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spk01: Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Home Capital Group Q1 2022 results conference call. 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. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin.
spk00: Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You may begin. Jill McRae, Vice President of Investor Relations. You We have a few members of our senior management team with us on the call to help answer your questions. On behalf of those speaking today, I know 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 on forward-looking statements on page two of the presentation. I would also remind listeners that HOME uses non-GAAP financial measures to arrive at adjusted results, and that management will be referring to both adjusted and reported results in their remarks. And now I'd like to welcome you, Srivastava.
spk04: Thank you, Jill, and good morning, everyone. I'll start with some comments about our first quarter results, followed by a discussion of the current market conditions, and conclude with a brief look ahead. Then I'll turn the call over to Brad, who will discuss our results in more detail. This was a strong quarter. We reported origination growth across all our lending business with $2.8 billion, including $2.3 billion in single-family residential mortgages. Of that, our alternative mortgage loans, which we refer to as our classic business, we beat last quarter's record originations with a new record of $2.1 billion in T1. Our funded volume of alternative mortgages in the quarter increased by 90% year-over-year. We reported strong growth in our commercial originations as well of $463 million. This represents a year-over-year increase of 70%. Strong origination activity contributed to growth in our balance sheet. We added over $1 billion to our loans on balance sheet in the quarter and reported 11% year-over-year growth in our loans under administration. Let me pause for my results to discuss the market. We delivered this growth in a market that is starting to show signs of slowing after the rapid growth of prices and volumes last year. Reports from the Canadian Real Estate Association indicate that sales volumes for the first three months of the year have moderated from the record levels of 2021. We believe this is healthy for the long-term sustainability of the housing market. We are also seeing upward pressure on interest rates for the first time since the start of the pandemic. the Bank of Canada began to increase the benchmark overnight rate with a move of 25 basis points in March and a further increase of 50 basis points in April. The bank has made it clear they will take necessary actions to keep inflation in check and maintain price stability. The bond market reacts to these signals and has priced an expectation of an additional move up to 100 basis points by year-end. This has a direct impact on our cost of funds. Let me explain. The market for deposits and the market for mortgages are both competitive. In a rising rate environment, deposits tend to reprice faster than mortgages. Typically, price on term deposits will follow closely to price moves of the equivalent term government account of the bond. Bond prices have moved rapidly this quarter, not just in response to central bank moves, but in anticipation of future increases. On the mortgage side, it takes some time for the spread between mortgage rates and deposit rates to revert to the mean. In the broker distribution channel, the first lender to raise rates may risk losing volumes until those rates are matched by other lenders. Eventually, rates will move up to bring margins back closer to historical mean levels. We've taken the lead in setting rates for our alternative mortgage loans at levels that began the move back to historical mean. We will always balance considerations of growth, sustainability, and long-term value in our pricing strategy. However, as our rates on our assets increase more slowly than our cost of funds, the result is an income pressure. We expect spreads to normalize if, as, and when the pace of rate increases stabilizes. Importantly, we were able to grow our loan book and gather assets that will continue to produce income into the future through refinance and renewal activity. We have found that retention improves in periods of rising rates because borrowers are less likely to switch due to having to qualify at higher rates than other institutions. Now, returning to our results and some of the other achievements this quarter. We were very pleased with the results from our token channel. We had a good quarter in terms of deposits and relationship growth. As rates have moved up, we have been thoughtfully and proactively moving consumer rates to maximize long-term value to both customers and investors. We closed our first RMBS offering for 2022 during the quarter and added additional funding to a number of channels as part of our funding diversification initiatives. Brad will share more details in his presentation. Additionally, we received an upgrade to our credit rating from DBRS. This is a validation of the strength of our company and our sustainable risk culture. We believe this upgrade will open up more opportunities for additional funding options in the future. On the credit side, our metrics are healthy. The biggest predictor of credit defaults is unemployment, and the outlook for employment in Canada is still quite robust. You will hear more about this from Brad a little later. On our internal Ignite technology transformation project, we made lots of progress. This includes we continued to develop best-in-class reporting to our mortgage broker partners to help them in their business. We added data analytics internally to better understand our customers. And we automated more internal processes using robotic processing automation, RPA tables. We were also named Great Place to Work Hybrid. This is particularly meaningful as our back at home team has put a lot of energy into developing a successful hybrid work model. We have continued to make progress towards our goal of reaching our target capital range. For a combination of growth in our risk-weighted assets and share repurchases in the quarter, we have brought down our CET1 ratio by 85 basis points. Our normal course issuer bid was approved on February 17, and we commenced purchases in the market. Now for a brief look ahead. We are continuing to see demand for both our residential and commercial loans. While rates are higher than they had been in the last few years, they're still low in a historical context. With our years of experience operating in all type of rate conditions, we are comfortable in our ability to manage profitability through this environment as well. Margins will be impacted by changes in rate expectations. but we expect they will revert to historical average levels in time. We will continue to diversify our funding sources and make progress towards our target capital range. We are committed to achieving an efficient capital structure to drive ROE and deliver shareholder value. Finally, I want to recognize the people of Home Capital Group for their work this quarter. It's great to see so many back in person. Thank you for your dedication to supporting our customers, our partners, and ultimately our shareholders through a very busy quarter in all our business areas. I'll now invite Brad to discuss our financial results.
spk05: Thank you, Yusri, and good morning, everyone. My presentation begins on slide six. This morning we reported net income of $44.7 million and diluted earnings per share of $1.02. The earnings per share decreased by 18% from the comparable period one year ago. Book value per share grew by more than 10% year over year to $37.45 and our return on equity for the quarter was 11.3%. which is still impacted by our higher level of CET1 capital, which remains above our target range of 14 to 15%. Slide seven shows the factors contributing to the 22 cent decrease in our net income per share compared with last year. 19 cents of the decrease is attributable to lower net interest income Another $0.17 resulted from a change in credit provisioning as Q1 of last year had a $12 million reversal of provisions. Offsetting these two items was a contribution of $0.16 from a 16% reduction in average shares outstanding compared with last year. Pre-tax, pre-provision income decreased by 20% year-over-year, largely due to net interest margin compressions. Slide eight is a look at our net interest income. Net interest margin for the quarter was 2.18% compared with 2.61% last year. In our last conference call, we shared the expectation the margins for the full year would be below 2021 levels, and U3 has given you a good picture of the elements that contributed to that decrease. It is still a competitive market for both mortgages and funding, But we expect spreads to normalize over time and that our net income will benefit over time from the growth in loan balances that we are achieving. Slide 9 shows our non-interest expense and efficiency ratio. Non-interest expenses increased slightly over the prior year, primarily due to increased salaries and benefits expenses. This reflects an increase in the average number of employees for the period, as well as increased compensation. As noted, our expenses increased by 1.5%, while our LUA grew by 11% over the same period, indicating that we have been able to increase our LUA without significantly increasing our non-interest costs. The negative impact on our efficiency ratio is primarily attributable to decreased net interest revenue compared to 2021. Turning to our lending operations beginning on slide 10. This quarter, originations in our single-family residential portfolio grew by 73% over last year, led by our Classic portfolio. As Yusri mentioned, this was a record for Classic in a quarter when sales volumes in Canada actually decreased from last year. Commercial originations also increased by 70% with growth in both residential and non-residential lending as we've added new origination partners and participated in more transactions. Altogether, originations increased by 72% compared with Q1 of last year. We reported strong asset growth this quarter. Our single-family loans on balance sheet increased by 15.5% over last year on the strength of our origination volumes and retention efforts. Commercial loans on balance sheet declined year-over-year through a combination of discharges during the period and sales of insured multi-residential loans into the CMHC pool, where they earned securitization income with no credit risk. Commercial loans under administration grew by 2.3% over last year. We have a good pipeline of commercial opportunities and expect to see continued growth in LUA. If current trends continue, we believe we can achieve double-digit growth in LUA this year, subject to market conditions. Growth in our open channel continues to outpace our broker source deposits. deposit source through Okin grew by 11% and now make up 31.5% of total deposits. We are seeing good engagement across all our Okin channels by delivering not just attractive rates, but also service and value. We are investing in continuous improvement of our digital offering for customers to improve our ability to service them. Internally, there's a lot of enthusiasm about the potential of Okin. We continue to move forward on our strategy of funding diversification. During the quarter, we closed an RMBS offering of $425 million. At the end of 2021, we initiated our participation in a $250 million committed securitization conduit in partnership with one of the major banks, backed by a pool of uninsured single family residential mortgages. In Q1, we increased the program limit to $500 million. Subsequent to the quarter end, we added an additional $500 million funding facility with another major bank partner. We entered into a committed secured warehouse facility for $250 million using uninsured single-family residential mortgages as part of our existing $400 million warehouse facility backed by insured mortgages. Post the end of the quarter, we increased this warehouse line by an additional 200 million, secured by 100 million insured and 100 million uninsured residential mortgages. We currently have a total warehouse facility of $850 million, 500 million backed by insured mortgages, and 350 million backed by uninsured mortgages. Turning to slide 13 for a review of credit during the quarter. During the quarter, we recognized a reversal of $138,000 in the provision for credit losses compared with a reversal of $12 million in the year-ago quarter. The reversal was primarily attributable to the commercial mortgage portfolio where we had lower Stage 3 balances combined with a favorable impact in our forward-looking models from the easing of health-related restrictions on businesses. We reported a $4 million increase and provision expense in our single family residential mortgage portfolio to reflect the growth of the portfolio as well as changes to the inputs to our forward-looking economic model used to estimate future credit losses. Net write-offs during the quarter were less than half a million dollars or about one basis point on an annualized basis. Slide 15 shows our allowance coverage. The total allowance for credit losses was $35.9 million at the end of the quarter, which is a 38% reduction from year-ago levels. Nearly 85% of the allowance is attributable to Stage 1 and Stage 2 loans. Allowance coverage of non-performing loans of over 20% is above the year-ago level, and we consider this level of coverage to be prudent. Slide 16 demonstrates that the credit quality of our loan book is solid. Net non-performing loans now represent only 11 basis points of our total loans outstanding. Gross non-performing loans, designated as Stage 3, have declined on an absolute basis, even as we are reporting significant loan growth. Gross non-performing loans total $26.5 million at quarter end. a reduction from last quarter mainly due to lower stage 3 balances in our commercial portfolio. Net non-performing loans at the end of the quarter have continued their downward trend and now represent only 11 basis points of our total loans outstanding. This is a validation of our underwriting and risk management processes and also makes it clear that our borrowers are deeply committed to staying current with obligations related to their most significant assets. Taking a look at our capital strategy on slide 17. We concluded the quarter with a CET1 capital ratio of 17.58%. Our CET1 ratio declined by 85 basis points during the quarter through a combination of share repurchases and growth in our risk-weighted assets, offset by capital generated from operations. During the quarter, we bought back approximately 373,000 shares through our normal course issuer bid. We can repurchase up to another 3.3 million shares under the terms of the NCIB and subject to market conditions, we plan on repurchasing the maximum number of shares allowed. Finally, the board declared a quarterly dividend in the amount of 15 cents per share. The board and management are committed to achieving a target capital range and regularly review all opportunities to meet this target by the end of the year. And now I'll ask the operator to poll for questions.
spk01: Thank you. As a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Jeff Kwan with RBC Capital Markets. Your line is open.
spk03: Hi, good morning. Just with the housing activity slowing and seeing some evidence of home prices starting to decline, Have you been making any changes around underwriting, but also just in general, how you're thinking about underwriting in this environment, given I think you have a target of 20% loan growth this year?
spk04: Good morning, Jeff. It's Yushri. Yeah, we've seen it slow down, but it's still quite robust. There's still a lot of activity. At this point, we're pretty prudent in our risk appetite and our underwriting guidelines. We have not made changes, but we have very fast, flexible underwriting. If we see a situation change by region or nationally, we can move rapidly to make changes. But at this point, we're continuing down the path.
spk03: Okay. And just my other question was, Brad, on the expense side, what we saw in the quarter, was this kind of a good run rate on expenses, or do you expect some variation the rest of the year versus what we saw in Q1?
spk05: Jeff, we expect to see some variation over the course of the year. Again, a lot of the costs in the current quarter are showing up in the G&A line or the result of activity-based expenses, so there will be some flex there. And... Based on our current forecast, there will be some variability around that, but again, it's going to be dependent on activity.
spk03: Okay, thank you.
spk01: Our next question is from Etienne Ricard with BMO Capital Markets. Your line is open.
spk04: Thank you, and good morning. The yield on the all-pay loan book declined sequentially. You point out in the MD&A that this is due to maturing vintage loans that carry a higher yield. Now, given that, you know, all the mortgages typically carry the one to two year term, at what point would you expect the portfolio yield to start increasing?
spk05: As you noted, the there is the portfolio yield, the renewal yield, and the origination yield. And we expect, as you noted, that over the course of 12 to 14 months, then we'll start to see an increase in that overall portfolio yield.
spk04: Okay, understood. And on the growth outlook, I just want to confirm, are you still expecting up to 20% loan growth in 2022 considering the magnitude of interest rate increases and affordability issues. In other words, what gives you confidence that the Alt-A markets will grow this year despite a softening of housing activity?
spk05: Yeah, just as a further color on that percentage, That was a overall LUA. So it's not predicated entirely on classic, and we'll see in our in our prepared remarks we do expect to see double digit growth we had seen a very strong growth in the first quarter increased on what we saw in our pipeline we were able to make the statement of 20 overall lua in our prepared remarks today we stated that we still expect double digit growth but there is now more uncertainty in that prediction than we had at the end of what we reported Q4. So it is possible, but it's more in terms of the uncertainty to be still double digits.
spk04: Again, it's usually just to add to that. In your remarks, I also talk about renewals. So even if originations slow down some, renewals could go up, which is obviously part of the formula of growth. As you go to another institution, it's a higher rate, plus you have to qualify at 200 basis points over. So renewals tend to go up in rising rate environments, so that's also part of our expectation.
spk05: And clearly it's that target or the expectation that we set out in our February reporting is something that we're still working to achieve.
spk04: Okay. And on capital allocation, clearly, you know, you're seeing, you know, still strong mortgage growth, to your point, albeit at a highly competitive spread. At the same time, your stock is trading below buck. So I heard you earlier in your comments, you know, you want to maximize use of the NCIB. That being said, at what point would it make sense for you to prioritize another SIB relative to growing the loan portfolio?
spk05: We're going to review market conditions, the value of our stock, where we think the most effective utilization of that capital will be. We have been successful in previous SIDs. We've also been successful in our NCIDs. The near term, our view is that an NCID is more effective and that if there's a requirement for an SID, that will occur later in the year. Again, subject to market conditions, and if any of those factors change, then we'll reconsider that approach. But certainly, we will be repurchasing shares when we are able to.
spk04: Thank you for your comments.
spk01: Our next question is from Nigel D'Souza with Veritas Investment Research. Your line is open.
spk04: Thank you. Good morning. I wanted to circle back on the conversation on net interest margin and the decline in asset yields. It looks like that contraction is more so on the asset yield side. And I was wondering if you could provide some more color on what vintages were driving that decline in the rollover yield and even on loan category mix of the certain loan categories that were more, I guess, critical or weighted in the decline in asset yields that you saw this quarter?
spk05: Well, primarily it was our classic portfolio, and that's going to continue through the course of the year as some of the originations that were made in previous months then become funded once the commitments are realized. So as I stated earlier, that's going to appear through the course of the next quarter until our rate increases start to appear in the overall block and the maturing loans get renewed. And as you said, we do expect if rates continue to increase, we do expect to see an increase in our renewals.
spk04: Okay. So when I look at your commercial mortgage portfolio, however, the asset yields quarter over quarter for that, part of your book. Other non-RES commercial mortgages, it's down 100 basis points quarter over quarter. RES commercial mortgages is down about 80 basis points. Any color on what's driving the decline in yields we're seeing in the commercial mortgage portfolio? Yeah, part of that, Nigel, is in commercial, we're getting higher quality business and higher quality business has larger deals. They have more competitive rates associated with it. That's part of your answer. Okay, so that makes sense because when I look at your non-res commercial book, I think sequentially we're seeing the first growth in our portfolio since the start of the pandemic. So, Any additional color in what you're seeing in the commercial mortgage space? Is it just, as you mentioned, higher credit quality borrowers and a rising rate environment, and do you expect that trend to continue? Yes, we do. The commercial market is very robust right now because there's a lot of pressure on building homes. The nuclear sort of beginning of that is on the commercial side. Land becomes homes, condos or houses. So we expect it to continue. We expect to see a lot of business and we expect to see high quality business. Great. And last question for me on your retention rates. The pickup in yields has accelerated over the last few weeks. So in the current quarter, have you seen an improvement in retention rates across your portfolio or any color where you're seeing currently in the markets?
spk05: Not as of yet. I think we've seen some increased housing sale activity. So that has a somewhat negative impact on retention, but it's slightly up.
spk04: Okay. That's it for me. Thank you.
spk01: Our next question is from Graham Riding with TD Securities. Your line is open.
spk02: Good morning. just looking at your CET1 ratios, fairly material drop quarter over quarter, you know, beyond the share buybacks that you did, was the majority of that drop attributed to the loan growth or perhaps, you know, the type of loan growth? I'm just wondering if there's anything else that was perhaps a factor. It was a bit larger than I expected.
spk03: It was due to loan growth.
spk02: Okay. Looking at your, on the credit side, what were the factors in your, single family sort of credit model that led to the uh um to the four million dollar increase in pcls i'm just wondering if higher rates with the fact that uh no i was it was all largely attributable to portfolio growth okay and then i'm sticking with credit it sounds like you're still not making any changes to underwriting at this point um but we are seeing some early signs of activity slowing and some price changes on the market, I guess. What are you looking out for? What do you need to see before you would start to consider making any changes to underwriting?
spk04: Yeah, you know, there's two markets for us. There's the Alt-A and the A. What has slowed down somewhat is the A. The Alt-A continues to be quite robust. Key is the job market is very, very positive. Employment is a key driver in our underwriting. We have to believe that that individual will have their job and able to pay. So that's a big part of our underwriting and income verification. So that is very robust. So that's why our underwriting continues to be healthy. And as I mentioned, the ALTA is not slowing down currently relative to today. Okay.
spk02: Understood. My last question, Brad, just for you, you know, thinking about NIM and how it progresses through the year, are you expecting sort of next quarter to still see some NIM compression or what's the timing here for mortgage spreads to catch up with funding costs? What's your expectations?
spk05: Well, my expectation was I hope it will be sooner than it has been, but we're making some progress. For example, if we were to just look at the average... spread between yield on our classic portfolio and insured mortgages, so that's a much more broadly quoted product. We had, at the beginning of the year, a variance of about... 80 basis points between the usual spread that we would see. That's now narrowed to 42. So there's still a bit to go. And we will see some further compression in Q2, subject to portfolio mix and how the market will behave in terms of funding costs. And then I know U Street has some more color to look at.
spk04: The key to NIM is steady rates or slow increase or slow decrease. What has happened is this fast increase, as I mentioned in my comments, fast increase sets deposits, our cost of funds, sets our other diverse funding such as RMBS, etc. We set it immediately. And then a little bit slower on the mortgage side, as I explained, in terms of competition. As long as rates – so we'll get an impact when rates flatten out or, you know, the rate of increase slows down. They went up very, very rapidly. So what Brad's referring to in the second quarter is a lot of the business that's coming in the second quarter we've already written. So we know what it's under. So as long as that happens, we'll get it back. We're quite confident.
spk02: Okay. That's it to me. Thank you.
spk01: Again, if you'd like to ask a question, that's star one on your telephone keypad. Our next question is from Julia Kuhl with National Bank Financial. Your line is open.
spk04: Hey, I think this might be me.
spk02: James from National on the line. Good morning.
spk04: Morning, James. Hey, James. Yeah. So first question is on any color you can provide us on market share. Obviously a really strong quarter from originations in the all-day book. What's your sense in terms of market share, competitiveness?
spk02: Do you feel like you got more flow than maybe otherwise anticipated given your competitive rates? Just a little bit more color around what you're seeing in the market on that one.
spk04: Yeah, Gene, it's very hard to know market share until everyone reports their results. And the reason for that is there's a couple of sources of market share, but it doesn't distinguish between A and Alt-A. One source is, you know, where mortgages are getting registered. Another source is Finestra or Filogix reports. But it doesn't break down between A and Alt-A. We're very pleased with our numbers. As we've said, it's a dramatic increase. We've had a very, very good high-quality business come in. So we're very pleased with our numbers, but very difficult to give you a market share until everyone else has reported. Okay. In terms of the RMBS, obviously it's been a pretty successful program last year. What are the indications from your bankers, from investors? Do you see any issues being able to issue some more RMBS this year, or is that steady as she goes?
spk01: What's your thought on that?
spk05: Jim, we don't see any issues with the continuing to be a programmatic issue on the RMBS market.
spk04: Okay, great.
spk01: Again, as a reminder, please press star one to ask a question. And it appears that we have no further questions. I'll turn the call over to Yusri Basada for any closing remarks.
spk04: Thank you, Chris. Let me wrap up by saying this was a great order. We reported great results in all our business areas. The resulting NIM is a normal structural outcome of fast-rising rate environment, and experience tells us that spread will revert to historical average levels over time. So please note our annual general meeting will be held on May 18th. We have announced three new directors have been nominated for election to the board. David Court, Joe Natale, and Ed Weiser, in addition to Betty DeVita, who was appointed last fall. Each of the nominees brings a rich background and experience to our board, and I'm excited to work with them. We look forward to welcoming shareholders in person as well as virtually. Thank you for your interest in Home Capital, and have a good day.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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