Home Capital Group Inc.

Good morning. My name is Chris. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Home Capital Group third quarter financial results conference hall. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Joe McCray, VP of Investor Relations. You may begin.

Thank you, Chris. Good morning, everyone, and thank you for joining us today. And apologies for the slight delay in the start time. Our agenda for today's presentation is as follows. We'll begin the call with our partner, Utrecht Asada, home president and CEO. Brad Kotich, our CFO, will then review our financial support, which will be followed by a question and answer period for participants. We have members of our senior management team with us on the call to help answer your questions. On behalf of those speaking today, I note that this call 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 and forward-looking statements on page two of the presentation. I would also remind ministers that HOME uses non-GAAP financial measures to arrive at adjusted results, and that management will be referring to both reported and adjusted results in their remarks. And now I'd like to turn the call over now to the staff.

Good morning and thanks for joining me. I'm pleased to be speaking to you today about our third quarter results. This was a quarter of good progress along the road back to the new normal of working and living conditions. Conditions that we all miss and want to get back to. I'm pleased and comforted with the prudent and measured approach to opening up that government, we here at Home Capital, and other businesses are taking to ensure that any progress is sustainable and enduring. We're seeing the benefits of this approach not just in the form of higher GDP and employment figures, but also in the ability of people to gather safely in. Here at Home Capital, this was a quarter of progress as we moved forward in all areas of our operation, executing on our plans for our core business, technology, and our deposit operation. Today, I'll be discussing the current state of the housing affordability our activities during the quarter, our outlook for the balance of the year, and our capital crush. After a bit of a breather earlier this summer, sales volume in September and October seem to be picking up across all housing types in our major markets. Prices have moved steadily higher as the growth in new listings is not keeping pace with the growth in sales. Attention is turning to the supply side of the equation to address the affordability gap. Here at home, we're happy to see this. Canadians have repeatedly demonstrated their passion and commitment to home ownership, and we share their view that everyone deserves the comfort and security of a home. While it will require years of commitment and the coordination from all levels of governments, as well as developers, lenders, and investors to create sustainable solutions, the current level of attention to this subject is a good first step. Turning to our third quarter earnings. Today we're reporting net income of $1.08 per share. We delivered strong growth in our book value and return on equity. Our teams also did a lot of work to set us up for future growth and I'm pleased with the progress in a number of key areas this quarter. First in originations. Our residential sales and underwriting team followed up a strong Q2 with an even better Q3. The processes and strategies we have put in place to drive growth are functioning the way we intended. For instance, working with our broker partners to become more efficient at processing applications and using the capability of our new CRM system to increase broker ideations. On the commercial side, originations picked up over Q2 and we're adding good business in attractive segments of the market. While we have started to benefit from a return to pre-pandemic underwriting guidelines during the quarter, we delivered this growth without compromising the prudent underwriting standards that we are known for. Our healthy credit experience this quarter and for the year to date reflects the underwriting discipline. Not only are our credit losses minimal, but the percentage of non-performing loans as a share of gross loans has declined to low pre-pandemic levels. Further, the continuing upward revisions to economic outlook led to an additional relief of our credit allowance. Brad will discuss more specifics on this portion of his presentation. Turning to our funding side, customer deposits through our Okin channel grew to $4.3 billion, and I'm happy to announce that our Okin branch launched the Okin app in early October for both iOS and Android devices. The launch follows extensive testing and feedback in one of our agile working groups. It offers flexibility, intuitive navigation, and an excellent user experience, as well as the ability for customers to review their accounts with us 24-7. Our launch of the Olkip app aligns with our strategy of serving customers the way they want to be served. We are working to increase engagement with the app across all our Open customers. Over time, we'll be adding more features to enable a broader range of transaction options. I look forward to sharing our progress with you all. Beyond Open, we continue to move forward with our funding diversification plan. We closed our third RMIS transaction in October. The attractive terms make this a competitive option for funding our growth. Earlier this week, we participated in a bank-honored securitization conduit. Together, these instruments added an additional $675 million of liquidity to our funding mix. We will continue to expand these and other funding sources in the future, having more options to ensure we are a reliable source for growth and competitive price. Our Ignite program is moving forward. We are focused on the development and testing required to support the next wave of upgrades that will focus on the efficiency of our deposit operations. Our teams have been hard at work to give us the tools and resources we need to build an organization that is ready to meet the challenges of the future. Now, looking at our plans for opening up here at home. I'm happy to say we have begun to welcome back people into our office. We took the step of requiring proof of vaccination for returning employees. We want our employees and our customers to feel comfortable when they are dealing with people from home and we are taking steps to make them safe. At this stage, nearly all employees are back in the office one to two days per week as we shape what is the right mix of hybrid working models will look like for us. It is great to see the faces of the home team and their conversations so the office environment. People are excited to be together again and learning to thrive in a hybrid meeting and work. It's no surprise that in addition to being a great place to work, Home was named to Best Workplaces in Financial Services and Insurance for 2021. I want to say a word about our capital plan, which Brad will discuss in more detail later on. We are pleased with the announcement by OSCE updating the regulatory expectations around capital return. Accordingly, we have announced plans for a $300 million substantial issuer bid for SID. This is consistent with our earlier communication that we would move swiftly to achieve our target CEG-1 ratio. We understand one of our most important responsibilities to our shareholders is effective management of capital. And we recognize that the excess capital we're holding is a drag on ROE and that the profitability we're able to deliver. The NID is the first step toward achieving a ROE that reflects the true profitability of the great business we're in. Looking ahead, we still believe that conditions are in place for a healthy, healthy market. Our broker partners report robust demand in our major markets, with sale gains in all categories of homes, including reduced drinks and condominium sales. Employment numbers are increasing, so people are going back to work. The data on the deposit balances show that consumers have a lot of savings. We continue to follow the Bank of Canada on the timing and magnitude of rate increases and the potential effects on the market. However, we are not yet seeing cause for concern about credit. Our economic indicators are strong, and the B20 stress test provides some affordability cushion against higher rates. In addition, the shorter duration of Alternative Mortgage Book provides an up-to-date view on borrowers' ability to pay. We will continue to drive value for our open customers and take advantage of opportunities to diversify our funding. And we will work to improve our return on equity for shareholders by optimizing our capital structure. Now, I would like to turn it over to Brad for financial review. Thank you, Utrecht, and good morning, everyone. This segment of the presentation begins on slide six. Net income for the quarter was 54.8 million, a decrease of 6.3% compared with the 58.5 million in Q3 2020. Adjusted net income was 56 million. Q3 net income per share was $1.08 for the quarter compared with $1.12 in Q3 2020. Adjusted net income per share was $1.10 after adjustments related to our NICE program. Book value increased by 16.4% year-over-year to $36.40 per share, and return on equity was 12.2% for the quarter, or 12.5% on an adjusted basis. Once again, we generated double-digit return on equity while holding substantial levels of excess to ET1's capital. Slide 7 shows the sources of the change in earnings per share compared with Q3 2020. ETFs was down by 4 cents, or 3.6%. Last year's earnings had the benefit of a higher reversal of credit provisions, partially offset by increases in ETFs as a result of the lower number of shares. Average shares outstanding were lower due to normal court issuer bids during the year. Our net interest margin was 2.58% for the quarter, compared with 2.61% in Q2 and 2.51% one year ago. The year-over-year increase in NIM is mainly due to lower funding costs and considering three cents to the change in net income. Our expectation based on our current outlook for interest rates, asset mix and competition with other lenders, is that there may be modest volatility in our net interest margin for the balance of 2021. Pre-tax, pre-provision net income was consistent with Q3 2020. On a sequential basis, adjusted EPS was down from $1.44 to $1.10, primarily due to lower reversals of provisions and higher non-interest expenses. Those expenses were up primarily from an increase in employee compensation, including employee incentives and severance costs. Our efficiency ratio is 47.3%, similar to one year ago. by nature of originations and loans outstanding in our single-family residential portfolio. Originations grew by 34% over the same quarter last year with particular strength in our classic portfolio. Classic single-family on balance sheet as of the end of Q3 grew 4% year-over-year. Originations in our commercial business declined in the third quarter compared with Q3 of 2020. Q3 of 2020 was an unusually active quarter for us due to favorable competitive dynamics in place at that time. Originations picked up over Q2 with emphasis on land and construction rather than restaurants and hotels. On a year-over-year basis, commercial loans on balance sheet at the end of the quarter decreased by 10%, resulting from payouts of SecureTite products as well as loans to retail stores and stores and apartments in particular. Our Ocon channel experienced good inflows this quarter and now makes up 31% for our total funding. The percentage of Ocon deposits held in savings rather than GICs increased to 23.5% from 18% as depositors are less inclined to lock in their funds in a period where rates may rise. Our overall Ocon balance has increased by $82 million or 10% year-over-year. For the year to date, inflows through our open channel have accounted for all of our deposit growth as we've used a variety of other funding options to provide liquidity. As Yusri said, subsequent to the end of the quarter, we went live on our digital banking app. Everyone here at home is excited about the potential of this new platform. Following the end of the quarter, we announced the successful completion of our second RMPS offering of 2021, and effective yield of 1.5 to 8% on the Class A notes. We are pleased that the pricing spread over Government of Canada bonds has narrowed with each issuance. Subject to market conditions, we will continue to be a programmatic issuer of RMDS. We also participated in a bank sponsored securitization conduit. Slide 11 shows the details of our credit provisioning this quarter. We booked a reversal of $3.8 million compared with a reversal of $7 million in Q3 2020. The influence to our third-party economic models continues to trend upwards, particularly the data on employment. The $3.8 million reversal is put roughly evenly between our Stage 1-2 and Stage 3 loans. Looking at lines of business, the most significant contributor to the provision reversal with our commercial portfolio, driven by both changes in risk parameters and actual retainments in this portfolio. For the year-to-date, provision reversals have totaled $34.7 million, compared with provisions of $41.8 million in 2020. Commercial loans have accounted for 62% of all year-to-date reversals of credit provisions. As the percentage of gross loans shown on slide 12, Reversals of credit provisions were nine basis points for the quarter on an annualized basis and 26 basis points for the year-to-date. Net write-offs for the year were $0.2 million across all lines of business for the quarter, or approximately one basis point. For the year-to-date, net write-offs totaled $0.4 million, or less than one basis point of gross loans. For the first three quarters of 2020, net write-offs were 26.2 million, or 20 basis points of gross loans, of which the majority was attributed to our retail consumer lending portfolio. The inputs to our economic models improved for levels of unemployment, as shown on slide 13, while the outlook for housing prices showed minor decreases across all scenarios. The total probability-weighted loan loss allowance was $35.7 million at the end of the quarter, while the allowance using just the base case declined from Q2 to $27.7 million. The probability-weighted allowance was approximately $8 million higher than the allowance would have been using just the base case. The next slide shows a breakdown of our $35.7 million allowance for credit losses as of the end of Q3. The chart on the right shows that 79% of our loan loss allowance is attributable for Stage 1 and 2 loans. The allowance has decreased in all our lending categories due to general improvements in FOI in addition to repayments and releases or reclassification of loans previously categorized in Stage 3. Non-performing loans have declined significantly as shown on slide 15. Net non-performing loans now make up only 15 basis points of our total gross loans. Meanwhile, our allowance coverage has increased to 22.1% of total Stage 3 loans. Slide 15 shows our PDP-1 capital ratio of 22.57% at the end of the quarter, an increase of 30 basis points from the end of Q2. For the year-to-date, we have spent approximately $70 million to buy back over 2.1 million shares at an average price of $32.73. This represents a discount of 10% to our quarter annual value. Because we were able to use cash at the holding company level, year-to-date NCIG activity has had no impact on our regulatory capital. As Yuzri mentioned, we plan to achieve a CET1 ratio within our stated target range of 14% to 15% by the end of next year. Today's announcement of our $300 million substantial ratio bid marks a significant first step towards achieving our target CET1 ratio. And now, I will turn the call back to Yuzri for closing remarks. Well, thank you, Brad. Now I'll ask Rick to hold the questions.