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spk06: Ladies and gentlemen, thank you for standing by and welcome to the Home Capital Group third quarter financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Jo McCrae from Investor Relations. Please go ahead.
spk05: Jo McCrae Thank you. Good morning and thanks for joining us today. We'll begin the call with remarks from Yusri Basada, Home Capital CEO, followed by a presentation by Brad Kodesh, our Chief Financial Officer. To answer your questions, Ed Carthouse and Mike Forshee are here from Sales and Underwriting, James Pelletier from Commercial, Benji Katchen, Chief Digital and Strategy Officer, Victor DiRisio, Chief Information Officer, and David Clough, Chief Risk Officer. After the formal presentations, we will have a question and answer period where we'll take questions from investors and analysts. On behalf of those speaking today, I note that this presentation may contain forward-looking statements and that actual results could differ materially from forecasts, projections, or conclusions in these statements. Please refer to our advisory on forward-looking statements on slide two of the presentation. I would also remind listeners that Home Capital uses non-GAAP financial measures to arrive at their adjusted results and that Yusri and Brad will be referring to both reported and adjusted figures in their presentation. Finally, a link to the slides accompanying this live webcast is available on our website at homecapital.com. With that, I will hand things over to Yusri.
spk01: Thank you, Jill. Good morning and thank you for joining us today for our third quarter results conference call. This year, our earnings call is taking place on Remembrance Day. Every year on this day, we take time to remember and to honour men and women who have served and continue to serve our country. to secure for us all the privileges of freedom and peace. May we all remember to keep a moment of silence at 11 a.m. in their honor. I hope you all continue to be in good health and good spirits through these unprecedented times. HOME is reporting another quarter of solid results today as we continue to manage through the impact of COVID-19 on our economy and our industry. I will speak with you about some of our accomplishments this quarter our progress on deferrals, and our Ignite program. Then Brad will take you through the financials in more detail, and we will conclude with a question and answer session. As a company, HomeTrust has a lot to be proud of this quarter. Our originations reached nearly $2 billion, a meaningful increase over Q3 last year, reflecting strength in both our residential and commercial segments. We delivered a net interest margin of 2.51% while keeping non-interest expense lower on a sequential basis. Combined with a recovery of provision for credit losses, we reported earnings per share of $1.12 and an increase of 67.2% over the same period last year. We delivered return on equity of 14.7%, and increased our industry-leading CET1 ratio sequentially to 19.35%. We concluded the disposition of the point-of-sale component of our retail lending portfolio, and we continue to make progress toward our strategic objectives, including our Ignite project, as we prepare our company to be a leader in the financial industry of the future. All of this happened while keeping the health, safety, and security of our partners, customers, and employees. Our performance this quarter is directly linked to the continuing resilience of the housing market. All our major residential markets are reporting increase in sales volumes and prices. The more time people spend working from home, the more it becomes important to have a home that fits that lifestyle. Instead of choosing to live somewhere close to work, people are choosing to live where they can get work done. With the background of the pandemic and recent resurgence in COVID-19 cases subsequent to the end of the quarter in some of our major markets, having a home as your bubble and your sanctuary takes on even a greater importance. At home, we recognize the purchase of a home is probably the most important financial decision someone can make. Becoming a homeowner is an enormous commitment and people do not enter into it lightly. It represents an investment of much more than just money. When someone buys a home, they generally do whatever they can to keep it. Our experience with deferrals during this year makes that clear and I'll provide more details on the next slide. You may remember from earlier calls that we initially allowed lending clients to defer up to two months of loan payments beginning in Q1 this year. As of the end of April, 23% of our loans in terms of dollar value were under deferral. By the time we reported Q2, the total had fallen below 8% as of July 31st. Today, I report to you that the value of loans is now less than 1% of all our total loans outstanding. The work we have done to find appropriate solutions for our lending clients has successfully helped them through this temporary hardship. Nearly 98% of loans that were previously granted deferrals have either been discharged or resumed regular payments. Borrowers are highly motivated to stay in their homes if at all possible. At this time, we're not accepting any new pandemic-related deferral requests outside our normal lending practices, and the remaining principal balance is not material to our operations. The deferral program was a coordinated effort by lenders, insurers, and regulators to provide support to Canadians affected by the onset of COVID-19 conditions. It was timely, appropriate, and effective. I'm proud of HOME's participation in this program. at the time as our people were transitioning from home we were able to move quickly and smoothly to implement a deferral program that conformed to our own risk appetite slide six gives an update on our ignite project we have adapted to remote working conditions and everyone is working diligently to move this project forward significant achievements so far this year include Our deposit automation system for home, or DASH, system for straight-through processing of deposits, has been launched and rolled out across multiple channels in the company. This improves the customer experience with rapid turnaround of GIC transactions. We implemented several robotic process automation activity throughout the company where repetitive transactions can be automated for efficiency and accuracy. Examples include processing of deferrals, property tax disbursements, and renewals. We created a number of business intelligence dashboards within the company for advanced data analytics and insights. Having access to improved analytical tools makes us more agile, improve our decision-making, and supports our sustainable risk culture. We launched a new customer relationship management system for our marketing team, replacing our old legacy marketing information. Ignite represents a multi-year journey for all of us at home. We have progressed in our implementation timeline in spite of the additional demands of managing the deferral program and navigating our pandemic-related disruption. Our digital transformation is delivering the operational and service capabilities we need to grow and thrive in the banking world of the future. I will now invite Brad to discuss our financial results.
spk00: Thanks, Yusri, and good morning, everyone. The presentation continues on slide eight. We continue to perform well and have seen significant increases in net interest income, net income, and return on equity. Our diluted net income per share increased by 67% year over year to $1.12 per share. On an adjusted basis, the year over year growth in net income per share was 64% to $1.18. The increase in net income resulted primarily from higher net interest income and the release in provision for credit losses. The increase in reported diluted earnings per share reflects the increase in net income and the decrease in the average number of common shares outstanding. The decrease in the average number of common shares resulted from the repurchase of shares under the companies NCIB in Q3 2019 and NCIB and SIB in Q1 2020. Our book value increased to $31.28 and our annualized return on equity was 14.7% for the quarter, 15.5% on an adjusted basis. Our pre-tax, pre-provision income was up by 27% compared with the same quarter last year, as total revenue growth of 17% was offset by only 8% growth in our non-interest expenses. Our efficiency ratio was 47.2% on a reported basis and 44.2% on an adjusted basis, compared to 51.3% and 47.8%, respectively. Slide nine shows the combined contribution of all these items to our year over year growth in net income per share. The most significant contribution to the 45 cent increase was improvement of 26 cents in net interest income through both margin expansion and growth in assets. The reversal of credit provisions contributed 15 cents. We had an improved quarter of originations in both residential and commercial portfolios. We continue to build our loan portfolio in a competitive market with growth of 2.6% year over year. As of September 30th, commercial loans made up 10.9% of our on-balance sheet loans compared with 11.8% in the prior year. The high quality of our loan portfolio is shown on slide 12, consistent with our risk appetite and prudent underwriting. Within our single family portfolio, our lending clients had a weighted average FICO score of 726 at the end of Q3. The uninsured portion of our single family residential portfolio is secured by real estate at a weighted average loan to value of 60.1%. Our net interest margin for the quarter was 2.51% as shown on slide 13. We continue to pursue a risk-based pricing model on our loan portfolio while experiencing a decline in pricing on our deposit products. Our net cost of funding reflects a balance between offering competitive pricing on our loan and deposit products while holding a prudent level of lower-yielding liquid assets. Our third quarter net interest margins improved by 11 basis points over Q2 and by 29 basis points over the third quarter of 2019. Consistent with our strategic objective to diversify our funding sources, homes deposits through our proprietary Okin channel continue to grow both on an absolute basis, 18.3% year over year, and as a share of homes overall deposit funding from 24.2% to 27.7% as shown on slide 14. Okin's share of our total deposit funding has grown every quarter since the end of 2018. Consistent with our prudent approach to liquidity risk management, term funding represents over 80% of deposits gathered through OKIN. The next slide details our credit provisions for the quarter and the year to date. Provisions for credit losses are calculated using forward-looking economic models sourced through a third-party provider, as well as management expectations of future performance. The primary contributors to the $7 million release of provisions related to loans that were repaid during the quarter in the commercial and other consumer retail loan portfolios, as well as the impact of an improvement in the forward-looking unemployment rate assumptions used in the estimation of expected credit losses. Our year-to-date provisions are primarily the result of changes in forward-looking macroeconomic data and the probability weightings assigned to different outcomes. As we have said in the past, the forward-looking nature of IFRS 9 means there will be quarter-to-quarter volatility in provisions as economic forecasts and model data are updated. Changes in economic conditions during 2020 have provided an example of that volatility. With the reversal in credit provisions, this quarter's provisions were negative 16 basis points of gross loans as seen on slide 16. This compares to positive 43 basis points in Q2 of this year and nine basis points one year ago. Net write-offs totaled nearly 24 million this quarter and 26.2 million year to date. $22.2 million of that, or about 93% of the quarterly figure, was attributable to the sale of a portfolio of loans within the HVAC rental segment of our other consumer retail loan portfolio. We see this level of write-offs as specific to that counterparty and not representative of the remaining portfolio. Home discontinued originating all HVAC rental financing more than two years ago. The remaining gross HVAC rental loans on our balance sheet total about $50 million, down from about $116 million at the beginning of the year. Net write-offs in our core residential lending portfolio are in line with historical experience for the quarter and for the year to date, while net write-offs in commercial lending are trending better for the same periods. Our allowance for credit losses at the end of the quarter totaled $78 million, with 72% of that attributable to performing loans. Stage 1 and 2 loans. This is a decrease in allowance of roughly $31 million from Q2, of which $7 million is attributable to the reversal in credit provisions and the balance attributable to write-offs. The total allowance is determined through the use of a model which incorporates three probability-weighted forward-looking scenarios and includes a management overlay. The inputs to those scenarios are provided on slide 17. The impact of using the three scenarios adds almost $10 million to what the allowance would be using just the base case forecast. Our allowance related to performing loans, classified as either Stage 1 or Stage 2, totaled $56 million at the end of the quarter, a decrease of $20.2 million from the end of Q2. This is attributable to net write-offs the assets derecognized or repaid referenced earlier, to updated inputs to our economic models. Our performing loan allowance under IFRS 9 will continue to fluctuate as predictions of the impact of COVID-19 on the economy are updated. We consider our loan portfolio to be well-provisioned. Net non-performing loans on slide 18 total just over $82 million or 47 basis points of gross loans. This compares with 42 basis points as of the end of Q2 of this year and 49 basis points as of Q3 of last year. Our liquidity and capital metrics are on slide 20. We continue to hold over $1 billion in high-quality liquid assets with access to additional short-term funding as needed. Our CET1 capital ratio of 19.35% at the end of Q3 increased by 87 basis points in the quarter and 171 basis points for the year to date. We have a strong capital ratio, well in excess of our regulatory minimum, and are committed to being prudent stewards of this capital in this period of economic uncertainty. We are confident in our ability to continue to generate solid returns for our shareholders while working towards our strategic objectives. And now I will turn the call back to Yusri for closing remarks.
spk01: Thank you, Brad. While we are pleased with our results we have reported today, we cannot ignore the continuing uncertainty that our economy is facing as a result of COVID-19. When we entered the lockdown conditions, we had no way of knowing how long they would last. What we have demonstrated today is that we're able to work effectively in any condition. We will continue to do so for as long as necessary until the risk to public health has passed. When the circumstances are favorable to reopen downtown, we will do so with the safety of our stakeholders in mind and in accordance with guidance from health authorities. Until then, we will challenge ourselves to use this time to execute on our strategic priorities, continue along our digital roadmap, learn from our experiences, and build a company that is stronger and more resilient than ever. No matter how long it takes, we have the financial resources, the capability, and the resolve to continue our important purpose of helping Canadians own homes. We thank you all for your support. I will now ask the operator to poll for questions.
spk06: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Our first question this morning comes from Chihan Tunke from Stiefel. Please go ahead.
spk02: Oh, hi, team. Good morning. Just a couple of questions for me. Let's start with the NIM. Obviously, big games here for the quarter, and I think it's the best... NIM performance in a very long time. So with the changes we saw on the yield curve post the election results and the virus vaccine news, do you think this level of NIM around, you know, 2.5%, what do you think, how comfortable are you with the sustainability of that going forward and how would the impact you're seeing on mortgage rates and deposit rates at this time?
spk00: Hi, Shannon, it's Brad. So far, we haven't seen a negative impact on NIM, although, as you mentioned, some of the forward-looking curves are different. We haven't had a chance to react, or we will react to those as some of those forward-looking curve items get incorporated in NIM. live mortgage or our commitments but for now we continue to see higher rate deposits will often be replaced with lower rate deposits and to the extent uh our underwriting teams are able to price our products at the current spreads then we we may see some slight declines in them but uh we're also able to uh or have been able to maintain it over the past couple of months
spk02: Okay, thanks for that, Brad. And then maybe a question for you three. So if you're just wondering, have you made, I didn't hear this, and apologies if you mentioned this in the remarks, but have you, could you talk about any of the changes you've made to your underwriting standards, you know, today versus where you were, you know, say at the beginning of Q3, any changes on the, any big changes with respect to that?
spk01: Sure, Sian. We did make some changes almost immediately in the early days of the pandemic. And while we still virtually still lend where we lend in major urban centers, there were certain pockets that we pulled back the LTV from, let us say, in a certain section, we do 80%. We moved it back to 70% or 65% are as appropriate. We also, in the verification of income, We're always very prudent at verifying income, but even took a harder look in certain industries, industries that requiring the gathering of people, for instance. We took a harder look on that. We have to be satisfied in even more than our normal income. And on the commercial side, very similarly, again, in certain pockets we looked at and said where are we comfortable or uncomfortable. And as well on the small commercial side, we, again, would look at income in a different way, what kind of income. industry is it, what kind of business is it, does the gathering. So there were a number of things we pulled back on, but I'd say we didn't change geographically, just within those geographies, a harder look at income and some LTV differences.
spk02: Thank you, Sri. If I could just sneak just one last question in for me. With respect to deferrals, obviously, you know, a big decline. Could you talk to at all what the LTV is of the remaining balance that's within deferrals? Are you advising any of these folks to simply sell their home into a strong housing market? How are you looking at the balance that's currently outstanding in deferrals?
spk00: Janet, the LTVs are consistent with our overall portfolio. Same with FICO scores. They may be slightly lower than average, but we haven't seen any significant issues with that deferral program. And as you've seen, that number has come down significantly. dramatically from its highs. And as you three noted, we're very happy that we were able to help our customers through a very trying time. And again, offering assistance to them and trying to organize their financial situation so that they can come back strong in terms of being able to make their payments in their overall credit situation.
spk02: Okay, thank you very much.
spk06: Our next question comes from Steven Bowman from Raymond James. Please go ahead.
spk04: Morning, everyone. Just a couple of big questions or a couple of questions, sorry. The first one is the other consumer retail loans, HVAC, is the goal to get that down to zero? I know you stopped HVAC loans, but any other consumer loans, is the goal just to get that to zero?
spk01: I'd say over some time, yes. We did sell some of it. That which we have, we're not lending further. We continue to administer the portfolio, and over time, it would go to zero.
spk04: Okay. Thanks. And then this is the second. I mean, your originations in the classic, pretty equal to last year improvement over the last quarter. So, I mean, what's your outlook in terms of housing? There is some concern that, you know, housing prices have risen significantly Even in, I would say, the suburban market that maybe you guys lend in is a little bit overheated. So just wanted to get your view for what's going on this quarter and your outlook maybe for the next couple quarters.
spk01: Yeah, these times it feels harder than ever to have outlooks. Things seem to change a lot. I don't think any financial institution would have predicted back in April the way the market has shaped this year. So to answer your question, we don't see much evidence in the near future anyway that it's going to be any different. Low interest rates are going to continue. People with jobs... seem to be saving more than they planned. They're not traveling. They're not going to restaurants. And people have changed what the definition of a home is. Many have decided that they want a backyard. They don't mind working further because working from home doesn't affect that. So those demand items seem to continue. So I don't know exactly what's going to happen, but it looks like the momentum will continue for a little while yet.
spk04: Okay. Thanks very much, guys.
spk06: Our next question comes from Graham Riding from TV Securities. Please go ahead.
spk03: Hi, good morning. So you flagged up in your provision in your base case implies I think that you're over provisioned by almost 10 million. If the world plays out according to what your base case model assumptions are, what is your expectation for you know, the potential for further credit law provisions to be released? Is that something that potentially fades back into your earnings over the next year or so?
spk00: Thanks. I'm going to answer that question in that you asked if the base case persisted. So basically, that would mean that we wouldn't have, absent any portfolio growth, we wouldn't have any further provisions. What may change, though, are the base case assumptions. So we'll continue to use different probability weighting scenarios. But if the underlying assumptions change and that base case changes, as well as any of the other weightings, then there is an opportunity for potential reversals. And as we said, with the volatility, to the extent that things would – deteriorate, then we would also be in a position to unfortunately have to or we're in a position to increase provision. So again, I just want to be clear. So if nothing changes and the portfolio stays the same, then we wouldn't need any further provisions. And if any of the inputs change and we've seen that they become slightly favorable so far this quarter, then there's an opportunity to see further recoveries absent any increase in the overall portfolio.
spk03: Okay. Understood. And how about those borrowers that went through that deferral process? They've obviously now, most of them are,
spk01: are off deferral are you expecting any you know arrears or any pressure from this cohort in particular or do you believe that this that this cohort should perform in line with the rest of your portfolio any color there yeah um as i uh as i mentioned many um are either back on repayment or have discharged there is a small number that have gone into arrears um it's uh It's less than maybe I would have imagined back in April, but we're working with them as we would in a normal process. So, you know, the good news is most are coming out very, very well, but there is a small portion. We continue to work with those who have gone from arrears, that small amount that's gone from arrears into jobs. sorry, from deferrals into arrears and help them out, help them as you would with any client who goes into arrears. So surprisingly small a fight.
spk03: Understood. That's it for today. Thank you.
spk06: As a reminder, it's star one in order to ask a question. Our next question comes from Jane from National Bank Financial. Please go ahead.
spk01: Yeah, thanks, and good morning. First question is related to the commercial mortgage increase in gross impaired loans, not impaired loans. I'm not sure if you addressed this on prepared remarks, but can you just give us a little bit more color as to what drove that quarter-over-quarter increase?
spk00: Yeah, sure, James. We had some loans that we interpreted as becoming non-performing, and as a relation to the current economic circumstances and we're comfortable that we're well provisioned on those loans.
spk01: Could you, like, so what is it about that current economic situation? Like, what changed from Q2 to Q3 if, you know, whether underlying economic assumptions would have improved?
spk00: Well, each individual loan, like commercial loans, are generally larger than residential. So any one particular circumstance of a commercial loan would result in changes to their staging, and that's how we would approach it.
spk01: Okay. Looking at the securitization process, NIM, big bump in the CMHC-driven net interest margin for securitization portfolio. How sustainable do you think that spread is or that margin is? Is this just a temporary impact and you kind of have to get through the mortgages that were originated a few months ago and are now getting securitized, or is that something that's sustainable?
spk00: I think short-term, yes, meaning over the next quarter or so, and then obviously we'll see where those changes would happen in the future games.
spk01: Next one is on the operating expenses. Can you just refresh us on what you're expecting from the Ignite program spend and where you think operating expenses X the Ignite program are going to trend here over the next few quarters?
spk00: I think, well, this quarter and the next few quarters are going to be where the majority of our spend will be coming on the SAP implementation. So our current forecasts are that we'll be consistent with this last quarter.
spk01: As in both... As in the... Yeah, so the...
spk00: The aggregate spend for non-interest expenses will be approximately what it was this last quarter as a run rate.
spk03: Right. Okay. All right. That's good for me. Thank you.
spk06: This concludes the Q&A portion of our call, and I would like to turn it back to you, Srivastava, for final comments.
spk01: Thank you, everyone, for joining our call. We wish you stay safe and healthy, and we look forward to speaking to you after our Q4 results.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
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