are flowing through, but we expect it will take a few more quarters to return to a more normalized EQB efficiency ratio versus our 45.4% in Q1. As a reminder, we're integrating a near 70% efficiency bank into the most efficient bank in Canada, so that takes time for our integration plan, and this is great progress so far. Our efficiency ratio remains a secondary measure. Our focus will always be first and foremost return on equity, the true financial performance north star. In general, year-over-year comparisons are difficult due to the acquisition, particularly to frame operating leverage given we report consolidated results. To help, I would expect more limited growth in FTE compared to past quarters, but with continued acceleration of EQ Bank, you will still see scaling in product, marketing, and technology investments. This includes the Make Bank marketing investments, and we're so pleased that Canadians are truly responding to the less take, more make message. Engagement is showing in the significant rise in daily customer growth so far in 2023. In closing, we reaffirm our 2023 guidance. When we report Q2 results, we will calibrate that guidance to account for a 10-month reporting period for 2023. This reporting year change will allow us to align with our Canadian bank peers as we announced in February. Fiscal 2024 will start for us on November 1st, 2023. This means we'll report Q2 in August, we will not report a third quarter, and there will be one four-month reporting cycle to close at 2023 to be reported in early December. This is a common approach and practice when companies change reporting years. We guided the more muted portfolio growth in the first half of the year, which translated, and we continue to have conviction in our targets for the second half of the year on a calendar basis. We expect stability in these margin levels for the rest of 2023. For PCLs, we expect trending similar to portfolio growth in coming quarters and stable trending in ACL as a percentage of lending assets, assuming no material additional changes in forward-looking indicators. Our mature and leading challenger bank approach delivered all-time record earnings, and we will remain focused on executing for investors while making steps to close this remarkably large discount to fair value in our share price. Now, we'd be pleased to take your questions. Michelle, if you can please open the line.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star, followed by the number two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question will come from Manny Grauman at Scotiabank. Please go ahead.

Hi, good morning. I wanted to start off by just asking about the margin and just isolate some dynamics there. Specifically, I wanted to understand what the impact of the full quarter of Concentra was on the margin, and also the impact of prepayment, if you're able to isolate both of those impacts.

Yeah, thanks, Benny. Good morning. So when we went into the integration, we knew we were bringing a lower margin bank, and we actually, as we looked at repricing and the overall funding costs, bringing them onto our stack, we've moved at a faster pace than expected. And I'd say, you know, I'm not going to say that was 20, 25, 30% of it, but that certainly contributed to a plus prepayment income. You could say it was a couple million higher than expected, but overall that the lower deposit beta continue with EQ bank. So we add all those up and you got to that, that expansion. And I think part of this is again, is the integration moving a little bit faster in some of the uptick and housing market activity, which is what you see also translate in some of that prepayment increase. Andrew, if you'd say anything else you're saying.

I think, I think it's, Always a bit complicated to pull the numbers to the top of the stack, maybe to give you a good read, but those are the three kind of key variables that I think is driving things. Certainly, you know, the deposit data is something that I'm particularly sort of proud of, and I think that goes to this, you know, the fact that we're driving all kinds of value in EQ Bank is creating that opportunity for us, yeah.

Just to understand the dynamics better around Concentra specifically, was it still an overall drag, and you're saying it was just, the drag was just less than you expected, and... Yeah. you could explain like you're basically able to reprice that book faster than you expected. Is that the right way to think about it?

I think that's right. Certainly, certainly one of the, yeah, certainly one of the bigger categories we've, our team's been quite successful in bringing the same kind of ROE discipline that we, that we have applied in EQ Bank. As you know, it always takes time to reprice their portfolios, but they have, they were a bit more, I think, organized about it as we completed the acquisition and therefore it, it, it, it got traction a bit quicker than we were probably projecting to you all.

And Andrew, you talked about deposit betas. Do you have any sense that over time that that will change for the worse? It looks like definitely the Bank of Canada is on hold here. So could we be in a situation where asset pricing kind of levels off, but on the deposit side, you will see upward pressure here on the margin?

I think, you know, you're seeing the big banks, you know, seeing the deposit beta not being quite as attractive as they would have hoped. But, of course, our gap, you know, we have a pretty big gap between, you know, them and us. So I don't really see that. But it will be an interesting question as to how fast some of our, you know, everyday bank accounts that pay really great rates of interest, if, you know, when the bank kind of starts to ease rates, how fast we can move to sort of go with them. you know, I would expect that, broadly speaking, we're going to sort of track the Bank of Canada downwards in those accounts. So I'm hopeful that that won't be an issue, but clearly the market dynamics can change. You know, as I mentioned in my remarks, we are really seeing a lot of really great traction with the broader value of the EQ Bank, you know, platforms at great rates on U.S. dollars, the Canadian dollar exchange rates, but it'll move the money around the world, become a more integrated part of your financial life. So I'm hopeful that the value we're seeing there will will allow us to be relatively good on deposit beta thresholds.

Thanks for that. And then just to follow up on Concentra, a few times you referenced sort of early positive signs and things moving faster than you expected. How do we understand that? Was it just your initial estimates were overly conservative, but sort of on the ground, what is actually driving that? What's actually... making that better than expected happen?

I think it's mostly on the cost side that I'm seeing that sort of, you know, I mean, I think we all know when we put two banks together, there's a lot of duplication. You can take those costs out. Don't forget, this is by far the biggest acquisition we've ever made. So we approached it with a sense of caution. It made sense even with a more cautious outlook. And I think it's just, it's true that our teams and the Concentra team have done a, a job better than I might have expected, but it's very hard to prejudge how an untested team in this kind of complexity of execution would do. But I think the reality is we've picked up some really great people through the acquisition. They've been incredibly constructive in making this all happen for us, revealing whether there are levels of value to pull, and our own team has been really on top of all the details. And there's so many moving parts, many of that's one of the challenges, sort of integrating that up into a message we communicate to more broadly at the top of the house is actually a bit of a challenge. But what I can tell you is every detail is being dealt with, and that's the net-net of all that is adding up to a great story.

Yeah, I think that's right. Even with the balance sheet, both sides of the balance sheet, even more resilient with growth than expected. And remember, it's even how you think of the accounting for when you do these acquisitions, right, when you think of fair value amortization of loans and deposits and how the actual whole process works. That's been a little more constructive, and then all that shows through Mergin as well.

Thanks.

Your next question will come from Mike Rezanovich at KBW. Please go ahead.

Hey, morning. Just wanted to get some color on your outlook for commercial lending in the near term, different performance in different categories within that portfolio. But just with respect to where we are in the economic cycle, do you think you can still keep pushing ahead with some pretty decent growth? And are you seeing or are you expecting to do any sort of runoff with the concentra assets that might impact what your near-term outlook might be?

There certainly is some modest runoff. Let me just start with where you finished there. There's some modest runoff on concentra assets as we're repositioning their book to things that are much more traditional to our way of thinking. That's pretty modest in the overall scheme of things, frankly. So, yeah, we continue to see opportunity. Our commercial business, and we've tried to really drive this home in the remarks, is really about multifamily housing. I mean, that's what drives it. And so the ability to fund the construction of apartment buildings, whether CMHC insured or otherwise, people buying apartment buildings to turn them over and improve the general structure and improve rents with that. is really an interesting business. You've seen rent increases in major Canadian cities, which are being expressed as obviously a concern on the one hand around affordability, but clearly opportunity for us to support developers buying buildings, improving buildings, expanding buildings, and so on. There's some really interesting data that CMHC is putting out that shows you the difference between the rent that people are paying on average and where new rents are in individual units. When you think through the capacity of that to support the building and new buildings and improve existing infrastructure, which is really where we play. I'm pretty optimistic about how it looks.

Ethan, thanks for that color.

And then, Chad, I just wanted to circle back on the margin real quick, not to harp on it, but I think we were all expecting a little bit of a decline sequentially. Is it possible to just delineate between your underlying margin if you exclude concentric I would still imagine that you would have had the lower spread business impacting you in a negative way, at least to some degree in the quarter. Can you sort of delineate between just those two?

Yeah, my couple short answers would be EQBX consensual would have expanded, as we did expand either way, so that trend was consistent. Pre-payment income, and again, I give a couple million attribution to that when you break that down by margin, and then some of this as well as not only the resilience of the business, but what I mentioned to many as well, when you look at the actual acquisition accounting, there are certain considerations with fair value amortization of loans and deposits, and I actually do settle this up on the balance sheet. There's some more positive tailwind there as well. So the difficult part with margin, as you know, it's not as simple as people expect. It's not just the assets minus the deposits. You've got prepayment, again, as expected, and I think you're seeing some of that as well when you even look at the media and see how some of the housing markets are upticking and people are actually looking again to refinance and actually take on new mortgages. So you see some of that translated prepayment. And then again, you have other variables that come in on the fair value side that come into net interest margin. So those are a couple of the ingredients, but I'd weigh to acquisition accounting, concentric stability, prepayment, and then the core EQB business continuing to expand, supported by the lower EQ bank, lower deposit beta as well, that's continuing to translate. Remember even that last rate hike, again, we held the EQ bank steady We're not chasing campaigns. So that stability consistency is translating all wrapped around our ROE calculator approach.

Got it. And just real quick, so the 2 million excess prepayments that you had in the quarter, are you expecting that to sort of linger in that elevated level going forward? Or do you think some of it comes back?

I wouldn't describe that as an elevated level, frankly. But the housing markets are really cool through the back end of last year. You know, that crop below, it was one of the surprises on the negative side last year. So I think it's really a case of getting back to more normal events. So I certainly, you know, generally, of course, you see more seasonal flows in this next couple of quarters. So I would expect this to continue for a while. That's right.

Thanks for the insight. Yeah, absolutely.

It's micro, a little bit closer to normal. That's exactly what Andrew said.

Thanks very much.

Your next question comes from Lamar Perso at Cormark.

Please go ahead.

Yeah, thanks. I'm going to start off on margins, just bolting on to the previous questions there. I think you answered most of what I'm about to ask, but I just want to throw it back to you guys. So what factors evolved more favorably than expected during the quarter? Was it limited to the impacts of prepayments and more positive evolution of Concentra, including some of those accounting adjustments you talked to, Chadwick? Or were there any other factors that contributed to that five basis points sequential increase versus kind of the slight decline we were expecting into Q1? Because this is a sharply better result than we were expecting just a few months ago. So I'll throw it back into your court if there's anything else.

Yeah, no, I'll just repeat again, Lamar. I think as well, when you look at the yield tables in the MD&A, you'll see some of that positive movement as well in the asset yield. So good growth in that conventional lending, which again, we focus on. So that some of that was as expected, a little bit better than expected. You see that even with some of our newer portfolios like consumer lending. Again, normalization of repayment income, as Andrew and I just hit. Concentra stability in some of the repricing, better than expected. And they're including some of the resilience of that, some of that lower source cost of funding as well, than expected. And then some of it as well is how some of the fair value amortization of loans and deposits shows up through margin. and that will stay around for a while as well, and that you can attribute to Concentra. So core business expansion plus some of these factors like prepayment normalization, amortization loan deposits, and then the strength of the yields, all coming in a little bit better than expected. And it shows the fortitude in our execution, to be honest.

Yes, I think the only thing that I think we were being a little bit conservative on, perhaps it might have led to the surprise as well, is not increasing rates in EQ Bank as the bank moved. So we were being a bit conservative about that deposit beta. And I think really where we've landed in that is it's a great everyday rate for your operational accounts, you know, to be paid 2.5% on interest, and we provide all the functionality that you would otherwise get from a checking account. If you are leaving money in the account, you know, you expect to leave money in the account for a longer period of time, you know, the move is into a term deposit, which is really easy to do off the app. So I think that's the trade, and we are seeing a bit of certainly a bit of movement into term deposits within the Ecobank platform, which I feel very comfortable with. But you lose a little bit of... When you win in funding stability, you potentially lose a little bit of margin there around that deposit beta. But it's a subtle thing, and we're constantly tuning it. So even when the budgeting teams come to us to ask how to think about that, I think we've probably built in a bit too much conservatism there historically.

Gotcha. And then Moving on to the gains on sale, probably for Chadwick, I think I heard you suggest that you can maintain some gains throughout 2023. Is that true? And if so, at this $14 million quarterly level, and then kind of what gives you the confidence in that? Because it does seem quite elevated to me, at least in Q1.

Yeah, absolutely, Lamar. So we have an incredible team. Remember, we're the largest securitizer of multi-residential insured lending in the country. We have great expertise. A couple of things you see is that the amount we did in volume, it's getting to the point of nearly equivalent to what we did an entire year in the past. With what's happening with originations in the market, we do think we can continue that. Some of the margin expansion is there. I think I would expect to see some consistency in the overall line in the next quarter. And then probably through to the end of the year, then we'll revisit that guidance for 2024. But this is a core expertise. This is a core, we call this core earnings too, right? We didn't, strategic investments is stripped out, but those core gains on sale are part of our expertise.

Yeah, we've been on a structural, sort of positive structural shift in this business over the last 18 months where we set up Equitable Trust. So we have a trust company subsidiary that's also a securitizer from Multis, which has given us much more capacity using an aggregator capability, an aggregator in the technology. So the volumes will continue to be higher structurally compared to where they would have been 18 months ago. And we do have the benefit through our other activities of creating a pipeline of future loans to go into this part of our business. So the ability to help somebody build a building through a CMHC insured construction loan, for example, and then take it through the securitization journey is really proving to be a valuable opportunity business and also going to give us more comfort in the source of business going forward.

Gotcha. And then last one for me, just on the office exposures generally and that 59% LTV, how often do you guys revisit the valuations on these office properties and how do you kind of manage the credit risk generally?

I mean, on this sort of revisiting price, although we're revisiting value in LTV, each property would be revisited once a year on a kind of rolling cycle when it's coming up for annual review. So it's not quite as easy to kind of capture the data as we would with single family where we use HPI to update the entire portfolio recorder. So, you know, having said that, you know, obviously it's a fair conservation, you know, fair margin of conversation when we're of safety at 59% LTV. So I would say there's not a lot of liquidity in the office market right now. So I think your sort of caution around that, the words of caution I'm sort of hearing is entirely merited. We're very keen to sort of manage credit risk carefully in these types of properties. We think we can be, if need be, a good owner of real estate. So we're people that would think about releasing space getting NOI up and then remarketing on a sensible basis, as opposed to, I think, other banks would take the view of sort of remarket as is, where is, and get the best value and take an early loss. I don't think that is the approach. To be clear, I don't think we have any office properties under management right now, but that is the approach we would take. As you mentioned, it's less than 1% of our assets, and we feel pretty comfortable with it, especially when you look at the types of tenants in these buildings. Most of it's multi-tenant. dental practices, doctors' practices, financial planners, so fairly diversified tenants that give us much more comfort than perhaps you've had large commercial tenants that could go, you know, could have financial stresses or business model challenges, or maybe their people don't want to come to work because they don't really want the space. So we feel pretty good about the asset selection in that business. As I mentioned, it's not a private asset class, and you can see that in terms of what a very modest portfolio it is within the original scheme of the bank.

Thanks. That's it for me, guys. Thanks, Mark.

Your next question comes from Etienne Ricard at BMO Capital Markets. Please go ahead.

Thank you, and good morning. On funding, could you please remind us of initiatives and assumptions supporting a pickup and deposit growth at EQ Bank in order to meet the guidance for 30% growth in 2023?

Are you just curious of the funding levers that you're in, or is there some of what work is happening under EQBank to support that growth? The assumptions around growth is what I heard.

I wonder if you could just reaffirm the question there.

Yeah, it's just more broadly the initiatives and assumptions underpinning your guidance for 20% to 30% growth in deposits at EQBank.

Yeah, so... The initiatives are very clear. As we talked about, we launched in Quebec around the beginning of the year. We launched in Quebec last year, so we did have no customers until December in Quebec. And then in January, we launched our EQ card. So both of those are driving the improvement in the addressable market. And then we've been much more aggressively putting advertising collateral to the market, which you've seen with our MakeBank campaign. We have actually been, you know, putting fairly significant advertising collateral in the market around the Leafs, you know, first and second round playoffs. So that's really getting some traction in terms of kind of average customer counts increasing. So, you know, it is a... I don't know if we revealed publicly how many customers we're expecting to have this year, but broadly speaking, every customer we pick up, you know, ends up with an average balance around $20,000. So...

As we add new customers, it's driving that deposit growth. Understood.

On the topic of banking stress in the United States, I recognize this is an evolving situation, and it's happening in a different jurisdiction. That being said, in Canada, how do you think about potential regulatory implications on risk weight, liquidity requirements, and and also insured limits at CDIC?

Yes, so I think it's very important for us to think about structural differences between the Canadian banking market and the U.S. banking market. In particular, there's been a flight of cash out of commercial banks of all types in the United States into money market funds who then turn around and can post the money directly at the Federal Reserve. In Canada, essentially deposits leave one bank, They have to go to another bank. There isn't such a facility enabled. So I think that makes the entire system structurally sounder. So I think that is a really, really important thing to think about. The other thing for those of us that are banking geeks, I thought the Federal Reserve's report on SVB that came out last Friday is sort of a primer on how to not run a bank. And I think there's unfortunately a few banks that are being run this way and they were set up to be very fragile. And so when you put stress on them, it's very difficult. And I think if you read that report and you compare what we've been talking about around the resilience of our bank, you'll see that it's really distinctly different. In particular, the interest rate shock and the way they're setting very high limits and then also even breaching those limits is stunning and startling and shocking and we knew about these things coming out of the financial crisis. No bank should have been set up for this kind of failure. In terms of regulatory reform, I don't know. I hope we're thoughtful about it because my own view is that supervisors and the regulations deal with a lot of these things. You just need to have good supervision and good management of banks. Why that failed in this case is disappointing, but I think before we reach for changes to the rules, we really need to understand that. Frankly, OSFI does a great job around a lot of these things, including more recently putting out a draft guideline on culture in banks, which seems to me is sort of potentially at the root of the problem. CDIC insurance, though, I do think I'm optimistic that we will increase the levels of CDIC insurance. Michael Mignotti, our general counsel, and I penned a note in the first week of the new year. So long... Long in advance of these challenges in the U.S., calling for higher CDIC insurance limits, and we do know that CDIC is now looking at that. I'm not saying, by the way, those two events are linked, but CDIC is considering its coverage limits, so I'm optimistic that over the next little while we'll see increasing limits.

Thank you very much.

Your next question comes from Jeff Kwan at RBC Capital Markets. Please go ahead.

Hi, good morning. Just wanted to go back to the multi-unit residential, your view in terms of being elevated. Is that a function of just higher market activity and is that more new apartment construction versus sales of existing properties? But also too, is it also a function of taking market share, because I know you talked about also having more capacity to be able to do more through aggregators and whatnot.

I think it's mostly that, frankly, the structural improvement in capacity. In the past, it's not been the ability to get the loans or get the assets. It's really been the ability to find capacity to fund them that's been our binding constraint. And so by some of these moves, we've opened up the capacity within the system for ourselves to allow us to support our customers with higher volumes. So yes, I think there is good activity in the market because a business that might have been done historically as conventional loans is moving more and more into the CMHC channels. So the overall market's increasing. We're definitely increasing share within the market and becoming a much more relevant player than we ever have been.

And just my other question is, as we're heading through the spring housing season and your comment of seeing some prices and we're seeing that in the market go up. Are you seeing anything from the competitive standpoint, whether or not in the prime or the all-tay space on rates and to the extent in certain parts players could probably play with amortization periods to try and drive new business?

I haven't really seen that, frankly. The players are the same on amortization. I think for all of us in the prime market, prime, by the way, it's almost irrelevant to your thinking about equitable as an investment vehicle. We have a good team there. It's a nice business within our framework, but it's not particularly relevant to driving the bottom line. That's a thin margin business. I think it's been a challenge for all of us to participate in that space with the volatility and interest rates to actually be pricing properly and thinking about where margins need to be. In general, I'd say the margins have widened a little bit, but I think it's really because we're all trying to make sure we don't get caught offside with a change in interest rates. The competitive dynamic in a more traditional space of conventional single family continues to be the same. Essentially, we have two or three significant players and I'm not seeing competitive behavior that seems strange. The one thing, of course, that's overriding us and really doesn't influence us at all is some dialogue around a couple of the big banks at least having variable rate mortgages that have gone negative AM, and I know that's causing some concern in some circles. We don't have that. We have arms that reprice and are amortized still maintain a positive amortization profile.

Great. Thank you.

Your next question comes from Steven Boland at Raymond James. Please go ahead.

Thanks guys. Andrew, you kind of just touched on what my question is going to be in terms of what are you seeing in terms of renewals? Like how are you dealing with your customer base, especially on the single family in terms of retaining those clients with the higher rates? You know, what's, you know, is there sticker shots still in place for, for some of your customers, I'm just trying to get a better sense of what that, what that retention and renewal looks like, that process.

Yeah, so I mean, I mean, in terms of the renewal percentage, we're, we're increasing, we're doing a higher percentage than we ever have, so it's, that part's good. There's no doubt that there's sticker shock on part of our customers. I mean, frankly, I have a lot of empathy for them, so we have to work with them to kind of figure out how to, how to adjust to that sticker shock. You know, it, it, you know unfortunately it's generally just us putting the pricing increases pushed by through by the bank of canada and general rate increases through to them so certainly we're not trying to take advantage of this and try to help our customers but obviously we've got a price in the context of the market so that's how that's working i think the big takeaway from all of this when you know when i read commentary around mortgage stress and so on is that the balance sheet of households are still remarkably strong in canada And that covers up a lot of, that's why these portfolios are holding up really well. So our customers that are renewing with us, despite the payment shock increases, have resources way beyond just the current income. The incomes are going up too because of inflation. So we're seeing remarkable resilience here. And that story about the balance sheet of Canadian consumers is one that doesn't enter enough, I think, into the mortgage market. you know, stability dialogue. And I think it's, I believe it's really important.

Okay. That's all I have. Thanks guys.

Ladies and gentlemen, once again, if you would like to ask a question, please press star one. Now your next question will come from Graham writing at TD securities. Please go ahead.

Hi, good morning. Um, Maybe a similar thing, but it does feel like Osprey is becoming a little more sensitive to liquidity and funding stress with some of their recent commentary. Are you expecting them to bring forward any changes on that front? And or similarly, are you making or expecting any proactive changes on your part towards holding more liquidity, just given the market backdrop and the sensitivity right now?

I would certainly expect that Osprey is going to be thinking more about liquidity. There's always a lesson to learn from banking stresses, and clearly there's a lesson about what's happened in the US that we need to think about. As I mentioned, I do think there's structural differences in Canada that make some of those lessons less relevant. We've always maintained strong liquidity, and as I mentioned, I think many should be surprised that we, for example, in EQ Bank, we only take deposits of 200,000 bucks, for example. I haven't seen other banks kind of operating with that level of caution. So, you know, liquidity, holding more liquidity can be somewhat helpful. Really, the issue is the structural way you're set up to make sure you can continue to access liquidity. And the work that Chadwick and his team have done on covered bonds, the strength of the EQBank franchise, as well as access to broker deposits, you know, really wide access to broker deposits across the country, I think puts us in great stead. So quarter to quarter, you'll see fluctuations in liquidity. A lot of that's based on the projections over the next six, 12 months in terms of fundings, our expected fundings of assets and that kind of thing. But in general, we're not thinking that we need to move our liquidity profile or risk appetite at all because we've always been conservative. It's always been my super, having been in this bank when we went through the financial crisis, being through the issues in 2017, it's always been a highly elevated kind of risk factor that we think about in managing and running this bank.

And for us to measure that, should we be looking at your liquidity as a percentage of your assets or is that too blunt of a tool?

It's definitely too blunt. It's definitely, you know, unfortunately there are sort of metrics that we're not, the culture of the industry is that we shouldn't be revealing them. that would be helpful to you, but we're not allowed to do that. Hope you think it's imprudent. We're not really allowed to do that. So looking at that is a useful way to talk about it, Graham, and then I think we can talk you through it as well beyond that. But that is a way, but it doesn't really reflect some of the seasonality and other things that you might see us setting up for that could be explanations for why liquidity is moving. We could always get more liquidity than we hold on the balance sheet. It's a question of judgment. How much do we think is appropriate given the way the business is shaping up?

Yeah, and you're one side too, Grant. Remember, so even when you look at the press release and the MD&A, we say we operate well in excess of 100% at LCR. That's always a good test point for you versus where the DCIVs operate. Then we have some other liquidity measures that come out at least once a year, like we had in Q4. And that liquidity measure you could expect is a haircut version of LCR, and that was over 300%. in Q4 that you would have seen in February. And then Andrew's point, some of the other disclosures of points around the insured aspect. So there's a few good measures that we had and how we reframed it in this quarter. So in DNA, I think it's worth checking out.

I always liken the bank to being like a sponge. If you actually go looking to squeeze liquidity out, there's a lot of liquidity there under the hood. And so that's a more complex argument than some of these much blunter ratios of how much HQLA we've got around. Yeah.

Okay, great. If I could jump to just some of the commercial arrears and credit, just wondering if there's anything sizable in there that you would maybe call out or just some color on the nature of those arrears and your comfort around no potential losses on that or limited losses.

Ron, maybe you can. I know you've done a deep dive in there.

Yeah, so thanks for the question, Grant. Again, you go back to the levels of impaired that we have. I mean, I do like to point out that we're basically just approaching pre-pandemic levels. And so I and the rest of the management team look at it as things have normalized. And so we're really operating with normal levels of impaired in that business. It's a number of accounts that you can count on one hand. And so we've got a very good view into all those, very good granularity. And it all goes back to what was said earlier on the call with respect to origination LTVs, the ability to get in and understand these, and having a lot of cushion. So while you do see a nominal increase in impairs, you don't see a corresponding increase in provisions on those because the view to working through them is you'll see a similar result to what you've seen from our historical results in working through those.

Yeah, I just walked through it. I asked the team to pull all file office files over 10 minute bucks and walk through them kind of one by one. And yeah, there's always things in every, every, every asset you have, but in general feel real comfortable with it after doing that.

Okay. Great. And maybe one more, if I could just construction loans, that seems like a higher risk area right now. It looks like you have 2.7 million in your portfolio and it, and it has been building. Is that you just, you know, honoring previous commitments as opposed to actively deploying capital there? Is that what we're seeing? And is there anything insured in there?

Yeah, there's a lot of insured in that. A lot of that is insured by CMHC.

So if that's two sevens over a billion, it would be the CMHC insured. Right, exactly.

So that's obviously, that's short against credit default and generally very high quality sponsors. So you can knock a billion off that before you really sort of think about the number. We agreed with you in terms of generally that's an area that in an inflationary environment seems a bit riskier. That's why we actually kind of dialed back on construction lending through much of last year. We are starting to see more opportunity now that we believe the inflationary pressures on construction costs, well, still the inflationary pressure, but people can get more confident on construction costs. I think we're in pretty good shape on that construction lending. Generally, a lot of the time we're operating at relatively low LTVs on completed costs with other parties behind us as well. So, again, sort of double protected on the kind of LTV in that business.

And are these multi-unit apartment buildings?

The vast majority will be multis and condos with pre-sales.

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

Your next question comes from James Glowing at National Bank. Please go ahead.

Hi, James. Yeah, thanks. Good morning. Just wanted to follow on that commercial loan growth theme. Conventional commercial loans look like they've declined quarter over quarter. Can you talk about what's driving that decline sequentially?

I mean, nothing particularly in terms of What drives that? Don't forget, in that business, they're larger, lumpy loans, so you get a few loans discharging and timing on funding new loans. You can end up with a bit of noise quarter to quarter. So I think that's the only explanation we can really provide on that.

Yeah, and remember in the whole book as well, we have the higher level derecognition as well in the quarter. So that's always going to be part of the overall commercial trending, and that's where you see the off-balance sheet increase. So we have about 11.5 billion or so derecognized off the balance sheet now, too.

Is it the same as what Joe was saying there? So if we have an insured, a multi that's insured by CMHC sitting on our balance sheet, and we roll it into a package and sell it to the Canada Housing Trust, that may or may not, usually would get derecognized so that it then comes off the balance sheet. So you really have to look at the total loans under management rather than the size of the balance sheet itself. That's right.

Yeah, I was thinking more on the mortgages, like the conventional side. And it sounds like there's nothing strategic there, just some lumpiness in that business rather than anything where you're maybe more concerned about conventional commercial loans or otherwise, something like that.

Yeah. And just to mention, when we stopped putting out new commitments for commercial loans through construction loans much of last year, that Obviously, we continue to fund into the existing commitments. Some of those buildings got completed. They got discharged. So you're seeing some of that. I wouldn't expect that kind of erosion to prevail. We're busier now. We're sort of more comfortable with some of these asset classes that we were feeling a bit concerned about in the middle of last year.

Understood.

Still in the commercial side, I'm thinking about multi-units. Do you have any initial thoughts or views on Any potential impacts if the federal government decides to fold in CMB funding? Are there any impacts on that gain-on-sale line? I'm not thinking necessarily on liquidity for commercial loans, but more on that gain-on-sale line. Is there any potential knock-on effects from that?

We don't know, frankly. That was a line item in the budget. So for those of you maybe not following all that detail on the budget, there was a proposal or some thinking around consolidating the issuance of Canada Housing Trust bonds into the general liabilities of the government of Canada with the view that that might reduce overall funding costs. Not entirely clear to us, frankly, that that outcome would even be achieved, but there is some work going on at the Bank of Canada to think about that. Presumably, the need and the overall strategic desire of the government to continue to fund multifamily buildings in the face of a shortage of housing should continue to create a good program. To date, we haven't heard much detail about that, but obviously we're very interested and engaged in how that might flow through and whether it might create some unintended consequences that we should be engaging with. But I think it's way too early to say.

Okay, understood. And then the last one for me is on the OPEX. It looks like OPEX this quarter increased you know, more or quite a bit more than what just like an extra month of concentra would have implied. So hoping you could, you could outline what are the, what are the, some of those drivers that are driving that are resulting in that larger increase? And is there anything seasonality wise, one-timey like marketing coming off next quarter? Like how should we think about, you know, this level of OpEx at 120 million in a quarter over the next few quarters?

Yeah, I don't actually think it's that surprising, James, when you do the math and the consensus. Last quarter was a little bit probably where you're struggling is just the math last quarter versus what was reported and adjusted. Because we only actually, when we carve out those integration costs, it's more on a bulk basis versus the line-by-line items. So you're probably just not seeing the line items with that level of detail. When you consider that, then the noise of Q4 plus that consensus and plus what I mentioned in terms of the launches of the QBankCard, the MakeBank campaign, some of those investments in our digital bank That's what you're seeing translating. And I actually think the 45% efficiency ratio is pretty solid, given where we're at in the integration. And notwithstanding, 16.9% ROE would be the paramount focus. So some of those trends, I think that's the way to think about it for the quarter.

Okay. Understood.

Thank you.

Thanks, Jim.

Mr. Moore, there are no further questions, so I will turn the conference back to you for any closing remarks.

Thank you, Michelle. As a reminder, we are hosting our annual meeting of shareholders virtually on May 17th, and we encourage you to log on, participate, and vote. Details can be found in our proxy circular, including on our advisory vote for executive compensation. We included this vote as part of our board's ongoing commitment to good governance, and I'm pleased that we've received support for our approach from the two most prominent proxy advisories. firms. Speaking directly to our institutional owners, I remind you that we find great value in direct engagement and encourage you to reach out at any time, not just during proxy season. During proxy season is a great time to do it. In closing, we look forward to reporting Q2 progress on August the 1st. Thank you for participating and have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning. Again, we would like to thank you for participating and ask you to please disconnect.