EQB Inc.

Welcome to EQB's earnings call for the fourth quarter of 2024 on Thursday, December 5, 2024. At this time, you are in a listen-only mode. Later, we will conduct a question-and-answer session for analysts. Instructions will be provided at that time. It is now my pleasure to turn the call over to Mike Rizvanovic, Managing Director of Investor Relations for EQB.

Thank you Jennifer. Good morning everyone and welcome to EQB's Q4 fiscal 2024 earnings call. Hosting today's call will be Andrew Moore, President and Chief Executive Officer and Chadwick Westlake, Chief Financial Officer. Marlene Lenarduzzi, EQB's Chief Risk Officer will be available for the Q&A portion of this call. For those on the phone lines, we encourage you to log into our webcast to view our presentation which may be referenced during the prepared remarks. On slide two of our presentation, you'll find EQB's caution regarding forward-looking statements as well as the use of non-IFRS measures. All references today will be on an adjusted basis unless otherwise noted. As a reminder, due to EQB's fiscal year change, our Q4 and annual results are presented relative to the fourth quarter, sorry, the four-month and 10-month periods ending October 31st, 2023 respectively. And with that, I will now turn it over to Andrew to begin the prepared remarks.

Thank you, Mike, and good morning, everyone. For the past 20 years as a public company, it has been a well-supported tradition to use our fourth quarter earnings to talk about our bank's strong and consistent results. There are many reasons to celebrate EQB's fiscal 2024 earnings and performance. Four increases in our dividend, ROE once again hitting the 15% mark, and positive trending in several key growth areas that helped push revenue well past $1 billion for the first time in our 54-year history, or further bolstered by EQB achieving or exceeding many of our guidance measures for the year. We have decades of proof points that validate our time-tested strategy focused on our customer and service mission, innovating and advocating for Canadians, ensuring a differentiated value creation model anchored in ROE, and building long-term franchise value, all underpinned by robust risk management. This celebration, well-deserved as it may be in the context of a challenging economic climate, comes with a caveat. Fourth quarter results did not measure up to our expectation on specific measures, and we are deeply disappointed by this outcome. However, the isolated reasons for shortcomings in this particular quarter in no way alter the conviction in our earnings growth or momentum for 2025, or importantly, our medium term, which should be evident from the strong growth guidance we issued. I will start with the primary reason for underperformance in Q4, which centers on equipment financing. PCLs and equipment financing amounted to $16 million in the quarter, the equivalent impact to about 30 cents per share EPS. For the year, the bank's PCLs were significantly elevated from our expectations, 71% of which was driven by the equipment financing portfolio in the context of a North American recession affecting the long-haul trucking industry. Bennington was slow to fully adjust their credit appetite to reflect risks and supply chain disruptions resulting from the pandemic, as we've discussed in past calls. The other component specific to this portfolio relates to pride group exposure involving suspected irregularities that account for 16.1 million in reported provisions in the fourth quarter. Unfortunately, we were not the only bank to have been caught up in this situation, which is subject to ongoing CCAA proceedings as described in our disclosure materials. This situation evolved through the quarter with the full picture only becoming evident to us towards the very tail end. As you know, we charge higher interest rates to compensate for risk-taking in equipment financing, but the calculus did not live up to our expectations in this area. In fact, if these PL, PCLs, and equipment finance had been aligned to expectations, EQB would have exceeded the high end of earnings guidance. This explains our deep disappointment in this specific part of our business for fiscal 2024. Just as important as understanding why the challenges in equipment financing occurred is communicating what we've done about it and how we will continue to proactively manage this business in the future. As part of our continued strategic review of the equipment financing business and to ensure better performance, we have put measures in place to de-risk and diversify this relatively modest portfolio. To start, we have shifted our focus to higher credit quality exposures with prime customers, which deepens our existing appetite for tightening. We also made clear adjustments to our credit underwriting process that meaningfully restrict and reduce long-haul exposure in the portfolio. Finally, we made decisive changes to the leadership team. We're seeing promising early results for our efforts here. Over the past few months, there are some encouraging signs that suggest industry fundamentals have begun to improve. This has manifested itself in the lowest level of early stage delinquencies we've seen in the last year. Other segments of the leasing market are holding up well. To clearly summarize, we have taken action and will continue to. We are appropriately reserved and expect improvement in this book in fiscal 2025.