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spk00: 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.
spk02: 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.
spk01: 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.
spk00: Thank you. At this time, I'll just remind everyone, if you would like to ask a question, please press star one on your telephone keypad. And our first question is from Etienne Ricard with BMO Capital Markets. Your line is open.
spk01: Thank you and good morning. Good morning. Congrats on the quarter and the return of capital. On this topic, in prior conference calls, we talked about expectations for your capital to the target levels within an 18 to 24-month period. Now, the new plan of reaching the target 14 to 15% to 1 ratio by the end of 2022 is even better. So what else is on your roadmap to return more capital by the end of 2022 in addition to the substantial shortfall? Yes. Thanks again. We've been consistent in focusing on share repurchases and mechanisms to repurchase shares. We think that our evaluation is where we view it attractive for us to repurchase shares. So that's been our focus. We do plan on renewing our NCID. And further to our previous commentary, we would contemplate the resumption of a quarterly dividend after we've completed those share repurchase activities. So, you're right, we have accelerated the timeframe since we talked last August. It's just a matter of utilizing those facilities. So, as I said, we're going to do the, we've announced the $300 million SID, which we expect to close by the end of Q4. And we will renew our NCID that expires on January 21st. And then we will review once the SID has closed. we'll then review our overall plan and the mix. So one of the key determinants will be what happens with the SID, and we'll be reporting back with our Q4 results on what we're going to do next in terms of capital return. Okay, great. And as it relates to funding, you know, just this SID, it has about $300 million in cash, $400 million in securities. How do you plan to balance on one hand funding the SID and on the other maintaining appropriate liquidity levels? Well, we're extremely confident in our ability to manage our liquidity. One of the things that we've been doing and have demonstrated over previous quarters is our access to the But in addition to that, we just recently completed our third RMUS transaction. We have just recently started to participate in a bank-sponsored securitization conduit. We also have the capability to utilize whole-loan sales securitization. And frankly, we only need a modest increase on a daily basis. audit funding to be able to work through the funding requirements for this SID. So, we're extremely confident in being able to manage our liquidity and, you know, post-quarter, once we were able to solidify our plans, we participated in the bank certification conduit as well as the RMBS transaction, which collectively brought in over $500 million.
spk00: Okay.
spk01: And looking into 2022, how confident are you in a potential credit rating upgrade? And how would that help home if you're funding from, you know, even more funding sources? I think it would be very helpful. Our view is that we should receive a rating upgrade, but that's beyond our control other than the continued performance and how we can demonstrate that to the relevant agencies. But clearly, an upgrade would open up the deposit market on a competitive basis and That would probably be the first thing that we would turn to once we reach investment grade for both our credit rating agencies. So that would be extremely helpful, but it is not incorporated in any of our liquidity plans. And as I said earlier, we're highly confident that we will continue to be a programmatic issuer of RMDX. and that we will continue to work in opening other lines and perhaps be able to participate in further securitization activities. Great. Thank you for your comments.
spk00: You're welcome. Our next question is from Nigel D'Souza with Veritas Investment Research. Your line is open.
spk01: Thank you. Good morning. I first wanted to ask a granular question on your PCL reversals this quarter. And when I look at loan categories, specifically single-family residential mortgages, I see that there was a reversal in your State 3 loans there. And I wanted to maybe tackle this a different way. You know, first try to understand what positive loans to migrate into State 3 to begin with. And I ask that given a backdrop of deferrals and substantial fiscal support programs. Would you share with us what the impairment trigger was in the first place to classify these loans as Stage 3? Well, typically, it would be missed payments and some behavior. They would be over 90 days would generally automatically put them into Stage 3. Sorry, 60 days would automatically put them into Stage 3. So as we went through, our current delinquency rate is better than it was pre-pandemic. And we've just seen a decline in those Stage 3s as they're either brought current or otherwise dealt with by our collections team. Got it. And from what I understand, the Stage 3 reversals are reflective of workouts. And, you know, when these borrowers resume their payments, are they resuming the payments original contracted mortgage rate or are they resuming the payment at the current mortgage rate? It depends on the situation. We may do a restructuring of the loan and then that becomes a refinance and gets re-underwritten. Okay, so the reason I ask that is if we do have an environment of rising interest rates, does that at all, you know, impact the potential for K-3 reversals that we're currently seeing in single family residential? Well, a lot of that movement in and out of K-3 is typically related to their payment or premium current. Okay, we're comfortable. Sorry, just to expand on that in anticipation of your comments. So, we're comfortable with affordability because, as you may recall, with this introduction of the stress test in 2018, all the mortgages are stretched to a 2% increase. So, that's something that gives us a lot of comfort. Okay, that's really helpful. And if I could end on a broader question. You know, from what I understand, if interest rates move up and mortgage rates are turning higher, that benefits the near prime space. You have probably higher retention rates than maybe from the migration from prime to near prime. Is it possible for you to quantify that benefit in any sense in terms of incremental mortgage growth? I mean, how much incremental mortgage growth or market share do you think you could gain for the first 100 basis points increase in interest rates and the second 100 basis points increase in interest rates? Well, there's probably two things that are going to happen. One is that you need to keep in mind in the near prime space, there's typically a lag in mortgage rates moving with deposit rates. So it doesn't happen immediately. We saw some of that in 2018 when the rates rose. It took some time for the rate increases to take effect across the market. and we do think that we could get more volumes of the, as you said, we'd probably get more deals as they can't qualify at major banks, and you're right, the book would be stickier. Okay, I appreciate that, Paul. Thank you.
spk00: You're welcome. Our next question is from Jamie Coyne with MDF. Your line is open.
spk01: Yeah, thanks. First question is just on the credit side, on the stage two loans and an increase in single family, stage two loans increasing quarter to quarter. Is there anything there that you can draw from that movement? Yeah. I think it's really just ordinary movement as we go through. I don't think there's anything that you would take away that's talking about the overall deterioration of the portfolio again. Okay. With respect to the bank-sponsored securitization conduit, how do the loans that you're placing into that conduit compare to the RMBS loans and also compare to the broader portfolio? They're probably closer to similar covenant quality. They are classic loans that we're putting in there. So I'd say it's pretty similar to the RVS. And would that be similar or higher or either credit quality or loan quality compared to the product? Similar. Okay. In terms of the credit recoveries today and looking at the ACL versus the base case scenario at 8 million, what's a reasonable expectation to think about in terms of how much of that can still be released over time? Our view right now referring to the residential portfolio is that Aside from state migration, we're probably not going to see, and subject to any improvements and significant improvements in the forward-looking information, we're probably not going to see any significant recoveries in the single-family ETL. The portfolio growth as we continue to originate more loans is going to presumably generate provisions as opposed to reversals. And as you saw in the results, commercial is a little more volatile. They have the longer typically the much larger size. So that's something that will move separately. from our overall expectation related to our residential portfolio and the other two portfolios that I think are relatively stable. So, another way of summarizing it is we do think that as residential grows, we'll probably be looking for visions instead of recovery, and commercial depends on volume and staging. And last one for me, just in terms of the high as an interest margin. It's declining for a couple of quarters in a row here. Still high historically. It's declining for a couple of quarters in a row. What are you seeing on the portfolio evolution early here in Q4? Is this a trend that looks like it could continue as mortgages continue to renew at slightly lower rates and the deposit pricing starts to back up a little bit? Is this something you should expect? for a couple of quarters here at least? Yes is the short answer, James. So it's a competitive market. We were seeing strong covenants. The overall impact, we obviously were striving, but it's competitive and one thing that's happening is we're really pleased with the originations and as we build our Our prime goal is to keep more of these mortgages on our balance sheet so that any marginal declines in NIN will be more than made up for increases in volume. Okay. And on that same theme, we've heard one of your competitors talk about maybe leaving interest rates a little bit lower through the initial rate hike cycle. Is this something you've given thought to to maintain a little bit more spread as the deposit costs increase generally? Are you talking about the mortgage rate or deposit rates? No, deposit rates. So holding deposit rates stable while prime rates and the Bank of Canada's high interest rate environment? Is that something you've given thought to as a strategy to maintain margin stability? The main driver is competitive forces. You can want to not change your rates to slide and spread, but competitive forces may force you to move because We compete with a lot of different financial institutions on the deposit side as we do on the lender side, so you can manage it as best you can, but you've got to get the volume you're looking for. Okay, great. Thank you very much. Thank you.
spk00: Our next question is from Graham Writing with TD Securities. Your line is open.
spk01: Hi, good morning. Any details on the timeline? Excuse me. The timeline and the process for this substantial . Yeah. Well, we announced today as you know, and we're intending to close by the end of Q4. And that's probably as specific as we're going to be as we work through. related to the offer okay so similar to your last uh i said these yeah you'll come out with the dutch you know terms for a dutch dutch auction um at some point in the yes in the near future i guess yeah i kind of bit ahead of myself there um yes okay um Jumping to, you made a comment just volatility around the end. Potentially, I think it was more of a year-term comment, but what we're trying to do is just reflection on competition or what we missed in that piece there. It's certainly competition on the asset side as well as on the liability side. So we're very much focused on scoring our books for origination. And so to a certain extent, we are being perhaps more competitive on race than we have been previously, and particularly through the pandemic. So I think I refer back to Lamar's abuse you made on our last call in terms of when you had more conservative underage criteria through the pandemic, we relaxed it. Sorry, not black, but we've gone back to our old stringent underwriting standards, and we're also extending some of our geographies where we want to look at increasing our exposure. So we're very much focused on growth while being very prudent with our NIM. I understand. What was some of those new geographies that you targeted? Well, it's more an extension of some of the... Postal codes, we get very granular with where we're focused, as well as we may now be working with higher loan values, and we adapt our pricing towards that. So we have a great underwriting team who takes a look, and most of it will still be focused in our Ontario and BC markets. Okay. As you're exiting 2022 and hopefully your capital has been right-sized into the targeted 14 to 15% CET long ratio. What sort of ROE are you targeting once you start exiting 2022 and you've right-sized your capital level? Well, moving mid-teens is our target. Okay, perfect. That's it for me. Thank you.
spk00: Again, if you'd like to ask a question, just press star then 1 on your telephone keypad. It appears that we have no further questions at this time. I'll turn the call over to Uri Posada for any closing remarks.
spk01: Thank you, Chris. We've got a lot of conflict this quarter with progress in our lending business, our funding, our technology, and our capital strategies. I thank the team at home for their efforts and look forward to seeing them all in person again. As a reminder, we have an investor day coming up on the 23rd of November. You all have received an invitation, and for those who didn't, please contact the investor relations. I hope that any of you will join us either in person or virtually. Thank you for your interest in Home Capital, and I wish you all a good day and a good weekend.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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