Home Capital Group Inc.

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 Q3 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Joe McRae, Head of Investor Relations. You may begin.

Thank you, Chris, and good morning, everybody. We'll begin this call with some brief remarks from Yusri Basada, President and Chief Executive Officer, and Brad Kodesh, Chief Financial Officer, followed by an opportunity for questions. Before we begin, I would like to point out that this call may contain forward-looking statements and that actual results are materially from forecasts, projections, or conclusions in this statement. Please refer to our advisor and forward-looking statements on slide two of the presentation. I would also like to remind listeners that the company assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Yusri and Brad will be referring to both adjusted and reported results in their remarks. It's now my pleasure to turn the call over to Yusri Basada.

Good morning and thank you, Jill. Before turning to our Q3 results, let me start with a quote from Statistics Canada reports. that was released in September of this year. Everyone needs a place to call home, but home isn't just a roof over your head. One's home can also be a source of security, dignity, and identity. This quote tells you how we understand and look at the housing market. A house is not like a financial asset that an investment manager will sell when the price drops. People are invested in their homes in every sense of the word. Let me share some thoughts with you on the market environment. With six decisive interest rate increases by the Bank of Canada, we are seeing a new cycle for the economy and the housing market, a rate environment that has not been seen in a generation. Inflationary pressures that are the highest since the 1980s. The Bank of Canada is determined to fight inflation through rate increases and quantitative tightening. These efforts by the central bank are essential to restore price stability in the economy, but they have made it more expensive to borrow. All of this has created near-term pressure on the housing market in the interest of long-term sustainability. Turning to home capital now, let me tell you about One, the impact of market conditions on our results here at home. Two, how we're responding. And three, why we believe we are well prepared to handle any conditions we may encounter going forward. Following a strong start in the first half of the year, single family originations have slowed in the third quarter compared with last year. Let's put this in context. In the first half of this year, we reported two of our strongest quarters in single-family originations. A slowdown from that pace is still meaningful activity level. Our single-family originations this quarter were comparable to Q3 2020, and we considered that a strong quarter. Looking ahead, we believe that housing activity will continue to soften as the market adjusts to rising rate environments. Turning to our commercial volumes, rising rates can create near-term pressure on commercial activity as well. However, the long-term outlook for commercial volumes is more constructive. This is underpinned by a multi-year requirement to add to the housing stock in Canada, particularly in multi-unit dwellings. We have a good pipeline of quality opportunities with creditworthy origination partners. Let me tell you about how we're responding to this environment here at home. We're not standing still during the slowdown phase of the market. We continue to focus on delivering excellent service and support our broker partners. We're driving value through building out our deposit side. We have been happy with the growth in both our broker deposits and Okin Channel. We are prudently managing our expenses while taking advantage of opportunities to improve and expand our service quality. Our investments in our Ignite project have allowed us to manage expenses. Last quarter, we went live on our new SAP banking service system. We did this while handling significant deposit inflows during the summer months. The new system will provide us with the benefits such as improved stability, enhanced reporting capabilities, and the ability to bring new products or features to market quickly as needed to grow the business. In the past four years, we have upgraded over 90% of all our systems. This is a major infrastructure upgrade that will deliver all these benefits well into the future. Let me give you an idea of what we expect looking forward. We are confident about our business model and going into this rate cycle. There are some strong drivers underpinning the long-term health of the housing market. We believe the demand for housing has been deferred and not eliminated as buyers adjust to changing borrowing costs and changing prices. Planned immigration levels for the next few years will provide a healthy supply of new home buyers. Federal Minister of Immigration recently announced plans to welcome 500,000 new permanent residents in 2025 and over 400,000 in each of 2023 and 2024. A large cohort of millennials reaching home buying age is providing further demand for their first or even their second home. Rapidly rising rents. are evidence that potential buyers are turning to the rental market while they remain on the sidelines. All of this, plus a strong employment picture, will dwell for household income and credit performance. And our credit quality remains strong. Non-performing loans and write-offs are very low. We believe homeowners are making the necessary adjustments in their spending to keep their mortgage payments current. If there is a prolonged downturn, we have the liquidity and capital resources to sustain us. Looking more closely at capital, we completed our SIB and bought back over $44 million of shares during the quarter. We're pleased to make this progress towards our target capital range. The bid was not fully subscribed, from which we can conclude that investors see additional upside potential in our share price for their investment time horizon. We will continue to seek opportunities to add value to our capital program while enjoying the flexibility made possible by holding capital during periods of uncertainty. I'll now turn it over to Brad for a discussion on the financial results. Thanks, Yusri, and good morning, everyone. I'll provide some insight into the drivers of our results this quarter. I'll be discussing our performance on a reported and adjusted basis. The adjustment is due to a breakdown of some capitalized software development work as part of our IGNITE project. Following a review, we recognized an impairment charge of $9.4 million on one of the IGNITE software development components and our other operating expenses. The after-tax impact to our earnings was approximately $7 million after-tax or $0.18 per share. We assessed costs and time to complete and chose an alternative solution that we could implement more swiftly and at a lower cost. This charge is related to that component and has no impact on the future operations of the company other than reducing future amortization expense. Starting with an overview of the quarter. We recognize that the interest rate environment can provide both tailwinds and headwinds to the business of mortgage lending. Our mandate is to take advantage of the opportunities afforded by the tailwinds to invest and strengthen our business to succeed through the softer part of the cycle. We believe we have done this over the past two years and we will use this time ahead to lay the groundwork for the company to thrive when we inevitably emerge from this period. We look at growth in our assets, and in our loans under administration as important measures of the health and success of our organization and are pleased to see our year-over-year double-digit growth in both metrics this quarter. We reported net income of Q3 of $31 million or $0.70 per share fully diluted. On an adjusted basis, net income was $38 million or $0.95 per share. Return on equity was 8%, and adjusted return on equity was 9.8%. Our book value per share grew by 11% year-over-year to end the quarter at $40.32. Slide 7 shows the factors that contributed to the change in our EPS compared with last year's earnings per share of $1.10. The most significant contributor was a change in net interest income, which accounted for $0.24 of the variance. The difference in provisions accounted for a further $0.12. Partially offsetting those two was a 21% reduction in average shares outstanding, which benefited earnings by $0.16. The margin pressure from rapid rate increases persisted into the third quarter. Q3 margins were slightly below Q2 at 1.92%, but the pace of decline has slowed. Our net interest income for the quarter was in line with Q2. The effect of a five basis point reduction in net interest margin was offset by an increase in average assets. We expect our margins to start to improve for the balance of the year and into 2023 as the impact of rate increases on our loans becomes evident over time. Looking ahead, higher rates within our loan book will have a longer term impact on our results through retention and refinance volumes. We continue to benefit from our investments in technology and operating efficiency. Non-interest expenses of $72.1 million this quarter included the impact of the one-time impairment charge. Without this charge, our expenses would have been $62.6 million, which is lower than Q3 of last year, despite a 15% year-over-year increase in assets under administration. Slide 10 shows our loan originations for the quarter with a 28% decrease in single-family originations compared with Q3 of 2021, which was an exceptional year. We had another strong quarter in our commercial loans with over $400 million in originations. For the year to date, we have originated over $6 billion in single-family residential loans and $1.6 billion in commercial loans which is higher than our originations for all of 2020. As of the end of Q3, we are reporting 19% growth in single-family residential loans on balance sheet and 5% growth in commercial loans. Savings through our Okin channel continue to grow by double digits year over year. We finished the quarter with $4.8 billion in customer deposits. Over three quarters of those deposits are in the form of term deposits as customers are enjoying the benefits of safe investments with attractive guaranteed returns. Turning to a discussion of our credit provisions. We booked $4.4 million in credit provisions this quarter compared with a reversal of $3.8 million in the year-ago quarter. This represents an annualized provision rate of eight basis points of gross loans. NEM write-offs at $1.4 million in the quarter represent an annualized rate of one basis point of gross loans. Slide 14 shows a breakdown of our credit provisions in the quarter. More than 75% of provisions during the quarter were attributable to loans in Stage 1 and 2, classified as performing under IFRS. Growth in loans on balance sheet was the main source of the increase in provisions on our performing loans. As of the end of the quarter, we had $44.1 million total allowance for future loan losses, with $4.6 million attributable to loans classified as impaired or Stage 3. This represents coverage of 12% of our impaired loan portfolio, consistent with our prior quarter. As we have good security for our loans in the form of high-quality assets, we consider this level of coverage to be appropriate. Our provisions incorporate forward-looking economic assumptions under a variety of cases. The use of multiple scenarios adds $11 million to the allowance calculated using just the base case. Slide 16 shows the composition of our gross non-performing loans. Total gross non-performing loans of $37.6 million represent only 16 basis points of our gross loans. Consistent with the prior quarter, and well below our long-term average. Our CET1 capital ratio was 15.41% at the end of the quarter, following our substantial issuer bid that Yusri referred to earlier. This is a reduction of more than 700 basis points since this time last year, as we took definitive measures towards our stated target range of 14 to 15%. We now expect to end the year above our target range as growth in risk-weighted assets was lower than our estimates earlier in the year when we were experiencing higher levels of low growth. We're evaluating both the economic environment and the most effective way of returning capital in this period of uncertainty. Year-to-date, we have returned $171.3 million to shareholders through share repurchases and dividends. In the last 12 months, we've bought back more than 8.4 million shares through substantial issuer bids. We have also repurchased substantially all of the authorized number of shares under our normal course issuer bid that expires in February of 2023. Between the SIB and the NCIB, in the nine months to date, we repurchased over 5 million shares at an average price of $29.11 per share. These purchases have been accretive to earnings per share, book value, and return on equity, while delivering on our commitment to achieve our target capital range. Finally, the Board declared a common share dividend of $0.15 per share. Now I will invite Ustree to make some concluding remarks. Thank you, Brett. The housing market, like the economy, has always had periods of growth followed by periods of downturn. We have weathered them in the past and come out stronger, and that is what we expect to do again. We will continue to execute on our objectives of prudent underwriting, investment in our service capability, and strategic risk management, while building an organization that we're all proud to call home. Our role as a leading near prime lender is strategically important to the financial services ecosystem. We make home ownership accessible to a broader group of credit-worthy borrowers and provide the benefits that I mentioned at the start of this call, security, dignity, and identity. This is how we deliver value to our shareholders. I'll now ask Chris, the operator, to poll for questions.