Q4 2019 Earnings Call
Good morning, My name is China, now will be a conference operator today.
This time I would like to welcome everyone to see people Yuppies financial conference call. All lines have been placed on mute to prevent any balco nice.
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Thank you John Good morning, and welcome to our fourth quarter fiscal 2019 financial results Conference call as John said My name is not Evans and I lived Investor relations team for CW be presenting to you today or could salaries TWB as president and Chief Executive Officer, and killing Graham, Our executive Vice President and Chief Financial Officer, I'd like to remind listeners the webcast participants that state.
It's about future events made on this call are forward looking in nature and based on certain assumptions and analysis made by management actual results could differ materially from expectations due to various risks and uncertainties associated with our business.
Just a little are forward looking statement advisories on slide number 18, I'll now turn call over to Chris.
Thanks, Matt.
Agenda for todays call is on the second slide I'll comment on the continued execution of our transformational strategy, including this morning's announcement.
Hi, Carolyn will follow with detail on or financial results in fiscal 2020 outlook before we moved to the question and answer session.
[noise] fiscal 2019 was an exciting year for CVB financial group.
We continued to deliver against our strategic objectives and create value for the people who choose CW be every day, our clients our people and our investors.
We generated solid loan growth with further geographic and industry diversification.
Supported that growth with a new record annual branch raise deposit growth of $1.5 billion generating very strong 12% overall growth branch based deposits as we continue to invest in your deposit gathering capabilities strengthen our full service client experience.
With ongoing profitable growth and strong capital ratios. We were also pleased to provide shareholders with an 8% increase.
Let me share dividend.
Our strategy for long term value creation is to solve for the unmet banking needs of Canadian entrepreneurs.
This year, we further enhanced operating model improved core business processes advanced our digital strategy and invested in branded culture.
These initiatives will position us to deliver breakout growth and maximize value creation from our upcoming capital transformation.
We're making strong progress on all fronts.
The growing community of business owners, we serve are benefiting from the fully integrated full service approach. We provide to me the financial needs. We will continue to empower our business banking personal banking wealth management and trust services teams to create an increasingly integrated experience.
The client centric operating model. We launched this year is designed to increase collaboration across our lines of business.
Our complementary business process improvement projects are designed to enable our teams to deliver for our clients more seamlessly.
And well proactive personal service and specialized expertise will remain at the core of our competitive advantage digital capabilities will be an increasingly prominent feature of our differentiated client experience.
The announcement, we made this morning represents another bold step forward on this frontier.
By deepening our partnership with 10 minutes, we're positioning ourselves to deliver seamless and and digital banking experiences for our clients. The owners is small and medium sized businesses.
Kevin This is the world's leader in banking software and our journey started with the successful launch of tenants core banking in 2016.
Now continues with implementation of the industry, leading 10 minutes Infinity platform. We were the first Canadian schedule, one banks to run Antamina is core banking and will be the first Canadian bank offer a differentiated digital banking experience powered by telling us data Lake Unexplainable eight I keep.
Abilities.
We're excited to build a 10 minutes partnership to deliver a competitive fully differentiated highly personalized world class digital experience to our business owner clients.
This announcement provides the purposeful innovation, we're fully committed to deliver to provide the proactive relationship based client experience. We're norm known for as we meet the rapidly changing needs of our valued clients across the full range of channels.
This year, we also expect to successfully transitioned to the advanced approach for regulatory capital in risk management. This accomplishment will represent the combination of a multiyear enterprise wide transformation effort with contributions from nearly every CW be team.
You will enhance our capital allocation capabilities provide a sharper view a portfolio risk and will make us more competitive on price and offering.
Advanced approaches a foundational capability for us to unleash our full potential deliver more for clients and to grow across Canada.
Our strategy is to translate these new capabilities from digital client experience to capital deployment into strong and scalable long term growth.
35 years much for growth has come from word of mouth recommendations through the confidence and trust of our loyal clients.
It's remarkable to think how successful we have been with limited investment in marketing.
And we're looking forward to our growth potential powered by a national brand driving increased visibility and stuff.
In the equity with their target clients.
We launched a new brand promise this year obsessed with your success.
And we sharpened our visual identity with a contemporary new logo.
We revamped our web sites and brought in new expertise to engage business owners through digital and social media. Finally, we launched a new brand campaign, we come to you to show business owners. The length will go to help them succeed.
We know that are clients see us as responsive helpful and different from the other banks.
The feedback we receive on a regular basis confirms that it's our people enter culture that sets us apart.
We're proud to be recognized as a great place to work, Canada and one of the best workplaces in Alberta This year.
As our transformation continues to drive significant change across CW. These financial group. We also know that our culture is evolving to support our ambitious strategic agenda.
In 2019, we introduced new core values the ground us in the qualities are clients and stuff love about CW b.
I'm confident.
Cultural will continue to be a competitor and help us attract diverse talent to drive our future growth.
As we enter the new decade, there's no doubt in my mind that we're prepared well for the future.
I'm proud to say that CW B is increasingly disruptive force in Canadian financial services.
We're well positioned to take a greater share of are chosen markets and deliver long term profitable growth in the years to come.
Ill now turn the call over to Carolyn.
Thanks, Chris and good morning, everyone.
We delivered solid fourth quarter in fiscal 2019 financial performance.
First quarter common shareholders net income and pretax pre provision income more upside and 3%, respectively and the same quarter last year.
Quarterly diluted and adjusted cash earnings per common share of 70, 778 cents were up 7% and nail respectively with the higher growth rate of diluted EPS, primarily reflecting no acquisition related fair value changes this quarter.
Fourth quarter total revenue growth was 6% net interest income was 7% higher with the benefit of 8% loan growth slightly offset by lower net interest margin.
Noninterest income was consistent with the fourth quarter last year, while credit quality was stable.
Noninterest expenses were up 9% well acquisition related fair value changes were 5 million lower and preferred share dividends for 2 million higher.
Full year basis common shareholders net income and pretax pre provision income were up seven and 6% respectively solid earnings growth reflects a 7% increase in total revenue stable credit quality higher expenses from the continued investment in our strategic execution and lower acquisition related fair value changes.
Full year diluted and adjusted Kashi P S $3.04 and $3, a 15 cents were up nine and 5% respectively. Total revenue growth included 8% growth of net interest income benefiting from 8% loan growth and stable full year net interest margin.
Acquisition related fair value changes were 12 million lower compared to 28 team while preferred share dividends were 6 million higher.
As Chris mentioned loan growth included continued execution against our balanced growth strategic objectives are further geographic and industry diversification.
Central and Eastern Canada continue to lead growth by geographic market with a significant 13% increase representing 42% of our overall loan growth this year.
We expect growth in Ontario to continue to reflect ongoing contributions from our established businesses with the national footprint as well as the planned opening of our first TWB, Ontario branch premises in Mississauga This year.
Our growing business presence in Ontario, we'll also continue to benefit from capabilities centralized in our Toronto Regional corporate office at 150, King Street, and we officially opened last quarter.
That said, we expect progress towards our strategic goal for Rytary would represent a third of the overall portfolio to moderate somewhat compared to the significant growth rate achieved over the past several years.
We expect the very high growth within CTP beam axiom, and see if need be franchise finance to normalize somewhat.
Growth from CW national leasing will likely be moderate and do you have strong competition and we expect high single digit growth within TWB optimum.
Looking at the rest of our footprint Ghost growth was strong in Alberta. This year at 8% followed by 5% growth in British Columbia.
Standing loans is this catch one and Manitoba grew four and 7% respectively.
With respect to industry diversification, our strategically targeted general commercial category led the way with a 15% increase.
Personal loans in mortgages increased 8%, primarily reflecting a mortgage growth to leverage our securitization capabilities.
Total loans within CMS, the optimum were relatively unchanged from last year.
Coming into 2019, we expected growth in this business to slow compared to prior years, reflecting our choice to tighten our approach in the market in response to be 20 changes and utilizing our ERP capabilities.
However, it's apparent that we tightened to more than competing mortgage originators.
With the new mortgage product for business owners launched late in fiscal 2019, we expect to resume growth consistent with the rest of our loan portfolio in 2020.
Growth of equipment financing and leasing in 2019 was strong at 9% overall commercial mortgages increased 5% well real estate pro Jack loans contracted 103 million.
In the normal course, we aim to delivered double digit overall loan growth were prudent.
This year, along with stable CW be optimum balances contractions within our project lending portfolio was a key factor constraining overall goes to the high single digits. The benefits of project lending growth in Alberta, and Ontario were more than offset by the impact of successful completions and payouts NBC.
While the pace of new project development and greater Vancouver has moderated.
Operations related to well supported projects continue and we have a strong pipeline of new lending opportunities.
Sound overall credit quality continues to reflect our secured lending business model disciplined underwriting practices and proactive loan management.
We remain confident in the strength diversity and underwriting structure of the overall loan portfolio.
Under IRS nine the fourth quarter provision for credit losses, as a percentage of average loans was 19 basis points with 18 basis points for impaired loans and one basis point for performing loans under is 39 provision for credit losses represented 19 basis points in the fourth quarter last year entirely related to impair.
Third loans.
On a full year basis under I first nine the annual provision for credit losses of 21 basis points related primarily to impaired loans.
Related entirely to impaired loans. This compares to 20 basis point last year under I asked 39, consisting of 19 basis points for impaired loans and one basis point for performing loans.
We currently expect losses in 2020 to remain within our risk appetite and to be comparable to our historical experience.
Gross impaired loans totaled 148 million compared to 138 million a year ago with both amounts representing 52 basis points of gross loan.
We continue to proactively manage both impaired formations and resolution.
As we've said before the level of gross impaired loans fluctuate as new impairments are identified and existing impaired loans are either resolved or written off and does not directly reflect the dollar value of expected write offs given tangible security held in support of our lending exposures.
Our business model remains focused on secured midmarket commercial lending and we have no material exposure to unsecured personal borrowing including credit cards.
October 31st 2019.
Total allowance for credit losses was 150 million compared to 111 million last quarter.
Allowance for stage, one and two performing loans is unchanged from both last quarter and our IRS nine transition on November 1st of 2018.
Slide 12 demonstrates our success in executing on key strategic objectives to grow and diversify our funding sources.
As Chris mentioned, we delivered very strong brand trace deposit growth of 12% over the past year, including 14% growth of demand and notice deposit.
This growth was comprised about half of our banking branches, a third from mode of financial and the remainder from CW be Trust services.
Our very strong brand trace deposit growth contributed to a reduction in the total balance of broker deposits compared to both last year and last quarter.
We also generated annual growth in our funding from debt capital markets with three successful senior deposit note issuances totaling 900 million and increased debt from securitization to support originations of both equipment loans and leases and residential mortgages.
The next slide demonstrates our solid track record of net interest income and total revenue growth over the past five years, along with the changes in net interest margin.
Despite a volatile competitive operating environment, we continue to win and expand client relationships grow our business presence and deliver steady increases in earnings.
For fiscal 2019, our net interest income was up 8% to a record 786 million, reflecting 8% loan growth and stable net interest margin of 2.60%.
Expectations for increases in net interest margin were tempered early in this past fiscal year. When it became apparent that anticipated bank of Canada rate increase would not materialize in the end stable net interest margin, reflecting the positive impacts of higher asset yields and lower average balances of cash and securities as a percentage of total average assets.
Offset by higher funding costs and changes in funding mix.
Looking forward, we expect to deliver high single digit growth of net interest income in fiscal 2020, and the benefits of stronger loan growth, partially offset by downward pressure on net interest margin.
Our net interest margin has operated within a fairly tight range between 2.50 and 2.60% over the past several years and we expect to remain around the midpoint of that range in fiscal 2020 with the potential for quarterly volatility.
We also expect growth of noninterest income with increases across most categories, reflecting our ability to extend and deepen relationships with both new and existing clients across all business lines.
Efficiency ratio of 46.5% compares to 45.7% last year as revenue growth was outpaced by growth of expenses, reflecting our continued investment in strategic execution.
Operating leverage for the year was negative 1.8% compared to positive 1.9% last year.
In 2018 revenue growth benefited from very strong loan growth, including 3% from a portfolio acquisition as well as a four basis point improvement in net interest margin and gains from the trust services strategic transactions.
Our annual efficiency ratio over the past three years is approximately 46% and we expect a consistent outcome in 2020, while delivering slightly positive operating leverage on a full year basis.
This incorporates our expectations for strong business growth supported through investment in strategic execution, along with effective control of non interest expenses.
Notwithstanding our commitment to prudently manage expenses based on expected revenue growth quarterly volatility of operating leverage is expected based on the timing of expenditures.
With very strong capital ratios of 9.1% common equity tier one.
10.7% tier one and 12.8% total capital at October 31st 2019, we are well positioned to create value for shareholders through a range of capital deployment options are baffled threex leverage ratio at 8.3% at October 31st remains very strong.
This year, we reposition CW these capital structure to both optimize our cost of capital and support ongoing profitable growth and strategic execution.
While our primary focus remains continued organic growth supported by strong capital ratios. The normal course issuer bid is a prudent tool to create value for shareholders what circumstances warrant as they have at various points in the past year.
Yesterday, our board declared a common share dividend of 28 cents per share unchanged from last quarter and up two cents or 8% from the common share dividend declared in the same period last year.
As Chris discussed.
Our steady execution on all fronts also includes progress towards our planned transition to the advanced approach for capital risk management as we've shared before we expect to file our final application and receive approval in fiscal 2020.
We anticipate a reduction in risk weighted assets as calculated under the ERP approach to increase our regulatory capital ratios.
However, we do not expect any other material impacts to our financial results in fiscal 2020.
In view of the planned capital transition later in fiscal 2020, we have discontinued our medium term performance targets. We introduced these targets at the beginning of fiscal 2016 and design them to be effective over three to five year period under the standardized approach to calculating risk weighted assets.
We are confident our transition to the advanced approach will support higher growth and profitability from our differentiated business model over the medium term.
We expect to gain more certainty about the magnitude of capital available for deployment upon transition to the advanced approach on approval of our final application.
And we expect to established revise multiyear performance expectations, incorporating incorporating benefits of the capital transition following formal regulatory approval.
As we consider fiscal 2020 on a standalone basis, including our strategic pricing and the potential impacts of the key performance drivers I've already discussed. This morning, we expect to deliver growth of adjusted cash EPS in the mid single digits.
Hi, good return on common shareholders' equity at a similar level to 2019.
Slightly positive operating leverage with quarterly volatility.
Strong CET, one capital ratio and growth of common share dividends in the high single digit range.
To conclude we're very excited about the you're ahead, we have executed our transformational strategy against a challenging backdrop over the past several years, we've created a larger addressable market and a more resilient business model to manage regional macroeconomic volatility going forward, we will continue to leverage focus business transformation and.
Yes men and break through digital capabilities, and our inclusive and diverse teams to enhance our client experience. Our strategy is designed to create tremendous value for the business owners, we serve and we're confident TWB is well positioned for breakout growth as a model enabled bank.
And with that I'll turn it back over to Matt.
Thank you Caroline that concludes our formal presentation for todays call and I'll ask Joanna to begin the question and answer period.
Thank you.
And gentlemen, we will now begin.
First question should you have a question. Please press the star followed by find on your Touchtone phone you will hear with rates on pump technology your request.
Should you wish to decline from the planning process, it's crestar followed by too.
And if you are using speakerphone, please flip the handset before pressing any Keith.
And your first question is from Scott Chen from Canaccord Genuity. Please go ahead Scott.
Good morning, I'm, just looking your 2020 targets.
Mr constant gdps growth.
Talk about stronger loan growth in your assumptions, maybe kind of backed away from that double digit loan growth target and may be.
Right number would be what you did in fiscal Q4.
Well, Scott, we Aspirationally will target low single double digit I mean, that's absolutely what we focus on by prudently delivered.
And just on National leasing Caroline you talked about I guess, one what was the growth platform.
19, and you talked about moderate moderate growth in and that does that mean kind of a low mid single digits.
Hi, I'm, just going to circle back with you Scott I, just don't have the numbers right on the top my head So we'll come back.
Yes, it would probably be yeah.
Mid single digits, yes, okay.
Yes, but just wondering okay excellent. Thank you.
Thank you. The next question is from many Coleman from Cormark Securities. Please go ahead.
Hi, Good morning, just a few questions on the transition to a RB first just.
If you're a little bit more clarity on the timing of approval can you narrow it too.
Specific quarter, and and then as a follow on this transition happen right. After that as soon as you get approval is is that does it just switch on right away or is there a lag.
So we plan to submit.
Early in the.
Early in the fiscal year.
So say lets say first half and probably approval in the second half of the year. So we can't really be more specific the not the.
Approval is not not in our control.
And then the day, we are approved as a model enabled AI RB bank, we recalculate, our risk weighted assets using the new venue models.
So that happens binary you are a standardized bank up until the day you are an ERP bank.
The availability of capital to be deployed is expected to be staged overtime.
Okay, and how soon you talked about.
Discussing with the market in a new new medium term targets. When do you expect that timing too when do you expect to unveil that.
We expect that to follow.
Fairly closely after regulatory approval.
And in terms of just the.
Spence drag coming from from this transition is there.
Is there a fall off a in terms of expenses right. After approval is there a spike.
The lead up.
Just maybe highlight is there anything notable in terms of how you see expenses flowing from this particular project in 2020, specifically.
Yes, so our.
It's it's a number of components there is a capital component that we have been working on over the past several years as we've discussed that will begin amortizing with approval.
There are also portions of preparing to be a model enabled the bank, where we have changed processes and workflows and the like and most of those cost has been have been expenses they've been occurred. So some of them will continue some of them will dissipate.
Overall, you probably won't see anything that would represent a material spike or a material change in our overall and I run rates.
And just on.
On the subject of expenses.
You talked about the new terminals.
Agreement or relationship how does that specifically a impact a expenses in 2020, and and then beyond whats the trajectory there in terms of expense the incremental expense growth.
Yeah, we it's sort of all factored into our total picture so we target.
Gross loan growth in the.
No.
Low double digits, we expect to be driving out total revenue growth in the high single digits expenses to follow with slightly below operating leverage for the year. So it'll be all in the all in the same package. Okay. Thank you.
Thank you. The next question is from Gabrielle to change from National Bank. Please go ahead.
Good morning.
Good morning, your supplement the.
Those balances there today.
The oil and gas production loans.
Turning and milling of impairments or is that a re class or is that just the new impairment.
It's one loan Gabe.
In a syndicated.
Structure that we don't have any anticipated loss.
Good.
All right.
Just wanted to talk about the real estate project loans.
The Ontario, Alberta, I'm, a band, but those are more than offset by a pay downs NBC then after I'm not quite sure I mean, what you're signaling there for the outlook I'm, a particular portfolio. It's been declining for a number of quarters military margins are probably going to.
Hi, This is your expectation.
So.
The DC market was very strong in 2015 16, our portfolio increased very very significantly with our strong tier one developers there those projects of work their way through and have been paying out over the last few quarters. So thats really pressured the.
Balances in that market because also in that sort of in the.
17, 18, 19 period, there was a slowdown of new developments. So replacement projects did slow down in particular in 18, let's say in it into 19, though with the kind of stabilization of the real estate market in the lower mainland that has started to come back. So we are seeing a good pipeline of.
New projects coming back into play for tier one developers there. So in terms of the book itself minus 3% growth over the year slight contraction, but looking for.
Fairly solid pipeline in school 20.
Terrific growth.
Yes, we expect growth in that in that portfolio in fiscal 20.
Alright, and my last question are you know the someone.
Yes.
The.
Main reason to remove medium term target in relation to.
Three engineered capital model.
A single factor like Oh, the really about how much excess capital.
Transition may or may not create for you and how are you address that capital or.
What's the rationale.
I think primarily gave us that we are we believe that.
The combination.
And number of major initiatives within our strategic execution culminate with.
The final application submission and approval and that resets our ability to grow in a fairly significant manner. So we just felt for us that we need more clarity around exactly what that will mean for us to be able to make medium.
Forecast to share with the market about three to five you're asked medium term potential from a financial perspective.
The really about the capital.
I would say absolutely.
Yeah.
Thank you good day, and you know Merry Christmas.
Thank you David.
Okay.
Thank you. My next question is from summit mile Malhotra from Scotia Bank. Please go ahead.
Good morning, guys, just maybe morning stay on stay on those expectations for a minute so.
Are we you tell us in 2020 should be similar and look I think the expectation for lower growth across the sector has been been prevalent for sometime but how are you thinking about ROE we after the.
After the transition occurs it would seem like you're going to have to retain less.
Hey, less of your your earnings every quarter as or in order to find your your WSE growth. So is.
Our unit position that communicate it how you're thinking about or are we going forward and then what what your investors can and look forward to from that perspective.
I would say at this point, we're comfortable sharing that we expect that.
One of the outcomes of the enhancements to capital and risk management that comes with an ERP approval will be the opportunity for capital deployment initially with the approval some of that benefit is expected to be staged and the second part of it is that as as you mentioned, we will be able to grow.
Hi, there faster than we have in the past using organic sources that capital generation or we will but are we will be able to add to the CET, one capital ratio, which gives us more flexibility around potential capital deployment options. So believe believe that both of those opportunities. Both initially and over time will be positive to our.
Okay.
We don't have certainty yet that we're able to share about magnitude and timing of that.
All right. So this is something as 2020 goes goes forward and we go to the into next year, you will hopefully be in a position to update all of these numbers accordingly.
Absolutely.
And then for Chris I think most likely the partnership with a domino, So I hope I'm, saying, they're correctly I think one of the this drug prospects for the bank. This year was the success.
That you had in building out the.
The core deposit base I know there's been periods of.
Let's call it a disruption in markets, where your funding profile has been a source of consternation, but you did show some.
Success in that regard in 2019, how this is maybe a bit of a stretch but could you talk to us about how you're looking at this partnership and the ability to further drive your deposit growth going forward and maybe as you are rethinking those those media true objectives are to be reintroduce at some point.
We will deposit growth play a play a bigger role in how you communicate with the merger.
Definitely yeah, and our focus.
As you know for a number of years has been that sort of generation of multi product clients. We've had a very strong history of solid loan growth and client generation through lending our goal and investment in our business processes in our core technology, our elimination of all of our legacy software.
As being to ensure that we can provide full service banking to our clients. Our next step into this 10 minutes affinity process will digitize. The front ended the bank provide online banking tools that are fully digital now that will come in the next year in this first year, what we will get as digital onboarding of clients, so starting with our.
Modus clients for example.
Later in this year and ending with the us being able to move small and medium sized businesses into digital Onboarding and then providing from a cash management perspective digital online banking. So again that all supports our ability to have more multi product clients, which then supports our our deposit and funding.
So file so we're extremely happy with the progress we made this year on our funding profile, we have a reduction in broker deposits increase in demand a notice of 12%. So these are very positive outcomes and it's entirely on strategy that we've been focusing.
Last question is maybe a little bit more more here now and then I was little it getting on so apologies if this came up.
Not only for for CW be but for some of your larger peers as well it does seem like commercial loan growth was.
Somewhat less robust on a sequential basis I don't want to focus too much on one quarter, where the only caveat being obviously there's been.
Good deal of conversation on the economic outlook and whether businesses or perhaps.
Topping the brakes on some project activity in Canada.
As you think about and I heard your expectations for the coming here. So maybe that's the answer but are you seeing anything in your footprint in terms of your relationship with.
See an eye lenders and are seeing libraries in particular that leads you to believe that the economic backdrop is perhaps leading to less commercial loan demand than than would have been the case for most of the past year.
So our fast growth portfolio is our general commercial book, which is our Q1, because that's our multiproduct find opportunity gives us the kind of that range of.
Of client growth and we had 8% growth number to 5% growth in BC and and 12% growth in Ontario. So.
We feel we have good growth, we've got to our market share we have an opportunity to expand.
The definitely uncertainty about the economy in Alberta.
As an opportunity we believe for us to prudently looked at our market share as we.
Kind of see how the clients.
And other banks.
Relationships work often in the past weve.
And the opportunity to pick up very strong clients in economically challenged times.
If we have.
Slower macroeconomic growth.
In fiscal 2020, we will continue to be very focused on those clients. We believe the.
The target of our of our bank at that small medium sized business does allow us to really specialize in kind of pick the winners in that area and we.
Continues to do that over the years and we have no change in our outlook for fiscal 20.
Thanks for time.
Thank you thanks.
Thank you. The next question is from Richard Roth from TD Securities. Please go ahead the check.
Good morning first question.
Good morning.
Yeah.
The difference between.
<unk>.
Yes growth.
Compared to.
Line growth in the high single digits and modestly positive operating leverage flat.
What's the offset.
So.
Yeah, I think it's the it's the just overall continued investment in the business thinking about prudence.
Conservative assumptions in our in our base. We are we are anticipating.
Ongoing challenges in our in net interest margin.
Both there is no a 50 50 chance I think at this point of bank of Canada rate cut coming in.
In 2020.
There is a little bit of NIM pressure coming from the implementation of IR, Firstly, alright, I FRS 16 on leases.
And then we know we have continued investments so operating leverage we are targeting to.
Positive, but slightly positive so not significantly positive and then again thinking about the equity base, we saw a fairly significant movement in our in the amount of average equity this year coming from a recovery in unrealized losses in our.
Our security portfolio balance and accumulated other comprehensive income. So there are some factors that are.
Not part of what factors into net earnings that then can impact.
Really.
Okay, Yeah, because I was just from the margin commentary for example, that's already reflected in your guidance and.
I understand the investment component, but presumably if you have positive operating leverage with.
Lets say, 989% topline growth that you're pretty much flow to the bottom line, unless there's something going on with taxes or something else and that's sort of always getting out if there's some offset yeah I didn't take into consideration there probably not probably not material around taxes, we are getting a bit of benefit from the the Alberta tax rate reductions, but it.
Probably not going to be more than a penny or something I think the other factor might be consistent provisions for credit losses actually implied growth and the dollar amount of provisioning given the expanding loan portfolio so that.
The metric stable, but the dollar amount would be higher we can certainly work work off line, Richard and try to figure out the difference is Brian and my other question I guess is related to credit losses, while we're on the topic.
This your cumulatively it looks like you're performing loan losses.
Almost negligible.
In contrast to most of your peers that.
Pretty high bookings this year in especially this quarter, what do you guys seem differently relative to your peers, that's allowing you from a modeling perspective to not.
Forced or push to booking more stage one stage to reserves.
So if we start with macroeconomic factors hours I would I will we start with sort of an average of the large banks public assumption. So we are relatively consistent with them. So I wouldn't say that there are differences in not the macroeconomic forecast that we start with.
We use a.
A different scenario, we don't we don't you sort of a set weighted average.
Small number of scenarios, but again that probably is not materially different and then we look at our portfolio the allocation between stage one in stage two both comes from finite factors. So any client for example, who is 30 days in arrears automatically moves to stage, two and as a lifetime care.
At a loss is estimated against it.
So then I think the only underlying part of it has to be our historic credit losses on the composition of our portfolio compared to compared to our peers.
Yeah, that's all getting I, so basically it sounds like in your modeling when you look at your historical.
Results, they've been better than somebody other banks, certainly I don't know exactly.
Behind the scenes, what's going on the rest departments other banks, but it seems to imply that your experience in downturns.
Better is that fair to conclude given the difference.
In stage two reserves.
Well.
Given the CW be as my only bank I think I compare to what goes on any other.
Bank Service Department, but I think one of the other factors, if we think about our portfolio and how it it might be different I think another factor is likely the duration.
So our book has on average duration of about three years, we have a number of portfolios and amortize to zero in that in that time period, and so that means that for many of our portfolios. The difference between a 12 month loss and a lifetime loss is not that material. So even the cliff effect of moving from stage one.
It takes to the dollar impact is not that material.
Thank you that's that's.
Very helpful. Thanks.
Thanks Richard.
Thank you. My next question is from Marco currently you Pharmacy RBC. Please go ahead Marco.
Good morning.
I had a couple of funding related questions for for Carolyn first firstly on the on the brand trays deposits that we've seen two quarters of a pretty strong growth there.
Just curious how the funding costs compare to broker deposits and and notably a on the motive financial side.
So I say, we've had three quarters of really strong deposit growth, but quite a bit too much over that line [laughter] overall overall, our branch raise deposit.
Funding overall has some more in and around about a 35 basis point, they're 35 basis points cheaper than broker on average.
It is motivate we have held our rate on ourselves savvy savings account at 2.8 for quite awhile now.
I have had really good growth in that portfolio.
That's one where we are still absolutely comfortable that the pricing of that product quite acquisition costs. We're learning a lot about that channel those clients are sticky and ER and we're really pleased with that and so it fits well into the overall branch raise deposit funding bucket that we saw.
That we have.
So as the to the funding mix shifts more towards branch raise deposits do you expect to see a bit of a a bit of an offset there for the for the NIM.
Or certainly that is actually is that is absolutely one of the key planks in our strategic priorities.
Because not only are the overall do the overall rates of that pool of brand trace funding are they more attractive than the broker rates. They are also relationship deposits, which allow us to move to multi products and have the opportunity to broaden our client experience with those clients. They also tend to be more.
Our operational in nature, and so there may be liquidity benefits as well so the amount to liquidity that we have to hold against themselves. There are a number of both strategic and operational benefits that come from a increase in the <unk> brand trace deposit proportion of funding.
Alright, and just sticking on that topic with respect to funding mix given the the recent changes in the comfort the covered bond a rule limits.
Just wondering how you guys view or potentially tapping that market from a funding perspective.
Yeah. So we are actively watching the activity of some of our peers around covered bonds and RMBS as well at this point.
Our view is that we're not currently originating enough volume of assets that are eligible for those vehicles to make them cost effective for us is that as a funding channel at this point, but certainly it's something that's in our radar that we're watching develop and thinking about our business model.
I see.
Okay, and lastly, and I apologize if you answered this already just with respect your NII guidance on your your net interest margin guidance.
Are you embedding any any rate cuts in to those expectations.
So the current impression is a 50 50 chance of one rate. So that's what's built into our assumption. Okay. Alright. Thank you very much.
Thanks Marco.
Thank you. The next question is from Dotcom metallic from RBC capital markets. Please go ahead.
Hello, Good morning, and a very sincere apology for asking the next set of questions. If you've already answered them in some shape or form or fashion, but I want to run through a couple of really quick questions. Here. So I can get to the real crux of my question.
So the first question is the magnitude of capital available for deployment.
Once you transition to the air beam approach.
Is uncertain can you speak to.
The level of uncertainty.
And what's causing the uncertainty is it purely that osby you have no clue.
How much they will grant.
Or how much will be approved.
And a and then I have some follow ups.
So I'm going to start.
The we've we've talked in the past that the models and the process and everything that goes into submitting the models for approval to use as a model enabled banks are around the calculate the quantitative calculation of the pillar one risk weighted asset calculation.
So working our way through that to the finalizes. The station of that was submission of our final application.
The second part is pillar two which includes economic capital thinks about concentration of the portfolio includes our internal our I Catherine turtle internal capital adequacy assessment process. We continue to work our way through that and that includes the establishment of what we believe are appropriate capital operating.
Hi, good for us as a model enabled bank.
And then we discuss and ER and and discuss that with the regulator as part of the approval process. So.
We expect that we've talked in the past that we expect there to be a transition to the full benefit. So we know that the maximum.
Differential between.
Yeah, RB risk weighted assets and the standardized approach the maximum today is 75% of standardized.
But we do expect the benefit of that to be phased in over time.
Okay, that's very helpful.
And then a follow up to that is.
What your intentions are.
And the reason why I ask that is let's suppose it.
I don't know pick a number half.
Get halfway there.
What would your intentions be and the reason why I ask this is it really will have an impact on highway model 2021 and beyond.
Because the way you guys right and the way I understand it is it will free up a lot of capital. It sounds like you intend to use it for organic growth.
And what your intention for organic growth really matters with respect to how long would have view margin and so on so can you give me. Some is there is there anyway, you can actually answer that question.
Well, it's a difficult question answered Darko of course.
Our what we said is our.
With the.
As we look to capital so number one it does.
It changes the speed limit on the bank right. So as we think about having say, 10% reduction R.W.A. in today's world, 10% growth rate starts to consume capital.
10% reduction R.W.A. would actually move that growth, it's 12% and at 10% growth, we would be generating positive comparable.
If we think about.
25% reduction R.W. way the current limit.
That would change our growth with 80% before we would start to consume capital and if we still grew 10% we would generate about 50 basis points or capital. So it changes are the.
Our flexibility quite dramatically both for organic growth acquisition.
Buyback or dividend increase so that would be kind of the order of operations with the number one being organic growth, we would like more clients, we'd like more full service clients, we want to improve our deposit base, we want a broader geographic footprint. So we're really focused on how we can deploy and more effectively managed capital.
Now to increase or addressable market in a broader geography.
Absolutely, so I guess, where I'm going with that is if if you get significant reduction.
The implication there is that you're on a more equal footing with the big six banks lets say, yes in which in which case you can grow faster, but you would be competing in a much more competitive environment. So why should expect your NIM overtime to actually decline, but it's still probably a higher or are we alone is that an appropriate way to think about modeling.
2021, and Dare I say 2022.
I think that isn't more appropriate way to think about it Darko you know it it could it could mean that.
Loans, where the yield does it meet our hurdles today could meet our hurdles and our return on capital hurdles threshold rates in going forward. So you're right that might have an impact on NIM, but would benefit interest income would benefit our OE.
Yeah, Okay precisely that's great. Thank you very much for that one last question, though on credit.
Despite the non build of stage one in stage two.
I run a calculation that appears to suggest that your coverage of your LTM or your last 12 months losses is still higher than the midpoint.
Of the of the Big six banks are such that suggest that a at least on the surface.
There might be some conservatism in your reserves.
So I guess the question then is if I look back at the last 12 months is there anything you would call out.
That suggests there were some one offs in the in the provision and a and that in fact.
Your conservatism is actually even higher or do you think that's just Uh huh.
Last 12 months of losses, as a fair representation and your coverage of that you're kind of where you want to be.
Great question I think if we look at our actual our specific provisions and write offs through fiscal 2019, we did have a handful of larger single write offs in the first half of the year and it normalized in the second half of the year.
So not really anything I would call out on that you know our provisioning.
Is our provisioning around impaired loans is absolutely consistent and unchanged from what we've always done when we look at every individual alone and we assess and determine the appropriate provision if any to take against them so that absolutely hasn't changed.
The method that we take regarding the collective allowance is absolutely.
I will materially correct within the IRS nine accounting framework with our traditional.
Conservative viewpoint right, we know our portfolio, we understand that we are a commercial portfolio as opposed to a largely residential portfolio. So our exposure is tend to be a bit larger. So we are comfortable with the level. So the level of.
The the models that we built in how they are functioning and then we ask ourselves how do we determine if the level of coverage is appropriate and one of the things. We look at is how many years a losses do we have in the performing loan allowance and so right now at the ended the year that about 90 million represents over two and a half.
Here's the losses using the last five years actual losses. So that includes the 2016 energy losses in that calculation and again another factor that makes us very comfortable.
Okay, great. Thank you very much.
Thanks.
Thank you. The next question is from Doug Young from day Chardan capital markets. Please go ahead.
Good morning, I will try to keep this a quick just back to the guidance and I made this is going to go towards the capital there be conversion as well, but you're signaling mid single digit EPS growth, but you're looking for high single digit dividend growth in fiscal two.
Your payout ratio, 35% in 2019, you've been targeting.
30%.
Are we moving towards more whats the big six banks payout ratios are between 40% to 50% is that.
Where we're moving towards four CW being bid the ERP conversion, let you missed there I'm a little bit easier.
I would say, we've we've not yet thought about really.
Thinking about formal guidance around the dividend rate in any IR be world because we're just not we don't have clarity yet on on what it means so can't really look out that far and comment on it the expectation on 2020 dividend increase really assumes our same practice.
Right assumes that we will continue to evaluate dividends every quarter.
All else being equal we have the historic practice of every other quarter, having an increase so it's really I would say based on.
No change consistent with the past at this point.
You are running above the 30% target you have been or I think sometimes so you are comfortable.
Running there were absolutely comfortable with the level that we're at currently and I are be approval.
This is one of the option that's available for us on the other side of the IR be approval is to think about the a.
Common share dividend increase.
Our common share dividend in general.
And then I know I've asked this question before and I know I don't know if we can size the addressable market that ERP conversion provides a few so.
Clearly yeah, you can go after more business less capital intensive.
What is the size of that market.
Yeah.
That that would fit within your threshold is there any way to think of that.
Well I think is very large we've got a very small market share.
And it's also in that lower risk rated so higher quality bar, where that today, we have trouble competing with the big banks on just given the comparable so the today as you well know have about half the capital.
As we do so from a return on capital perspective, as we price out loan opportunities, we're not competing for those larger clients. So we have the opportunity and to really generate.
Many more clients increase or marketshare, and all the markets in which we operate.
Is there any one is segment or anyone region, where you see greater opportunity.
Well I would say, Ontario has got tremendous opportunity for us its largest economy in the country. We're just opening our first branch there in the spring.
We've got strong established businesses, there with a national leases from axiom franchise finance are often mortgage team is there.
So we think Ontario's guide.
Very good opportunity for growth BCEI is a solid economy and Alberta, we had 8% growth. This year. So we will continue to be very focused on our strong client base in Alberta as well. So we believe that all is the work we've done to transform our offer to our clients to improve their client experience with us.
Is to generate better funding better.
Lending structures better processes internally.
Really increase the scalability of our bank and our next step into digital with terminals with someone else Infinity. Just is the next point that allows us to just deliver more to all of those clients and combined with a or b and all of our internal process improvement, we just see lots of opportunity gain market share.
Okay. Just lastly, Caroline I missed your NIM outlook. So can you please repeat that Brian . Thanks.
So we've been up to 60 full year for 2018 and 2019, when we look back over the past several years, we've been operating in a range between 250 into 60, and we expect in 2020 to be kind of around the midpoint of that range.
Great. Thank you very much.
Thank you.
Thank you. The next question is from Steve Theriault from a capital. Please go ahead Steve.
Thanks.
Just a couple a one clean up and good again on the margin that 50 to 60, you said it but it is it fair to say, it's more of the lower end about range. If we do get a rate cut in 2020 girl.
So our our guidance around the midpoint of that range assumes one rate.
Okay.
And then I want to ask just around the terminals. The vigilant digital offering you been offering piloting and then offering for awhile to commercial customers.
I was up and going and B is that affected or enhanced by the terminals agreement.
So we don't have digital right now so this is a new offer.
What Weve delivered was a new online banking product for small business that has generated the growth of branches deposit so.
What we will be doing very well actually replacing that with a full digital offer that includes all the cash management services and.
The opportunities for us to provide even more insight into a clients business operations and it will provides better data and better ways for us to assist clients in their cash management processes.
And so that will that very much enhances that initiative ultimately it's it actually it's a step change it's a much bigger opportunity.
And yet and that's a 2021 conversion for.
And.
Do you have a sense that onboarding wind or yes, 2020 is the.
Getting the so.
The foundation in place that allows us to digitally onboard clients 2021 is the delivery of the online banking.
Products.
Okay I'll leave that thanks.
Thank you thanks, Steve.
Thank you and the next question is from Nigel This is that from a fairness investment research. Please go ahead Nigel.
Hi, Good morning. Thank you for taking my question then we're running little late on time I just have two quick follow ups for you the first on.
Margins in capital is keeping with the and Carol and you mentioned on capital on the air be transition that the availability of capital is expected to be staged over time is there any insight you can provide is on the cadence and timing of the capital release. So in other words, the bulk of that become available a upon transition and then.
Incremental salability pass that or is it more evenly spread out in over a what time period.
But that is we are working on getting certainty on that through the period between now and approval. So there's nothing specific that I can share on that today.
Okay and then the last quick question I have is on your margins you mentioned Carolyn as well.
An impact from higher from 16, I believe a is it possible for you to quantify what that impact might be on on your margins.
So it's.
One basis point no more than two.
So a factor, but not the whole story certainly.
Okay. That's all I had thank you Uh huh.
Thanks Nigel.
Thank you go no further questions you May proceed.
Thank you John Thank you all very much for your continued interest in theater, we the financial group, we look forward to reporting our first quarter 2020 financial results.
On February 27, and with that we wish you all good day and all the best this holiday season.
Ladies and gentlemen, this concludes the conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.