EQB Inc.

Welcome to EQB's earnings call for the fourth quarter of 2023 on Friday, December 8th, 2023. At this time, you are in a listen-only mode. Later, we will conduct a Q&A session for analysts. Instructions will be provided at that time. It's now my pleasure to turn the call over to Sandy Deauville, Vice President of Investor Relations and ESG Strategy for EQB.

Thanks, Lyra. Your hosts today are Andrew Moore, President and Chief Executive Officer, and Chadwick Westlake, Chief Financial Officer. Also with us is Marlene Lenarduzzi, our new Chief Risk Officer. Marlene joined in October with more than 25 years of experience in risk management. Most recently, Marlene was head of Counterparty Credit Risk Management and Market Risk Strategic Initiatives at BMO Financial Group. Expect to hear from her on these calls in future quarters. Welcome, Marlene, to the bank. For those on the phone lines only, we encourage you to also log on to our webcast to view our accompanying quarterly investor presentation. There, on slide two, you'll find 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 where applicable or otherwise noted. It is now my pleasure to turn the call over to Andrew.

Thanks, Sandy, and good morning, everyone. Before jumping into 2023 performance highlights and our 2024 guidance, I want to acknowledge a few important milestones in our long and successful corporate history. Ten years ago, Equinor Trust received its banking license and became Equinor Bank to appeal to a new generation of financial services customers. 2024 will mark our 20th year as a TSX-listed company. And yesterday, EQB began reporting on the same fiscal year basis as the Canadian banking industry. These 10 years included the launch and scaling of EQBank, the best digital platform in Canada, expansion of our leadership positions in single-family and multi-unit residential lending, the launch of decumulation lending, and the accretive acquisitions of Bennington Financial and Concentra Bank. These and many other developments define and reflect the organization we are today, purpose-driven to enrich people's lives, managed with a strong risk culture, technologically advanced, and more capable than ever. A then and now picture of Equitable Bank's assets and deposits demonstrates our transformation in scope and scale, becoming Canada's seventh largest bank. And with that, the shareholder returns at EQB are leading compared to banks on the TSX and S&P 500. Our progress has been accompanied by annual earnings growth, the consistent achievement of ROE above 15%, strong credit performance, and an unwavering focus on doing the right thing with customer service as the beating heart of our approach. These calls are intended primarily to help our investors and analysts sort out the underlying financial performance over recent history. And Chadwick will provide that insight shortly. While the noise that inevitably accompanies a change in year-end makes comparisons more difficult, EQB clearly delivered great financial results in 2023. In fact, our EPS performance over 10 months surpassed what we achieved in 12 months in 2022. What I'm most proud of is that through this 10-year journey, we've kept our clear focus on building a better bank that improves our customers' lives. This is a hard culture and mindset to maintain, and one that is now embedded in our DNA to provide enduring competitive advantage. Equivalent Bank's defining strengths position us as the challenger bank in Canada, a category we established and defined, with customer upside that is different and better than our industry peers. I'd like to thank the entire Equitable team for delivering great results again this year, with a special shout out to those whose efforts were required to transition our reporting year. Candice Banks got together in 1965 and agreed that October would be their common year end, apparently as a favor to overworked accountants to shift year end reporting away from the times that these firms are most busy. This change predated Equitable's founding by five years. Now that we are firmly established as a distinctive player in the banking industry, I think our industry analysts will be pleased with the ability to make side-by-side comparisons that include Canada's challenger bank going forward. Now to performance highlights and our outlook. I speak regularly to our focus on value creation, discipline on capital allocation, and an all-star objective of generating more than 15% return on equity. We achieved our ambition again in fiscal 2023, with 16.5% ROE in the fourth quarter, ending at 17.1% for the 10-month fiscal period. This takes our 10-year ROE average to 16.3%, which we believe is leading amongst Canadian banks. Our priority for 2024 is to again deliver ROE of greater than 15%, which is performance that rewards shareholders for their ownership, while being consistent with investing in the capabilities acquired by the business to flourish in the years to come. We ended the year with a record $111 billion of assets under management and administration, up 8% in just 10 months. This continued growth demonstrates the strength of our brand, the trust customers have in us, and the value of delivering innovation and service excellence in underserved customer segments. On November 1st, we marked one year since our conceptual bank acquisition, which gave us additional scale advantages and made Equitable Bank the seventh largest bank in Canada. I'm pleased to say we outperformed our key business case targets ahead of schedule. We're also continuing to find new ways to serve our credit union partners. Recent expansions of securitization, consulting, foreign exchange, and digital banking services create the means for us to do even more for them and their 6 million members. With the experience gained in working with the people who joined Equitable through the acquisition, we are also confident that Consentra Investment is poised to continue to deliver great results for shareholders in the form of earnings accretion, non-interest revenue growth in 2024. Foundational to the long-term franchise value and growth of Equitable Bank is EQ Bank, our digital bank. Here we had another big year on the back of the highly successful MakeBank brand campaign and new service innovations. The Forbes number one rated bank in Canada for three years running added another 93,000 customers in just 10 months, rose to 30%, taking us past the 400,000 mark with hundreds signing up daily. You may recall that we launched the EQBank payment card at the beginning of 2023. Just a few weeks ago, the card launched in Quebec. This payment solution has been game-changing for our customers and EQ Bank as a purely digital bank. Customer enthusiasm for our first-to-market, all-digital, first-home savings account also surpassed our expectations. We could not be more excited about what lies ahead for EQ Bank in 2024. Early in the new year, you will see us expand our brand voice with a message that builds on our learnings from 2023. In 2024, we'll be the first all-digital business bank for small businesses, giving them a better way to bank. These initiatives will help us achieve our 30% to 40% EQBank customer growth guidance. Another business that is important to us is commercial banking. We operate through seven lines of business, and our on-balance sheet loan portfolio grew to $15 billion in 2023. The vast majority of our commercial lending supports real estate where people live. We are a leader in funding the development and renovation of apartments, construction of condominiums, and other types of multi-unit residential real estate properties. In order to help Canada close a significant housing supply gap, and as a matter of strategy and risk management, we focus on lending in major urban markets. We have been a reliable lender in this space for decades and are a significant player in in the market to securitize insured multi-unit loans through CMHC-sponsored programs. You'll see in our MD&A guidance that our expectations for multi-unit lending continues to reflect a bullish outlook, and with it, an expectation that we will again realize strong earnings from the associated securitization activities. Recent actions by the Canadian federal government support our guidance, including the increase in the Canada Mortgage Bond Program to fund multi-unit projects sponsored, insured by CMHC, which the government believes will stimulate up to 30,000 more rental apartments being built per year. In our MD&A, we described the composition of our commercial portfolio and underscored that office buildings, shopping malls, and hotels represent about 2% of our loan assets. In personal banking, our strategic focus has remained particularly on growing Equinor's de-accumulation lending business, particularly reverse mortgages. Our Talking House TV campaign debuted this fall, and for the first time we established a direct-to-consumer connection. I'm delighted to note that decumulation lending assets now total $1.5 billion, up 43% in just 10 months. We expect this growth trajectory to continue in 2024 as Canadian seniors look to Ecuador Bank to help them tap the wealth that their homes represent. For single-family uninsured lending, We experienced moderate growth aligned to our 2023 guidance, with assets increasing 3% from year-end 2022. You'll recall that in both June and July, the Bank of Canada raised the overnight rate with a discernible market impact. On the flip side, loan retention is much higher, and this is a tailwind that we expect to continue into 2024. For those of you worried about tail risks, I would point out that over... 80% of our uninsured single-family mortgage customers had their mortgage originated or renewed in this higher interest rate environment. As you think about risks, I urge you to review the MD&A, showing how the bank's historical loss rates over the past 10 years, including 2023, have always been far lower as a percentage of total loan assets than Canada's peer banks. I'm also excited about our announced agreement to acquire 75% of ACM advisors. Beyond adding about $5 billion in assets under management to EQB as a new subsidiary, separate and distinct from Equitable Bank, ACM brings us a new opportunity to enrich people's lives and a new source of non-interest revenue for EQB. We look forward to partnering with Chad Mallow, Chad Mercer, and the entire ACM team to build on their 30-year history of delivering value for institutional and accredited retail investors and commercial borrowing customers. Now over to Chadwick.

Thanks and good morning. Before I jump into the numbers, let me reinforce Andrew's earlier comments regarding the fiscal year change. Our Q4 results in 2023 are presented as a four-month period ending on October 31st and compared to a three-month Q4 that ended on December 31st in 2022. There is no Q3 in 2023, which is a one-time occurrence to enable the change. This realignment of our year-end is a great strategic outcome for EQB. As you've reviewed in our results, we exceeded our ambitious guidance on all key earnings metrics. Our employees delivered for our customers. In turn, we are able to reward our investors for it. 2023 presented a challenging macro environment in the first full year with Concentra. This morning, I'll offer context on a few key performance measures before turning to Q&A, including margin and funding, revenue, credit performance, expense management, and our guidance for fiscal 2024. As part of revenue, I'll include some comments on a top strategic priority that translated extremely well in fiscal 23, being multi-unit residential and affordable housing that now represents nearly a third of our $62.4 billion in total loans under management. First, margin of funding. At 2%, NIM expanded one basis point from Q2, mainly due to higher sequential prepayment income higher yields on the conventional loan business, and cost of funds increasing more slowly as we continue to optimize new funding sources. On a year-over-year basis, NIM expanded 10 basis points to 1.97%, primarily benefiting from the Bank of Canada rate increases and a static lower deposit beta maintained in EQ Bank. This strong net interest margin led to a 13% increase in net interest income in fiscal 2023 compared to 2022, even with two months less of results. Our long-term efforts to diversify and strengthen sources of low-cost funding are translating. Funding markets continue to be liquid and efficient for our strategy. In Q4, we launched our first BDN, or bearer deposit note program, as a new wholesale lever, and we have many others in addition to core retail, such as $1.7 billion of covered bonds, $1.6 billion of deposit notes, and $2.4 billion of credit union deposits. More than 95% of our deposits are term or insured, and our matched funding focus and approach to hedging are serving us well. Now more into revenue, particularly non-interest revenue. Anchoring back to our 2022 Investor Day, we set a goal to diversify and grow our non-interest revenue to represent 12 to 15% of total revenue by 2027. We are progressing well towards this target with non-interest revenue representing 13% of total in Q4 and 12% on a full year basis compared to 6% in 2022. A few key areas to call out here are multi-unit, concentric trust, and payments. For insured multi-unit, we now have $20 billion in loans under management, up 11% sequentially and 27% year-over-year. $15 billion of this amount has been derecognized through the CMHC, CMB, and NHA MBS programs. As these units are insured against default and are not prepayable, the assets are derecognized when securitized and sold. The corresponding event and spread differential results in upfront non-interest revenue in that reporting period. This amounted to $25.9 million for Q4 and $56 million for fiscal 2023, more than double year over year. Second to touch on is how we're building relationships and expanding product offerings to credit unions and wealth advisory firms across Canada through Concentra Trust, which contributed 23% of total non-interest revenue in 2023. Also to note, is that we have been growing contributions from payments, including priorities such as EQ Bank's payment as a service business, serving as bin sponsors for third parties such as Berkeley Payments and BlackRock. This business enables us to support the needs of the FinTech community by leveraging our card infrastructure and rolling out prepaid cards of various use cases. Upcoming, the acquisition of ACM will be accretive to fee-based revenue in fiscal 2024 once the deal closes, in the order of magnitude of 15 to 20% plus growth above our current levels of fee revenue. Now to credit risk trending. Our net allowance for credit loss ratio increased two basis points sequentially to 22 basis points, in line with our expectations given shifts in our lending portfolio and provisioning following changes in economic conditions. As a reminder, in our lending portfolios, nearly 100% is secured and approximately 52% is insured. The average LTV for our single family uninsured portfolio was 62% in Q4 compared to 63% in Q2. We do not offer single family variable rate mortgages that could be triggering negative amortization. About one third of our single family lending is insured and the credit scores of our borrowers remain healthy with an average of 742 beacon on new originations in the past quarter. We are holding to our consistent risk management framework. As we've been signaling in the past few quarters, we expected impaired loans to continue to increase through the credit cycle, which you see in our results. Due to our prudent lending approach, in general, we continue to not expect to lose money on these impairments. Gross impaired loans increased $146 million, or 63% quarter over quarter, to $380 million. Most of this increase related to our commercial business, with two-thirds relating to five commercial loans. We are appropriately provisioned, and these loans are expected to resolve in coming quarters without losses on many of them. This translates to a net impaired loans ratio of 76 basis points as a percentage of loan assets. PCLs increased to $19.6 million in Q4, up from $13 million in Q2, with a PCL ratio that increased 1 point to 12 basis points. This growth was primarily related to Stage 3. Over 70% of the PCL was attributed to equipment financing, which is something we expect in price in the business, plus one commercial loan. Our personal and single-family portfolios are performing well. And as Andrew noted, the majority of our single-family uninsured lending has already renewed to current pricing levels. And now shifting to expenses, we are pleased to end another year with a world-class efficiency ratio, particularly compared to other Canadian banks. On a quarterly basis, expenses were up mainly due to there being one extra month in Q4. And for fiscal 23, while there were only 10 months, it was the first year with Concentra included, plus new investments in EQ Bank products, services, and marketing. In terms of Concentra, as noted on our last earnings call, we set a target to achieve annualized cost savings of $30 million within 18 to 24 months post-closing and achieve this ahead of schedule. This milestone is reflected in our Q4 43.8% efficiency ratio, or 44% for fiscal 23. This is particularly strong in the context of Concentra having had a near 70% efficiency ratio. While additional earnings synergies continue to be expected over time, the most significant drivers have been substantially delivered. There will be some continued investments on the technology side. In Q4, we also had other one-time adjustments, including for costs related to acquiring and preparing to close ACM and for our fiscal year change. Our staffing level growth slowed sequentially as we leveraged our economies of scale made possible with our technology stack and momentum to being a cloud-only bank. Now I'll wrap up with some context and guidance. While inflation has moved in the right direction, interest rates continue to present some challenges in the broader economy, which may impact short-term growth across EQB's various business lines. Rate relief for customers may come before too long, but either way, we take confidence from the fact that our business model has proven to perform across economic and credit cycles, and the ongoing diversification in sources of funding, assets, and revenue have further strengthened our positioning and risk management profile. While there remains uncertainty, we have conviction in 15% plus ROE guidance. We expect some variation in returns each quarter, in part due to investments in our EQ Bank franchise, but 15% plus remains our North Star performance for the year as a whole, more weighted to the second half of 2024. With our change in fiscal, to help with transparency, we are again issuing dollar range guidance. For diluted adjusted EPS, we provide a range of $11.75 to $12.25. dividend growth of 20% to 25%, and book value per share growth of 13% to 15%, combined with set one remaining above 13%. These targets are a great reflection of EQB's business model. To wrap up, 2023 was another year of solid execution, purpose-driven solutions introduced for Canadians with the best service of all banks and continued momentum for our challenger story as we aim to continue reducing the significant discount in our share price and expand our track record of delivering the best long-term shareholder returns of all peers. Now, we'd be pleased to take your questions. Laura, can you please open the lineup for analysts?

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star, followed by the number two. We have our first question coming from the line of Manny Groman from Scotiabank. Please go ahead.

Hi, good morning. Andrew, I was interested in getting a little more detail in a point you made about 80% of uninsured residential mortgages either originating or renewed in the higher rate environment. And just... I wanted to explore that a little more. Obviously, it's a big focus for the market. And just wanted to see if you're seeing any signs of stress in customers that are renewing at higher rates. Is there anything that you could highlight in terms of that being a stress point for any of the customers? And so I'm curious about that first.

Certainly, I have a lot of empathy for our customers here. I think, you know, lots of people wouldn't have expected interest rates to rise as fast as they have. And so when you were offering renewals, you know, our cost of funds is going up and we offer renewals at a fair spread on those renewals. So certainly have a lot of empathy for our customers have to face that challenge. And we are seeing some people at the margin that are, you know, you're seeing a little bit more early delinquency. People are having a little bit of challenge to make those payments, but it's not really translating into anything in the way of losses. I assume that some people, unfortunately, are forced to maybe sell the home to find a cheaper way to live or whatever. But in general, I think it's more encouraging the other way, where the vast majority of our customers are able to absorb this increase. I don't know whether it requires working an extra shift or whatever to make of the mortgage payment.

How big a factor is amortization here? Are you seeing customers increase the amortization in order to make the payments lower and able to manage the rising rates?

The amortization doesn't change, but of course mortgage math is such that the principal payments you're paying As you go through an interest shock, the principal payment per month reduces. So that does soften the blow of the interest rates going up a bit. As you recall, mortgage rates are very low. The vast majority of the mortgage payment is actually principal payment. Interest rates go up. The principal payment goes down in actual nominal dollars. But the number of years to amortize has not been extended in general.

And just if you could update us, we've spoken in the past about retention rates and And have they moved higher? Is there any change there? Can you just update us on what you're seeing in terms of retention, especially relative to sort of historical levels?

Yeah, so we are seeing higher retention rates, roughly speaking, on renewals. We're sort of 10% ahead of where we would normally be. And that seems to be, you know, it's been the case throughout the last year or so. Fairly consistent.

Thanks so much. That's it for me.

Our next question comes from the line of Mike with Vonovik from KBW Research. Please go ahead.

Hey, morning. A couple of quick ones for me, but I wanted to go back to the impaired loans. And what I'm wondering is just looking at the ratio of 76 basis points, I get it that it's mostly in your commercial book, but it seems like it's a lot higher than it was even during COVID. And I fully understand that what you see on your impairments is certainly not necessarily correlated with what you'll book in terms of the loss. So can you talk a bit about the collateral, or maybe first off, why it's as high as it's ever been? And then secondly, talk about the collateral and why you're confident that you're not in fact going to see that correlation increase.

Thanks, Mike, for that question. So, you know, I sort of, I think thematically, you know, what we're seeing is that we lend against good real estate, good cash flowing real estate by and large. What we're seeing is some of our customers that may have other projects that, you know, that we're not lending on, but as they've seen interest rates rise, inflation in the project costs and so on, it's put a bit of stress on them. So we're seeing the way lending gets good collateral. And essentially what's happening is, you they're being forced to restructure those assets, either selling the assets, refinancing them in different ways. For those of you that have followed Equitable for a number of years, you've seen this pop up in the past where we've seen fairly significant impairments. We've had the confidence to express that they'll resolve over the next sort of three to six months, and they have resolved that loss. So this is not a new phenomenon in our bank, but it is one that is definitely more accentuated But the senior executive team have been through these kind of major loans, kind of loan by loan, thinking about the underlying asset values, thinking about the path to resolution for our customers. And, you know, we certainly are pretty confident that over the next couple of quarters, I think you'll see some good progress over Q1, but the bigger progress is going to be in the Q2. We've got properties already contracted for sale and that kind of thing. We've got one closing, I think, this week or next week. So there is some pretty good resolution on the bigger ones that we're able to identify.

Okay. So you're confident there's no real change in the underlying risk of your book?

That's certainly our feeling. I mean, certainly it's a stressed environment and it wants to be blind to the fact that we're in an elevated risk world. But we've done a Clearly, it was an issue coming into the quarter end to make sure that we did a super deep dive to make sure, more than normal, that we were comfortable with that statement. The conclusion of all that work was we're pretty comfortable, mate.

Okay. That's super helpful. Just a quick one on the mortgage growth. The single-family growth, it looks somewhat stagnant this quarter. It's certainly not surprising. We're seeing volumes in the market very, very weak in most jurisdictions, especially the Do you have an outlook for near term, say heading into 2024? Do you think this book can grow low single digits or are we looking at maybe a little bit of contraction? I know you've got the shorter duration in your portfolio, so you'd see that a bit more quickly than some of your larger peers. But if we do see rates higher for longer or rate cuts maybe not happening until the back half of the year, are we looking at maybe a little bit of shrinkage in the book?

I don't think we're going to see shrinkage. I think you're going to see low single-digit, based on kind of current best-expected case, low single-digit type annualized rates through the middle of next year. Clearly, the market is signaling that the bank is going to be starting an easing cycle in March or April. And as you mentioned, that may not happen. But I think as the market starts to anticipate rate cuts, you will see a bit more activity in the housing market. There's clearly pent-up activity. lines, a bit of a standoff between sellers and buyers. So I'm relatively optimistic, frankly, that as we get through the first third of the year or so, we'll see some more activity. What I've been encouraging our teams to do is really to keep our franchise really strong until Buck is returned to a more normal period.

If I can add, Mike, as well, what you would have seen in the guidance, though, so we had 5% to 10% for single-family uninsured for 2024 compared to that 3% to 5% we have for 2023. So that does show, to Andrew's point, some of that conviction for later in the year. And then I'd just underpin that even more with how we look at our overall business mix and then that wealth decumulation side, though, that reverse mortgage side, particularly we have that additional guidance of 40% to 60% growth. So you can see where we are focusing on growing and at different points in the year.

Thank you for the insights.

We have our next question coming from the line of Limar Prasad from Cormark. Please go ahead.

Thanks, Serge, for taking my questions. Maybe just sticking along the lines of Mike's questioning there. I'm wondering if you guys could square up the 18% to 12% loan growth guidance at a consolidated level for 2024. It just seems a little bit high to me. Can you perhaps talk to what assumptions you're making in there? Maybe you're assuming some rate cuts. How do you see momentum in the first half of the year versus the second half? And maybe I'll leave it there.

I think as we spoke about in the script and so on, we are expecting a bit more growth towards the back half of the year. Chadwick, maybe you can sort of get into more of the details, the models and so on.

One important nuance, Lamar, is that that's loans under management too, right? So what Where you see that continued growth expectation in particular is the multi-unit residential business, the insured business. That just increased another 11% sequentially and 27% year-over-year. We have that 20% to 25% growth. We'd expect that to have pretty good continued momentum in the first half as well, plus with our decumulation business. We think that will continue, especially in the Q2, really, and then the balance on the personal side, particularly in the second half of the year. So it does build up, but that's where you're seeing some weightings because those are big dollar figures in the multi-unit business as well, weighting up that 8% to 12%.

Just to be clear on that, to give you a bit more color, we do a fair bit of CMHC construction lending. So we already know that these projects are committed and that we're all starting to fund into them. So as capital is put in those buildings, we're advancing against that building. So we you know, I think the kind of single family story is probably a bit more one for the sort of more towards the end of the year, Q3, Q4 time period, which I think, again, you know, demonstrates the strength of the franchise. You know, if you were talking to us 10 years ago, it would all have been about that single family growth story. And right now we're able to balance, you know, across a range of different businesses.

Gotcha. And would it be fair to suggest that you could come in below there if, you know, I mean, we all look at the economic forecast or forecasting recuts into the second half of the year. But what if the bank of Canada doesn't move? Is it reasonable to assume something below that 8% to 12%?

I mean, it could always happen. I mean, we're first of all driven by risk, right? We're first of all driven by making sure we lend sensibly prudently as prudent bankers. And if the assets aren't there that match that mindset, then we will grow slower. And we've always been clear about that while we Our general growth has been running at about 15% a year over the last decade, but the first job is to make sure we can lend safely into a market that we're comfortable in, where the cash flows are there, the asset coverage is there, and we're lending to borrowers of good character and so on. If that isn't there, then we won't be trying to make it to force it. I do think that despite that, let's remember the underlying dynamics. Household formation has been There are people that have had children and want an extra bedroom and haven't moved in the last little while because the housing market's been slow. There are people coming to Canada that want to buy homes. There are people getting married that want to buy a home. And all of that has been a little bit put on delay for the last 12 months. So I think one can think that towards the end of next year, surely that pressure starts to kind of create a more active market.

Appreciate that. And then you guys talked about the need invest in growth initiatives and risk management. Maybe you could spend some time on talking about how you're seeing expense growth play out for 2024. Could you pull back on expense growth if loan growth comes in below expectations? Maybe some comments on operating leverage and efficiency expectations would be helpful.

I'll let Chadwick deal with the math on that again, but I think it's very important that we move across all frontiers of the business watching your live sport on the New Year, you'll see us advertising with a really great campaign. So that leads to expenses. But also, we've got to make sure that we're investing in risk management, compliance management. It's really critical to banks. And so we're not going to back away from that just because maybe you have a quarter or two that's a little bit soft in terms of loan origination. So there's always a little bit of flexibility on the expenses, but these are non-negotiable. We've got to make sure we've got the infrastructure to run a safe bank.

Yeah, I don't think too much to add there. It's well said. We didn't provide the efficiency guidance, but in general, as we said, we believe that's an advantage for us. I think we can stay within the ballpark, but we're going to continue to invest to grow the franchise. Do we have levers, Lamar? Could we pull back to Andrew's point? Yeah, there are some areas we can pull back on and make our choices in some select quarters, but we have the ability to continue to invest for the cycle. Those are some of the choices we've been making to grow for the long term. So We'll keep an eye on it, which is what we've done. I think it's pretty remarkable, as we said, that we also just integrated in a 70% efficiency ratio business and are back in that 43, high 43 range, 43 to 44 versus our historical range of 42%. So we've shown we can be very smart and efficient with our spend. and we'll apply that next year too.

I mean, other banks have other levers. They can move their executives from the business class into the back of the plane. We're already in the back of the plane, so there's not much further we can go in terms of some sequestering expense there. Just in terms of kind of mindset, we're always very careful with our shareholders' dollars, which means we don't really have much kind of... There's not much... We need to make sure we invest in the critical things to run this bank safely, and there's not a lot of flex. And I don't think I also think that executives need to come into the year knowing that they've got the permission to spend the money on the things that are going to be important five years from now, not so much about what Q3 might look like, for example.

But we won't lose focus. I know you're leaning into, which you often do, if you're going to target even flat operating leverage, and that's still the goal over the average of the quarters is to maintain our efficiency. But you'll see the operating leverage flip based on the quarter.

Appreciate the time. Thanks.

Thanks, Lamar.

Our next question comes from the line of Etienne Ricard from BMO Capital Markets. Please go ahead.

Thank you, and good morning. This might be premature, but with the increasing possibility of interest rate cuts in 2024, what deposit beta would you expect for your demand deposits at EQ Bank in a declining rate environment, and would you expect that beta to be similar to what we've seen since the start of rising rates over the past few years?

Yeah, I think it's a great question. I mean, certainly I have a strong view that it looks like the bank account is going to be into easing sooner rather than later. And I think that will impact our deposit beta. So it's going to be hard for us to offer the value proposition if we want to stand up in the market and be offering great rates all the time. It'll be hard for us to drop EQ Bank and rates and... and still stand out in the way that we want to kind of build our brand. I would say that generally what I've observed over the years in a dropping interest rate environment, spreads on mortgage spreads and just general lending spreads expand. So don't forget these are managed rates. Somebody's got to make a decision to drop mortgage rates in a competitive market that tends to lag a little bit. So there may be a bit of an offset there with spreads on mortgages themselves expanding. In fact, we're already seeing that today. If you look at prime mortgage spreads in the market today, on the fact that the bonds have rallied on 90 basis points over the last 30, 45 days on the five years, and yet we haven't really seen much in the way of dropping five-year rates. We have dropped rates a little bit in the five-year terms across a few buckets. We're already seeing that downward trend, but nonetheless, spreads tend to be wider for banks in a falling rate environment, so that may offset some of the deposit failure in each bank.

Great. Thank you very much.

Ladies and gentlemen, just a reminder, should you have a question, please press star, followed by the number one on your touchstone phone. We have our next question coming from the line of Graham Riding from TD Securities. Please go ahead.

Hi, good morning. I just wanted to go back to the commercial impairment. So it looks like your allowance for credit losses for commercial are 25 basis points right now, which is essentially in line with your last five-year average. I'm just wondering why you don't think there's an argument to move those allowance for credit losses higher, given your arrears are sitting about three times higher than the last five-year average currently?

Well, I think, as I mentioned, it's a loan-by-loan analysis. And despite the fact we've had 25 basis points reserved for a number of years, we've never lost anything like that. In fact, I don't think we've really lost anything on a commercial loan in the last 15 years. Funds I can already remember of any significance were in commercial loans in Edmonton back in 2008. So, you know, we feel very comfortable with it. I know it's sort of, it's a very reasonable question. What I can tell you is that, and I referred to it earlier, you know, our team has really done a deep dive looking at each asset, understanding the value, understanding the cash flows, really comfortable with the position we got to. But, you know, I think I was asking similar questions. Does this make sense, guys? We feel this makes sense. Certainly there's a lot of the large ones you can look at and say very clearly we have an exit route. There is no loss to be made. It's just a matter of timing. So I feel pretty good about it, Graham, but I can understand there might be some skepticism about that.

Yeah, just remember it comes back to how we even look at the LTVs and the properties in Andrew's point, the types of properties that we're lending into, the locations of the properties. That's why we say we're very prudent. This is one thing we're extremely good at. And for a lot of the growth, remember, a lot of this has been insured and very targeted growth as well going forward. So the diversification, the spread of these loans across each province and our understanding of the properties, I'll just reinforce Andrew's point. There's a lot that goes in behind this. And there's quite a lot of complexity of these models, but we have conviction of this.

Just as a reminder for those perhaps sort of observing U.S. experience in commercial mortgages, don't forget, we're always first lean. Always, always first lean. We typically have almost always have personal guarantees from the proponents of the project. So we've got a lot of sort of backup support here. Sometimes there'll be mezzanine dead in behind us that's people that really know how to manage real estate. So the model has always worked well and continues to, I think, stand up well in this more stressed environment.

Remember, too, for commercial, 73% of that book is insured now.

Yep, yep. No, I'm looking at both your ACLs, both on an insured and uninsured basis. Okay, that color's great. Maybe just broadly, if I could just do one more follow-on. When you give us your EPS guidance for next year, what is sort of baked in there from a credit loss provisioning perspective, perhaps relative to what you've done in 2023? How do you think about that?

Well, we can't really project out the PCLs. I'd say we have some consistent expectations built in, Graham, but unfortunately, for us, we can't just pick a PCL number, but we certainly have some continued expectation of some continuity for the next couple quarters, probably more towards normalization and expectations in the second half. But it's that ACL ratio, right? When you even think of the overall ACL ratio as a percentage of the lending assets, that's where we have some consistency in our assumptions.

Okay, understood. Thank you.

It's a super tricky one just to think about this one, just intellectually, Graham, as you think about it. You've got to roll forward 12 months and then try and figure out what the macroeconomic forecast is going to be 12 months from now and then predict a forecast. So I think the team does a good job in putting a number that's reasonable. But of course, if there were a lot of dark clouds, that would be a bigger number at the end of the year. And if it which really relates to the actual performance of the next 12 months.

Yeah. And so a little bit – we go back to our earlier point, though, a little bit more waiting on the first half versus the second half. Just reinforce that.

Yeah, that's helpful. Okay. Thank you.

We have our next question coming from the line of Stephen Boland from Raymond James. Please go ahead.

Good morning, everyone. Maybe just one question, Andrew and Chad, too. On a single family business, you know, the government put out that mortgage charter. There's a lot of media around it. But is there any impact to your existing book right now? And is there any way that you envision you may get market share gains out of, you know, if there's any changes with the bigger banks as well?

I don't know there's a market share gain opportunity. Clearly, there's more obligation on banks, which we hope to feed our customers properly. And frankly, we always believe we have. So what's being asked for is entirely reasonable. So it seems sensible. I was worried that you go from trying to feed your customer right to that becoming a regulatory process, which doesn't have quite the same sort of feel to it. We're always working with our customers if they are looking for things to help them get through a period. But generally, we're very disciplined on giving relief because our experience has been that really people, without getting too far behind on their mortgages, they can never catch up. So there's very little real change that you should be concerned about as investors going on in the book.

It's just good that we're very consistent to our purpose. This is the dangerous point, right? In terms of how we operate, this actually reinforces the principles of our business and how we support Canadians. So I think at the dangerous point, if anything, it undertones our entire mission. So hopefully that gets more broadly reflected by customers as well.

Okay.

So I do recall that our average LTV is, you know, in the 60s, so there's a fair bit of room to...

The mortgage charter itself, do you find it has teeth or is it just general stuff that banks should be doing anyhow? You can comment that you're already doing that, working with your customers, but do you see any irrationality out there with the single family business in general?

It certainly has teeth because the FCAC regulates. teeth for sure. I don't think it really changes our behavior because I think we would have behaved in this manner in any event.

Okay. Thanks, guys. That's all from me.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Moore for final closing comments.

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Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.