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spk14: Instructions will be provided at that time. It is now my pleasure to turn the call over to Sandy Duville, Vice President of Investor Relations and ESG Strategy for EQB. Please go ahead.
spk01: Thanks Julie, and good morning everyone. Your hosts today are Andrew Moore, President and Chief Executive Officer, Chadwick Wesley, Chief Financial Officer, and Marlene Leonard-Dutsey, Chief Risk Officer. For those on the phone lines only, we encourage you to also log on to our webcast to view our accompanying presentation. There on slide two, you'll find EQB's caution regarding forward-looking statements, as well as a use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted. Due to EQB's change in fiscal year and the four-month prior period for Q4 2023, commentary today will focus on -over-year comparisons for income measures. -over-year measures compare this first quarter of 2024 and then January 31st, and including ACM midway through the quarter, to the closest applicable period, which is Q4 2022, ending December 31st. As you review the MD&A, this period also includes the acquisition of Concentra Bank and its contribution for two of three months for that quarter. And it is now my pleasure to turn the call over to Andrew.
spk08: Thanks, Sandy, and good morning, everyone. In the next few weeks, we will mark our 20th year as a publicly listed company. While we have not quite reached that milestone yet, it does appear that we will be able to celebrate the best 20-year total shareholder return of any bank on the TSX and on the S&P 500 when we opened the Toronto Stock Exchange that morning. We achieved benchmark setting performance one quarter of the time, and you can see from our most recent results that Canada's Challenger Bank continues to work well for our customers while rewarding our investors. Our quarterly earnings per share increased 12% year over year, where you could again, delivered more than 15% ROE. And our board of directors authorized a dividend payment 20% higher than the prior year. These are good results achieved despite a slower housing market resulting from Bank of Canada tightening. This is also our first fiscal quarter to align with other publicly traded banks. We recognize that the fiscal year end change adds complexity to interpreting results. And I hope you agree that the team has done a nice job in trying to cut through this noise. In reaffirming our 2024 guidance today, we believe we have started the year well, and we're set up to see stronger performance in the next few quarters. The sales activity in residential markets increases and based on our expectations for our securitization activities. We also expect provisions for credit losses will moderate in the second half of the year. Understanding that this is a busy day of bank reporting, I will highlight just a couple of important developments, beginning with brand awareness and customer growth. In January, we launched our Second Chance campaign, featuring Eugene and Dan Levy, and followed in Quebec en France with Deuxième Chance, starring Québécois mother and daughter duo Diane Levely and Laurence Leboeuf. Both of these campaigns are rooted in a key insight that many Canadians still bank with the financial institution their parents led them to, despite the downsides of high fees, little to no interest, and widespread dissatisfaction with financial incentives. A curious feature of banking compared to the choice and change in so many other aspects of life. As Canada's Challenger Bank, we use these insights to create tension and encourage Canadians to ask whether they're being properly served by their first ever banks, to look beyond what is familiar and to get a second chance to reach you bank where they can make more. Many of you will have joined the 19 million Canadians who tuned into the Super Bowl this year and saw our campaign ads run throughout the game in English and French, and continue to see our name pop up on screens, social media, TVs and billboards across the country. We are pleased with the approach of having recognizable Canadian celebrities in our advertising, and are confident that our second chance campaign is dramatically enhancing brand recognition that will in turn have a positive impact on customer signups and the cost of customer acquisition. Of particular note is the exceptional positive reaction that Quebecois consumers have had to second chance where search, web traffic and new account signups are all up by significant margins. We launched BanqueQ in Quebec just over a year ago. We're excited about how many Quebecers seem to agree with us that BanqueQ is a better way to bank. It's also time for something more. It's time for EQ Bank to enter the small business market, which we'll do later this spring. EQ Bank small business will provide entrepreneurs the opportunity to earn high daily interest on their hard earned cash with great access to payment solutions that are traditionally been pretty clunky for these customers. As a long time lender to small business, we intimately understand the challenges faced by entrepreneurs. This no fee product is all digital, meaning being available whenever and wherever a business plan wants to use it. This launch is just a start as we continue to build new services for Canadian entrepreneurs. As a technology leader in the banking world, we're also making substantive gains in digital innovation with an embrace of automation and artificial intelligence. Our technology team works in agile pods, allowing us to leverage our technology and talent to drive faster and better customer value. We're running a pilot project using generative AI agent assist tools in our customer care center. And we have a new partnership with Trulio to enhance the EQ Bank customer onboarding experience using their AI tools to deliver advanced security and identity protection. Taken together, these advancements add to our challenge bank advantage. Another development worthy of note is the 55% year over year growth in our accumulation business. We now have a $1.6 billion portfolio and continue expect strong growth going forward led by demand for reverse mortgages on the back of market leading product value and consumer awareness, courtesy of our Talking House campaign. For our personal bank, more broadly, we expect to see a stronger market this year for single family housing, foiled up by pent up demand and Bank of Canada easing, which will support our single family mortgage origination activities. While expanding, we've been investing in risk management and compliance to ensure our bank is well prepared for the growth we see in the years ahead. Well, you can see from our financial statements that there's been increase in arrears. We are confident that we are well reserved and we will maintain our low loss rates. The portfolio remains strong, supported by conservative LTV and good credit scores. Our lending has always been prudent to fit the circumstances. Today, over 70% of our commercial loans under management are insured through various CMHC programs. And we continue to prioritize lending secured by buildings where people live. In order to help Canada close a significant housing supply gap, and as a matter of strategy and risk management, we focus on multi-unit residential lending in urban markets with loans under management growing 34% year over year. Now some brief comments on our credit book, which is standing up well. Our real estate lending business is using consistent approach and we essentially lend with the goal of not losing money. Our equipment financing business, which accounts for just 2% of the bank's total loans under management, is quite different. In that segment, we price loans at a wider spread, expecting that some of this spread will come at the cost of credit losses. To the form, this is an area where we saw elevated losses representing over 80% of our net PCL for Q1, or $12.7 million. These losses were largely a result of the cyclical downturn in the long haul transportation sector, which represents about 44% of our leasing business assets. What we're seeing here is a trucking industry that's been negatively impacted as demand for transportation services has declined with shifts in consumer spending patterns since the high watermark of 2022. This has put pressure on some of our customers, which has resulted in elevated default rates. The PCL is mostly due to lease originations from the 2022 vintages. More generally across the commercial book, we're getting increasingly comfortable in our commercial portfolios and pads will start to normalize in the second half of this year as we reach resolution of larger commercial loans. In fact, already in February, $55 million has been resolved or made current and we have a plan to exit the vast majority of these loans with full recovery on many of them. I'll wrap up my thoughts by acknowledging another important milestone. Partway through Q1, we completed our majority interest acquisition of ACM advisors, bringing nearly 5 billion in assets under management into EQB and a very talented team. We're excited about the potential of the ACM business and are working with management toward a goal of doubling this business over the next five years. While it's early days, ACM is performing to plan and our partnership is focused on elevating performance for ACM and their fund investors across Canada. To conclude, EQB started the fiscal year with good results and all our businesses are set up to see even stronger performance in the next few quarters. Now over to Chadwick.
spk11: Thanks and good morning. Before I jump into the numbers, let me repeat how we were presenting our results to the fiscal year change, as Sandy outlined at the beginning of the call. With our fiscal year change and to October 31st, for a year over year comparison, we're presenting Q1, 2024 relative to Q4, 2022, which is the closest period. For quarter over quarter, as you would expect, we are comparing Q1, 2024 to Q4, 2023. However, this is a three months to four month comparison. So we focus on our quarter over quarter commentary on primarily balance sheet measures. While this adds some complexity, we're very pleased to now be reporting on the same cycle as the Canadian banking industry. The feedback we have received from our stakeholders on this change is unanimously positive. As you reviewed in our results, despite a challenging macro environment, we're starting fiscal 2024 with a solid quarter, a record top line, but nearly 300 million in revenue and margin expansion. We are trending well on all key guidance measures. Capital continued to expand with set one increasing to .2% and our total capital ratio up to 15.4%. With continued strong capital levels, our board of directors has approved removing the 2% discount on our common share dividend reinvestment plan, while still maintaining this excellent program for our investors. Our book value for share increased 14% year over year, driven by an average ROE closer to 17% over the past four quarters. This performance also reflects growing weighted average diluted common shares outstanding, which increased further with shares we issued from treasury as part of our investment to acquire ACM and Q1. EGB's book value per share this quarter reflects a downward adjustment to shareholders equity to reflect the value of a future option to acquire the remaining 25% of ACM. Without the adjustment for this option, book value per share would have increased 15% year over year and 3% quarter per quarter. This morning, I'll move right into additional context on a few key performance measures before opening the call to Q&A. First margin, NIM expand to one basis point from Q4 to 2.01%, mainly due to the ongoing benefits of our funding strategy and increasing yields on higher margin conventional loans in the commercial portfolio as outlined in our Q1 MDMA. Margin is supported by the continued lower deposit beta contribution of EQ bank deposits, diversification of funding. NIM expanded in the quarter despite lower prepayment income, which we expect to increase and normalize at a higher level with more housing market activity, especially if policy rates move as markets expect in 2024. This margin expansion and growth in conventional lending resulted in net interest income increasing 17% year over year. Overall increases in asset yields were driven by the combined effects of rising rates, a higher percentage of our personal lending book consisting of uninsured loans, rising uninsured commercial yields and a reduction in on balance sheet insured multi-unit residential loans that are lower yield. Driving the shift in our personal lending portfolio was uninsured lending growing 7% year over year with decumulation growing 55% over the year. The accumulation lending yields are slightly higher than our typical uninsured single family residential loans with longer terms and conservative weighted average LTV for the portfolio of less than 40%. Our commercial portfolio excluding CMHC insured multi-unit residential grew 10% year over year led by our secured lending toward larger borrowers, including growth in our insured residential construction business. Now in funding, combined with expert treasury management, our long-term efforts to diversify and strengthen sources of low-cost funding are continuing to translate. Last quarter I referenced the launch of another new funding source, our first bearer deposit note program. In just one quarter, it's grown to nearly 500 million in funding, demonstrating investor conviction and our credit quality and ability to repay. You can expect to see more activity in our funding programs this year, including for cover bonds in Europe and our deposit note program in Canada. Also in the next couple months, we expect to launch another exciting EQ Bank Challenger deposit product. We'll share details soon, but the noticed product design will enable customers that are in a higher rate and also reduce competitor attrition that we see at times. Great for our EQ customers and our deposit momentum. Now over to the important growth story of non-interest revenue, which increased over 14% of total revenue in the first quarter from .5% last quarter. This growth is on strategy and driven by increased gain on selling and income from retained interest from our multi-unit residential lending activities, fee-based revenue from consenture and serving credit unions, increasing revenue from payments, and about half a quarter of benefit from ACM. ACM's asset management revenue is captured under fees and other income on a consolidated basis. For insured multi-unit residential, we now have 21.5 billion in loans under management, up 34% year over year. 16.1 billion of this amount has been dereconized through the CMHC, CMB, and NHA MBS programs. As these units are not prepayable or have their cash flows fixed, the assets are dereconized when securitized and sold. Corresponding event and spread differential results in upfront non-interest revenue in that reporting period. Gains on selling income from retained interest amounted to 19.4 million for Q1, representing 110% increase year over year. We expect to maintain this level of revenue in coming quarters. Now I want to a few additional comments on credit, in addition to the context Andrew provided. ECL was 15.5 million in Q1, reflecting the impacts of both future expected losses driven by macroeconomic forecasts and loss modeling. Phase three provisions and write-offs increased to 17.3 million, with two thirds associated with our equipment financing business. The net effect was a PCL ratio of 13 basis points in Q1 compared to 12 basis points last quarter. Weighted to the PCL rate on equipment financing, increasing to .76% compared to .67% in Q4. Not surprising at this point in the credit cycle with these particular vintages as Andrew outlined, and we do expect these to start to normalize later in 2024. The consumer lending PCL benefited from a new agreement with a consumer lending partner, increasing cash reserves to secure against losses. This was part of our original guidance and plan for 2024. Based on our lending approach and business mix, our personal banking portfolios are performing well. Higher than last quarter, now about 85% of our single-family uninsured lending has already renewed since interest rates began to rise in the spring of 2022, a positive forelooking indicator for a book. Net allowance for credit loss ratio remained consistent sequentially at 22 basis points. And of the 25% increase in the impaired loans to 475 million from Q4, 57% was related to personal residential lending and 43% to commercial. The weighted average LTVs of these impaired residential and commercial mortgages are 68% and 47% respectively, mitigating expected future losses and considered and the allowances we hold against these loans. For the residential portfolio, based on our historic and stress scenarios for losses, we believe we are very appropriately reserved. Recent indicators in Q2 so far are that early delinquencies are moderating and as housing market activity picks up, we expect delinquencies and arrears will continue to trend in a positive direction, particularly in the second half of 2024. And similarly, while overall impaired commercial loans increased in the quarter, we saw the rate of increase in impaired loans drop 40% versus last quarter. As Andrew noted, we are beginning to see our resolution strategies mature and loans resolve. Shifting to expenses, non-interest expenses increased 134 million as we continue to make important strategic investments in building EQB, importantly into EQ Bank innovation, next level brand awareness with an impact of millions of eyes on EQ Bank over the past month and investing in our enterprise support functions. Q1 expenses also increased with a half quarter of ACM. From a people perspective, our FTE increased 4% over the quarter with our new colleagues at ACM accounting for over half of these positions. The balance reflects growth in product, engineering, customer service, as well as our enterprise risk management and finance teams. We are being measured about expense growth, leading with our pace of hiring, but are also excited to bring great talent to EQB in this market. On the technology side, we've been continuing to expand our cloud capabilities, invest in cyber and fraud and accelerate innovation and data and AI solutions to support both customers and employees. We have the ability to move fast and smart in managing our expenses and investment dollars. We are investing through this cycle, making effective long-term trades that will benefit us in the years to come. Achieving our ROE guidance will remain paramount over achieving short-term positive operating leverage over the course of a few quarters. To wrap up, this fourth quarter demonstrates that our strategy is translating. We have the ability to grow and manage credit across cycles and our diversification and sources of revenue and funding is paying off. We offered ambitious challenger guidance again for 2024, with the priority being 15% plus ROE, the center of our value creation model. With Q1 in the record books, we continue to believe we can achieve guidance, including 15% ROE, the leading consideration being the pattern of provisions for credit losses translating as we expect in the second half of 2024. We're investing in our franchise for the long-term, stories being heard and understood by more Canadians every day. And with a lot more innovation to come this year, we will continue to build on our momentum. Now we'd be pleased to take your questions. Julie, if you can please open the line for analysts.
spk14: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Jeff Kwan from RBC. Please go ahead.
spk16: Hi, good morning. Just on the impaired increase that we saw, particularly on the residential side, was there any trend or what was kind of driving it? Was it seeing incremental job loss? Was it ability to cope with higher payments, geography? And then on the commercial side, the impaired 50 had been, that were driving the increase over the past two quarters. Do you have any update in terms of when you expect those to be results?
spk08: Yes, thanks Jeff. I'd say sort of thematically, the impaired in the single family business are larger homes in sort of surrounding areas of the city. So this is where I think the payment shock has had the biggest impact. So larger loans, larger homes. The good news from our perspective is it's quite skewed to lower LTVs. So I think the payment shock is causing people to have challenges actually paying, but we are fairly confident that the recoveries will be very good. So we're not expecting much in the way of realized losses over the next couple of quarters. Although a slower housing market clearly is, doesn't make it harder for people to sell their own homes if they run into financial difficulty. To the extent we've got a few homes who are trying to sell, not finding the same activities we'd normally expect. Hopefully that will sort of start to resolve as spring market comes around. So the question on commercial loans. Yeah, I mean, I think we're expecting good resolution here. Because of the commercial loans, what happens is it takes a bit of time even when you have got a good resolution in place. Often you're going through a court process to actually affect the sale. But we are making good progress. And as I mentioned, not expecting much in the way of losses. In fact, Darren and I have been, Darren and I and the risk teams have been drilling into it more deeply. I've been getting increasingly confident about how to resolve this with sort of minimal loss. Does anybody have any color there, Marlene?
spk10: No, I would just add, thanks for the question. We do know that when we look through our impaired loans or commercial impaired loans, about 38% ish are current. So despite the impaired notation, they are up to date.
spk11: Yeah, about 100 million got resolved in the quarter two. So it's good momentum. And these are pretty isolated math, like we talked about in past quarters in terms of the handful of them.
spk16: Okay, and then just my other question was on the residential mortgage side, thoughts on how the spring housing season is shaping up, but also too is on the all taste side of the market, are you seeing any divergence in terms of level activity or other trends relative to what's happening in the prime part of the market?
spk08: I mean, certainly all the data is pointing to spring, starting to spring a little bit. So we saw good data around kind of Toronto housing sales in January, middly compared to an incredibly low activity level the prior year. So, that gives us reason for confidence. I would say that we're not seeing, in our part of the market, we're not seeing quite the same pickup yet, but I think often, sales activity, so contracts being entered to is a little bit of a leading indicator before you actually see the mortgage applications coming in. So, teams are feeling pretty optimistic about it. I did meet with our sales team yesterday and they seem to be feeling pretty confident about our position in the market and how our brokers and distribution partners are thinking about the year ahead.
spk11: Even that's part of the comments I offered, Jeff, in terms of the recent indicators in Q2, it's part of that activity Andrew mentioned. And even in the last couple of weeks, to be honest, Andrew and I were speaking with the teams recently, just literally in the last couple of weeks, we're seeing a lot of activity pick up just for some resolution too. So, it's
spk08: just to pile on with the comments. I think the thing that they're still seeing a lot of enthusiasm for is our ability to renew our customers and see the good sort of loan growth in the books. That's generally being an area where we outperformed others we've observed in our space.
spk16: Great, thanks for the team effort on the responses.
spk08: Thanks,
spk16: Jeff.
spk14: Your next question comes from Manny Gromen from Scosche Bank, please go ahead.
spk03: Hi, good morning. I just wanted to follow up specifically on the subject of credit and specifically the equipment finance business. Andrew, I think you talked about expecting minimal losses and just hoping you could provide a little bit more perspective on what's giving you that confidence. Is it just the market for equipment and you can realize good values or is there something else that you're seeing going on there? So, that's the first question.
spk08: Sorry, my comments about minimal losses didn't refer to the equipment financing business which as I mentioned is a business that we expect credit losses through the cycle. And clearly we're seeing that in one part, particularly focused in one part of the book, which is really the 2022 vintages of long haul tractors and trailers, which I think at Calderon we had just under 200 million of assets with that sort of character. And we're seeing our customers there, as I mentioned, losing their roots, which is resulting in defaults. And then we are seeing losses crystallize in that part of our book. So, we think it's around these sort of limited to that vintage, the 2022 vintage. But I am expecting that through the next couple of quarters we will continue to see write offs coming from that part of the book.
spk03: And can you give us a perspective just in terms of average ticket sizes in that portfolio? And when you talk about losses. They're round about,
spk08: as you can imagine, they're tractors and trailers. So, you can imagine they're sort of in the $70,000, $100,000 kind of range, not large tickets. So, it's a kind of diverse, almost like a consumer lending portfolio in the way we think of it. We model it with kind of FICO's, equipment values and that kind of thing, as opposed to, I can talk with much more confidence about the commercial real estate, because we can look at a list on the single page of paper of anything that's delinquent. And as you understand the underlying drivers of each individual loan and give you sort of confidence that that building's worth. You might have a loan with a $10,000 delinquency, for example. We know the asset's worth $20 million and it's a matter of time to work through and get our money back.
spk03: And then just in terms of the outlook. So, I just wanna make sure that I have this correct. I thought you were saying that you'd expect performance in the equipment finance to normalize in the second half of the year. So, is that what you were referring to or? Yes, there's
spk08: precisely many. So, second half of the year, I expect that this current quarter Q2 will still continue to see these elevated defaults in this 2022 cohort. But beyond that, we're out with presuming that things will normalize.
spk03: And the rationale for that is just that you see a specific cohort, you're gonna resolve it and then you don't expect issues beyond this cohort or is there something else that you see in the second half of the year that's gonna help improve the performance here?
spk08: Yeah, I don't think it's really an expectation around changes in the macro environment, particularly. But don't forget these are relatively shorter term leases, typically written on 60 months. So, they do amortize down fairly quickly. Let's just say we've got a $200 million cohort that we're concerned about. So, we're expecting that as we've probably seen many of the customers with weaker business models already default and the analysis we've done gives us that confidence, although of course, anything predicted about the future is always gonna have uncertainties to it. But we're feeling good about it. And Marlene, you've been deeper into this and I have put this
spk10: even. Yeah, thanks for the question, Manny. I think as we look at some of the newer originations, there's one cohort that we're concerned about from the past, but the newer originations are skewing towards more of the prime business. And so, as we look through those, we feel much more confident that the second half of the year is gonna be turning towards those more normalized delinquencies and losses.
spk08: Just as a way, the local team did a good job in the middle of 2022, started tightening and changing credit criteria, making it more demanding to get a loan as we were concerned about potentially overexuberance in that part of the market. So, we've been improving the position over time.
spk03: So, you've made changes there at Time to Writing. Okay, that's great. Yeah, we made changes back
spk08: in 2022. Unfortunately, the peak defaults happen from 12 to 18 months after lease originations. So, clearly, you're expecting to work through that hump, if you like,
spk12: because that's a time frame.
spk03: Got it, thank you.
spk15: Your next question
spk14: comes from Mike Rizvanovic from KBW Research. Please go ahead.
spk06: Hey, good morning. I wanted to go back to the impairments on REZE mortgages. So, the 54 basis points, it's obviously moved up quite a bit here, more than fourfold year over year, and it's more than doubled in two quarters. And so, in the context of the big six banks, I'd like to compare you guys to, it's not substantially higher than most of your big six peers. And my premise has always been that it's probably because you've fully repriced your loan book for higher rates, whereas the banks are certainly not there yet. Is that something you'd agree with?
spk08: Certainly the way we think about it. So, actually, I'm, to some extent, as well as obviously these are, as you point out, these are increased levels. The fact that most of our customers already had their book repriced and were facing that interest rate shock is, in a sense, a demonstration of how resilient this group is. I think I would be concerned if I was seeing this kind of level with repricing yet to come. But unfortunately, I think what we're actually seeing is the arrears forming as a result of the payment shock that people are having to deal with. And then I think that's consistent with the thesis I was talking about, which is really something with Jeff's earlier question around where are we seeing these delinquencies. It is the larger mortgages and larger homes. So you think about a larger home with a self-employed borrower whose business might be somewhat impacted by kind of macro conditions, as well as that payment shock. You can see how that could be leading to higher arrears, but not to losses for us, because again, there's plenty of equity in these homes.
spk06: That's super helpful. And then just in terms of the LTV, I think Chadwick mentioned the 68%. And I know it's a weighted average. I usually don't take much with that number, because we just don't know the distribution. But what can you offer on your LTVs in terms of distribution? Just based on HPI levels, I can't for the life of me imagine that you have anything that's anywhere near 100%, but what would be north of 80? Is that something you could ballpark for us?
spk08: Yeah, so certainly greater than, so first of all, that's a deep insight that we don't always get from analysts. So the average that you can use the data, but certainly well less than 10% is over 90. And I think we'll actually say almost nothing over 100. Where you do end up with the odd loss is kind of these idiosyncratic loss, what we would call idiosyncratic loss, where somebody hasn't looked after the house as well as they might have done. So you assume the house is gonna be in a certain condition, but we put the loan out three or four years ago and somebody hasn't kept it in good repair. So sometimes that can create this slight leakage. The good news about that is it's really, really, really small in the overall scheme of the book. So the vast majority of the stuff is below 90% LTV and as you say, the average 68%. So we're in pretty good shape.
spk11: And I was just on those, sir, Mary, even as we have in the setback, right, Mike, so 64% of the overall single-family uninsured portfolio, our new originations remain about 70% LTV. And it's literally, you can almost count on a hand anything even above that 80% mark. These are low, those averages are very reflective to portfolios.
spk06: Okay, that's super helpful. And then just to sneak one more quick one in, just in terms of the, and for your kind of base, like have you guys actively providing forbearance? I know the big six banks don't like to talk about this. They do do it in the background. How active are you on helping people manage that, refi or renewal process when they're paying more on the mortgage? Like I'm just wondering the level of activity, the level of forbearance you've had to sort of help your clients with through the last few quarters.
spk08: Yeah, it's relatively few loans, or actually sort of very few loans where we have provided forbearance. Having said that, we're very open to doing that and obviously trying to help our customers in an empathetic way and meeting the expectations of regulators in that regard. And really what our kinds of customers have to be able to demonstrate is there's a route forward through the forbearance to get to a place where the loan is in good shape for both them and us. Unfortunately in this kind of environment, for some people, the best solution is that you sell the home, preserve the equity. So that's the dialogue we have. We feel we handle it pretty well. But there's a fair bit of kind of discipline on our part in how we think through that, when a forbearance makes any sense. And we'd have to have fairly good evidence that it's gonna put the loan in a better position.
spk12: Got it, thanks for the call.
spk15: Your
spk14: next question comes from Lamar Persfeld from Carmark. Please go ahead.
spk02: Yeah, thanks. I wanna come back to this discussion on the equipment finance portfolio. Maybe I'm reading too much into your comments, but it sounds like there's an up-tiering of that portfolio. Is that a fair comment?
spk08: That was, I think for those of you that were around in 2019, which is many of you, thank you, I think that was our plan then and has been what we were executing on. So increasingly we're migrating into what would be regarded as prime space in the leasing equipment business. And that's the place we wanted to be. So we felt that the time we bought Bennington, we were buying a platform and that that was the direction of travel. Marlene, do you wanna give a bit of an update on where we are on that?
spk10: No, the portfolio is doing well in terms of our our migration to the stronger credit profile customers and looking at our average beacon scores or looking at the underwriting changes that we've made since 2022, certainly we're seeing about 55% of our portfolio now in prime. So it's really playing out through our numbers.
spk11: I remember Lamar too, for the consensual portfolio of nearly 300 million that we acquired, that was all prime as well. So that also weighted the overall portfolio 1.3 billion higher too.
spk02: I guess, yeah, that's very helpful. But I guess where I'm going at is you've now seen rising impaired losses for the last couple of quarters throughout 2023 and into 2024. Is that like looking forward, should I expect the yield on that portfolio to move materially lower? Like I know it's not a massive portfolio in terms of size for you guys, but it is very accretive to your margins because the yield is so high. So I do care about it. And ultimately I care about the impacts on all bank names. So that's kind of the approach I'm thinking like, is there gonna be a very sharp shift in the mix of that portfolio over the next couple of years that would cause the yield on it to move materially lower?
spk08: No, I wouldn't expect so. And really there's a trade off for kind of cost of credit, PCLs versus the rate charged. So any give on the line effectively comes back back in provisions we would expect. So no, we're pleased with the yields we're able to get on our prime book, frankly. So it appears to drive ROEs that can see completely, wherever we were operating with the credit bands, the ROEs are pretty
spk11: good across that book. And you saw that trend, right? So even as we talked about all this migration to prime, Amar, when you saw that in the MDNA, right? So you can see versus the Q4 period versus last quarter to this quarter, our yields are actually still expanding.
spk02: Okay, yeah, that's kind of where I was going at, more so for the number to put into my model. And then Chadwick, sticking with you, I'm gonna go with a big picture question here. Do you think it's still plausible to come within your EPS guidance range? Can you go through why that's still a reasonable expectation given the softer Q1 result? I think it really does hinge on the back of a better credit outlook for the back end of the year, but I'm assuming there's probably a little more to that. So talk to me about whether that's still in play and your confidence level there. And what if loan growth doesn't come back as expected? Can we still get there?
spk11: For a top down, Amar, the year is playing out exactly as we had expected from a guidance perspective, with the first anchor being that ROE. So that's really important. The portfolio measures right across the board, as we expected, and we had signaled right this first half of the year, particularly from a credit loss perspective, and from an investment perspective in the bank was gonna be a little bit more elevated. So when you think through the four quarters, based on the trends we're seeing so far and based on our updated forecast, we do still have conviction that that range of EPS is absolutely still doable, and achieving our ROE guidance is still doable. And to achieve that base case guidance, we didn't expect or build in that rates had to come down in this environment to achieve that. That was still our base case guidance too. So if our guidance or our expectations or the reality of PCLs, say in the back half of the year, don't play out as expected, that's something we'll have to revisit. Right now, based on all the variables, all the forecast and the business momentum, which is very strong, like the margins, the portfolio growth, the customer awareness, it's very, very strong. We have an incredible team here. So we have a lot of conviction in our team and our growing customer base and the stability of the margins and the funding costs. So add all those up. I think we're still on track for the guidance that we have reaffirmed today.
spk08: Yeah, if I could just, again, so to add some color to what you have, there's a couple of things I mentioned in my script. One being, we are expecting increased securitization activity in this current quarter and beyond, and that's helpful to obviously add to margins. And the other thing, just to kind of, your comment about, you know, housing market not coming back. Our earnings are actually not terribly sensitive in for a year to the kind of origination volumes in year. As we originate loans, we take a provision for stage one right away. We've got cost of originating that loan. So you wouldn't expect earnings for this year to be terribly sensitive to kind of our assumptions about housing market volumes. We do, of course, have an impact on the longer term, I think, for the bank, but I wouldn't think that we're particularly sensitive to that, and of course, you know, as you're rightly pointing out, there's so uncertainty about how the housing market will work when the bank carried all these and when the housing market comes back to life as
spk12: a result of that. Thanks for the time.
spk15: Your next question comes from
spk14: Etienne Ricard from BMO Capital Markets. Please go ahead.
spk04: Thank you, and good morning. On EQ Bank, as you get ready to launch the platform for small business owners, how meaningful do
spk05: you believe commercial deposits could become over time?
spk12: I
spk08: believe they're very significant over time. I do think it's a sort of three to five year build for something to get excited about within your models. You know, it might be a few hundred million dollars, but we're really inspired when we look at challenger banks around the world about how well they've been up to service the small business market. If you look at the UK market, for example, you know, the individual challenger banks have captured 10% of the market from what was a standing start in a few years. And so we do think that that same thing applies. In Canada, there is a general dissatisfaction with small businesses who have the kind of existing, their existing options, if you like. And so we think we should be able to deal with that quite well, and don't forget, many of our customers in EQ Bank are self-employed already. So the ability for them to, or small business customers, so the ability to open up a small business account that goes alongside their existing EQ account is going to be something that's really compelling to them. I think our vision is you'll see it have a single page in a glass where you'll see both the balance in your small business account, as well as your personal bank, personal account. And for people operating in that kind of entrepreneurial world, you know, they're often thinking about the money in the business as being kind of their money as much as the money in their own personal accounts. So we're really excited about that opportunity. And then of course, you know, the broader impact on brand awareness, customer acquisition generally, you know, we believe as we pick up small business accounts, some of those people may not have a personal account with us, and we'll be able to accelerate the growth of our small business accounts. So we think it's a very meaningful, it's going to be very meaningful over this
spk12: three
spk08: to five year horizon.
spk05: Now as a follow-up, how do you think about the relative stability of small business deposits relative to personal deposits?
spk08: Well, we think they're actually gonna be fairly, obviously a number of kind of archetypes within small business. I think one of the things that's been a bit of a journey to get here, there are some small businesses where you've got high, very high volumes of small value transactions. You've got other small businesses that are actually fairly stable cash amounts, relatively small amounts of cash flow. Small businesses, they're often with a kind of tax advantage structure to, you know, it's by people leave money in their small business. And that's actually good, that more simple use case, yes, it will be easy to move the money, but the money isn't moving that much in and out of these accounts. And those should provide a fairly stable platform where we think actually the kind of a good rate GIC offering which we offer will be pretty interesting to those kinds of consumers that, you know, they know they're gonna pay a tax bill six months from now, so buy a six month GIC, it's a pretty stable kind of asset for them and liability for us. So yeah, that's very much the approach we're taking. And we're not trying to kind of boil the ocean in small business, but we are looking at segments and trying to be really good for individual segments as we feel we've kind of honed our view on individual segments, so we'll extend it to, to, you know, the next segment, you know, large number of shareholders, more transaction volume, that type of thing. But our starting offering is gonna deal with the many millions of small businesses that you have a much simpler
spk12: need. Thank you very much.
spk15: Your next question comes from Nigel D'Souza
spk14: from Veritas, please go ahead.
spk04: Thank you, good morning. I wanted to follow up on equipment financing and I'm trying to get a handle on the potential tail risk for losses in that segment in a more stressed environment. So we're already close to 4% launch rate, but if we were in let's say a recessionary environment or something where the macroeconomic conditions tier rate, do you have a sense of what the range of
spk05: potential losses could be for that portfolio?
spk12: Well, did you want to try and handle
spk05: that one?
spk08: Sure,
spk10: I mean, it really depends on a lot of factors, Nigel. When we look at our forecasting, we think about the one cohort we've talked about how that's flowing through the system. You know, there could be some increased losses beyond what we're expecting, but I think we're anticipating that at least next quarter, worst case two quarters, we'll see the losses around where they are right now and starting to come back down further. But all indicators are that with a more challenging environment that will encourage the Bank of Canada to cut rates sooner and perhaps more deeply and that will bode well for those customers as well.
spk12: Okay, and if I could- Go ahead.
spk15: No, that's all.
spk04: Yeah, so if I could maybe talk about this more strategically, when I think about your business segments or your categories in terms of the risk adjusted margin and the risk adjusted margin for equipment financing, if you take the 10% yield to track 4% cost of funding and the close to 4% loss rate, you get a risk adjusted margin a bit below 2% and your uninsured single family book would be generating currently a risk adjusted margin above 2%, so that signals to me, I would interpret it as the pricing of that existing book isn't sufficient for the risk profile you're currently experiencing and maybe you could expand on, what do you think is a minimum acceptable risk adjusted margin for that business and how does it tie into how you're going to underwrite your business going forward?
spk08: Yeah, thanks, so obviously what you're dealing with there is a peak cycle loss, so we would expect losses of something like 150 to 200 basis points through the cycle, in fact, a year or two ago, we were below that 150 basis point target, so that is, it's true that if, you're quite right, if we're expecting these level losses then our pricing doesn't, over the longer term, our pricing doesn't make sense for this business, so that's something we'll obviously have to continue to tweak and play with, and I think the jury's still out on our longer term position for this segment of that part of the business.
spk04: I wonder if you could just expand on, sorry to harp on this, but the pricing of that existing business, why shouldn't it maybe just reset high for the entire industry? Was it just mispriced risk where the competitive market where the yields were about 10% and maybe they should have been closer than their teams or was it just an outlier on credit risk unique and prime and specific to that segment in the transport sector and the pricing was a corporate, just trying to understand how you think about this business.
spk08: Yeah, I think you might see the industry reprice, frankly, because what we're hearing is that our competitors are observing the same as us, it's not an idiosyncratic, equitable only thing, so I think we'll have to ask those questions and it may be that the whole industry prices or the criteria in these parts of the business reset.
spk05: Okay, thanks for the insights, appreciate it. That's it for me.
spk14: Your next question comes from Graham Riding from TD Securities, please go ahead.
spk07: Oh, hi, I just wanted to drill down on the commercial arrears a little bit more, just make sure I'm getting your message correct. So it does look like those arrears are about three times your recent average, but your allowance for credit losses is sort of in line with that historical range, so does it really come down to, are there some large sort of specific mortgages here that you've dug into and you don't see much credit risk? Is there sort of, are there some outsized mortgages in there that are sort of large in size, but you view as maybe low in potential loss potential?
spk08: Yeah, absolutely, and I think actually, again, for those of you who follow the story for a while, I remember we had an arrear a few years, two or three years ago where we were competently expressing there'll be no credit risk. It took three or four quarters to roll it off and there wasn't any credit loss. I think that's what we're seeing here. One of the larger ones we have, for example, is a condo project that was under construction. The developer chose to start putting more structures on the same site, and that caused some challenges with the project, but we received a number of bids from people potentially interested in buying this project and it's well in excess of our loan amounts, so that's a lot, I think the largest loan actually in the impaired bucket. So as I mentioned, despite the fact we got those bids, it might still take, we probably won't actually get the money this quarter. It takes a while to go through the receipt and the process, but the bids are in hand and they're solid bids from credible players, so we feel very confident about that. And I think that's what gives us confidence on the whole commercial book. We can actually sit around the romance we have and talk through each one and understand kind of what losses might come out of these and when they will resolve and feeling really good about that as a result of spending some time on it.
spk07: Okay, great, and just for sort of context, isn't just like half a dozen type oranges that you're digging through or 20 to 30? What sort of size of oranges here are you digging into?
spk08: It's, I've just got them right in front of me actually, so it's about 25 in total. Some of them are quite small, so not really meaningful. There's a 10 or 11 or something over 10 minutes.
spk07: Okay, that's helpful color, thank you.
spk08: And just to say in fact, I can have them, I put on one spreadsheet that tells you, you kind of know that load, you'll remember that one.
spk07: Right, okay, so you do have some specific things to do on here. Did you say that this portfolio had an average loan to value of 47%, did I hear that correctly?
spk12: Yeah, right.
spk07: Okay, and my last question if I could, just non-interest expense, how should we think about how that's gonna progress? I know there's some further ACM to flow in, this is a partial quarter, but beyond that, throughout the rest of the year, how should we expect that to progress? Cause I think you made a comment about maybe the second half expenses, either being lower or the growth rate being lower, maybe you could clear that up for me.
spk11: Yeah, it's expect the sequential growth, the slow down. Jeff, after yes, you count for ACM, we're gonna continue to invest, but there was a little bit more loaded up into Q1 as well for some of the larger marketing investments, but I wouldn't expect that continued level of growth sequentially.
spk12: Okay, understood, that's it, Ray, thank you.
spk14: Your next question from some Steven Boland from Rem and James, please go ahead.
spk13: Just one question, obviously on impairments, you mentioned the second half of the year on PCLs and impairments should kind of start to normalize, what about the shorter term? Can we assume that the impairment levels on an absolute basis have peaked or is it gonna be similar in Q2?
spk08: You can expect the impairments, you're gonna come to Sony, I'm pretty confident the commercial impairments, for example, will be down quarter of a quarter when we report Q2. You'll see PCLs and impairments with some slightly different concepts, I still expecting reasonable PCLs flowing through from the equipment leasing business that we previous mentioned. So, obviously we believe we're well reserved and there's obviously some complexity about provisions as it relates to kind of modeling and how the economic scenarios look going forward in terms of your stage one and stage two provisioning. So that's by its very nature, hard to predict.
spk13: Okay, and then when basically, just to follow up then on the residential, have you seen the bulk of, you think impairments, even in your past due, but not impaired, are you seeing that kind of moderating heading into Q2 results as well?
spk08: I think that's what we're expecting. Again, the story that, as I mentioned to one of the previous analysts, it's easier with the commercial ones because you can look at each loan by loan, but I think in general, that's the broader expectation with our single family modeling.
spk13: Okay, thanks very much guys. Thanks.
spk14: Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next questions come from Gabrielle Deschamps from National Bank. Please go ahead.
spk09: Hey, good morning. I just wanna clarify some of the comments you were making earlier just to make sure I understand them. Sounds like the pace of formations in the commercial portfolio will moderate in the second half. So we could see another uptick in Q2 or maybe not. I'm not quite sure I understand that.
spk08: To be clear, Gabrielle, we do expect the impaired in commercial to be lower at the end of Q2 than they were at the
spk09: end of Q1. Okay, so you do expect a decline in Q2. And just related to the, excuse me, the prior question there from Steve, the delinquencies in the mortgage portfolio, we saw an uptick quarter over quarter, mostly in the early stage. Would you expect that increase to moderate or actually decline in Q2?
spk08: I think as I'm gonna say, let me just to be sort of consistent with what I said to Steve, I think we're expecting it to moderate, but it is harder to figure out because it is a sort of loan by, it's a large number of small loans.
spk09: Okay, perfect. That's it, thanks. Thanks.
spk14: And there are no further questions at this time. Mr. Moore, back to you for closing remarks.
spk08: Thank you, Julie. And before we leave you today, we'll be celebrating our 20th anniversary by ringing the bell to TSX on Monday, March 18th. There are shareholders who have been with us for these 20 years, and I thank them for their loyal support of EQB. I also congratulate them for buying into an IPO and turning their original investment into a 20-year return of about 1,000%, including reinvested dividends. For those who are new to our story and really want to learn about EQB as an investment opportunity, open an EQB bank account. 4% interest every day if you deposit your payroll awaits, as does a convenient no-fee banking experience. That potent combination will lead to thousands of extra dollars in your pocket over time. We'll speak to you soon as our annual and special meeting of shareholders is on April 10th at 10 a.m. This will be a virtual event, and we hope you will participate. Thank you, and have a great day.
spk14: That concludes today's call. You may disconnect your lines. Thank you.
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