Q1 2020 Earnings Call
Good morning, My name is just kinda it'll be a conference operator today at this time I would like to welcome everyone to the Canadian Western Banks Q1 earnings Conference call and web cast 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. She would like to ask a question. During this time simply press Star then the number one on your telephone keypad. She would like to withdraw your question. Please press star followed by the queue. Thank you Mr., Matt right you may begin your conference.
Thank you Jessica and good morning, everyone and welcome to our first quarter 2020 financial results Conference call.
My name is not right and I Love Senior Vice President, leading our finance and Investor relation teams presenting to you today, our Chris Howerton, President and Chief Executive Officer, and Charlie Brown, Our executive Vice President and Chief Financial Officer.
I would like to remind listeners and webcast participants that statements about future events made on this call. Our forward looking in nature and are 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.
More information refer to our forward looking statement advisory on slide number six teams.
The agenda for today's call is on the second slide.
Without I turn the call over to Chris.
Thank you Matt.
I'll begin with comments on the continued execution of our transformational strategy and Carolyn will follow with details on our first quarter financial results. I will then discuss our ongoing strategic priorities and outlook for the remainder of the year before we close with the question answer session.
I'm pleased to report that we're off to a great start to what would be a transformational year for TWC, our strategic priorities remain on track and we're focused to deliver strong financial results that leverage the strategic investments we've made.
Our targeted growth this quarter demonstrates progress to our goal to become the best full service bank for business owners in Canada.
We're benefiting from our continued investments to enhance or in person and digital capabilities and strengthen our full service client experience [noise].
So bus gross you branch raise deposits were supported by our focus on further improvements to our client experience and resulted in a continued reduction in higher cost brokered deposits. This growth reflects on stride issue performance for a full service bank branches motor financials and CWD.
Services, we also generated very strong new lending strategically targeted general commercial portfolio.
With ongoing profitable growth and strong capital ratios, we're pleased to provide shareholders with a one cents increase to the common share dividend compared to last quarter, the two cents higher than last year.
Our strategy for long term value creation is to solve for the unmet banking needs of Canadian entrepreneurs, we intend to become a disruptor, forcing stated financial services and a clear full service alternative for Canadian business owners, we are advancing or digital strategy and investing in our people and culture.
We continue to enhance our operating model and maker core processes smoother and better for our clients. This includes continued streamlining of lending administration activities to more efficiently support higher levels of growth and client service.
As you'll see on slide five we continued to execute against our strategic priorities on all fronts.
We have moved just a final stages of preparation to submit our ERP applications with regulatory approval expected within fiscal 20.
With approval, we anticipate a reduction in risk weighted assets calculated using the entire be rather than a standardized approach to increase our regulatory capital ratios on an ongoing basis ever be approval will support an acceleration of our organic growth rate or allow us to consider other uses.
Capital such as acquisitions are common share repurchases, while remaining conservatively capitalized.
This quarter, we announced enhancements to our digital capabilities to accelerate our strategy to improve our client experience and fuel higher levels of client growth.
Announcements included our partnership with 10 minutes to replace our current online banking platform was seamless end to end digital banking experiences for the owners small and medium sized businesses.
A new fully digital group or is p. offering and non registered products to CW Trust services to extend our addressable market.
And the partnerships between CWD national leasing.
Dealer Dot coms equipment listing sites to allow prospective clients to access a digital online financing application powered by CW be national leasing.
We look forward to our first full service branch in Ontario opening this spring.
Together with our investments in digital capabilities. The Mississauga branch branch will enable our teams to deliver are uniquely proactive full service client experience to business owners in key Ontario markets through both personal and digital channels.
This quarter, we transferred or wealth management businesses, even Murphy, our SVP banking to integrate our client offering a banking and wealth services CW be has a unique opportunities to add value at every stage of the business owners journey from managing costs, what today to building well for tomorrow. We're.
Crowded the progress our teams have made to align our culture with our and this is ambitious strategic agenda and enhance or employee experience to create value for our people. We continue to be recognized as a career destination for top talent. This quarter, we celebrated being named one of the best workplaces in Alberta to compromise.
Last fall certification as a great place to work Canada.
I see that we'd be NASA leasing was recognized as one of counted as most admired corporate cultures, one of Canada's top 100 employers would have Manitoba soft employers.
Well, making progress on our business transformation agenda, we achieved robust growth in branch freeze deposits and very strong growth in strategically targeted general commercial loans are ongoing initiatives will position us to deliver break out growth and maximize value creation for upcoming capital transformation.
Well now turn the call over to Carolyn will probably provide more detail on our first quarter financial performance.
Thank you, Chris and good morning.
Our performance highlights for the quarter on slide six compared to the first quarter last year common shareholders net income and pretax pre provision income were up eight and 1% respectively.
First quarter total revenue was up 4% compared to last year, driven by 4% higher net interest income benefited from 7% loan growth, partially offset by a seven basis point decrease in net interest margin.
Noninterest expenses were up 6% driven by a 9% increase in salaries and benefits combined with 5% growth in premises and equipment expenses.
Higher salaries and benefits for select hiring to support overall business growth and execution of our strategic priorities along with annual salary increments.
Increased premises and equipment expenses reflect ongoing investment in technology infrastructure to support future growth as well as depreciation of our previous investments.
Diluted and adjusted cash earnings per share 82, and 83 cents were up nine and 4% respectively.
Higher growth rate of diluted earnings per share reflected the recognition of a 5 million dollar charge for acquisition related fair value changes in the first quarter last year related to the successful and accretive acquisition STWB maximum.
You'll see on slide seven total loans were up 7% over the past year.
Positive contributions from all provinces Central and Eastern Canada continued to lead growth by geographic market is very strong 11% growth representing roughly 40% of our overall increase in loan.
Growth in this market was again underpinned by strong performance from our businesses with a national footprint, including CWD Maxxim, even be nationally thing M.C.D.V. franchise finance.
Most expectations for our business lines remained unchanged remain unchanged as we continue our progress towards our strategic goal for Ontario to represent a third of the overall portfolio.
6% growth in both BC, and Alberta reflected expansion across all portfolios other than a contraction in real estate loans do successful completion.
Yes.
We delivered further industry diversification with very strong 11% growth in general commercial loans. It reflected ongoing efforts to target business owner clients and increased full service relationships across our national footprint.
General commercial loans now represent 30% to the total loan portfolio compared to 29% a year ago.
Kristalose in mortgages increased 10%, primarily reflecting a mortgage growth to leverage our securitization capabilities.
Total loans within CTP optimal mortgage increased 1% from last year.
We have experienced higher payout levels due to competitive pressures and their refinement of our risk appetite within the alternative mortgage market, which includes a preference for stronger borrowers ongoing enhancements to our insured mortgage lending capabilities and more risk sensitive pricing was the adoption in the ERP are expected to support stronger client retention and new growth in future.
Periods.
Commercial mortgages increased 10% compared to last year with approximately 75% to the annual growth coming in this quarter.
Merely from very strong new lending volumes across BC, and Alberta, strong, 7% growth equipment financing and leasing respected increases across all provinces real estate project loans declined 11%, primarily driven by the impact of successful project completions.
Number of large projects that began to fund as early as 2016 I've been successfully completed and paid out over the past two years. So.
Sequentially, our loan growth was up 1%.
Well this level of net growth was impacted by elevated pay down we had stronger fundings across the entire book this quarter and are comfortable with our pipeline of new lending opportunities moving into the second quarter.
Turning to slide eight gross impaired loans totaled 243 million at January 31st.
Compares to 136 million last year, and 148 million last quarter, representing 84 basis points of gross loans. This quarter up from 51 basis points last year, and 52 basis points last quarter.
The majority of the increase in impaired loans related to commercial mortgage connections based in Alberta, and excluding these two connections our gross impaired loans were approximately 60 basis points.
As we've said before the level of gross impaired loans fluctuate new impairments are identified an existing impaired loans are either resolve their written off and does not directly reflect a dollar value of expected write off given the tangible security we hold to support our lending exposure.
The overall loan portfolio is reviewed quarterly credit decisions undertaken on a case by case basis to provide early identification of possible adverse trends.
We continue to carefully monitor the entire loan portfolio for signs of weakness not identified any current or emerging systemic issues.
At January 31st our total allowance for credit losses was 160 million compared to 113 million a year ago, and 150 million last quarter.
Our allowance for stage, one and two performing loans was 91 million compared to 90 million last quarter, and 80 990 million last year and 89 million last quarter.
The overall credit quality of our portfolio continues to reflect our secured lending business model disciplined underwriting practices and proactive management are expected an actual credit losses remain low despite the two loan connections that made up the bulk of our new impaired loan formations this quarter.
We remain confident in the strength diversity and underwriting structure. Our overall loan portfolio. We continue to expect fiscal 2020 credit losses to remain consistent with our historical experience.
Turning to slide nine the first quarter provision for credit losses on total loans as a percentage of average loans was 18 basis points compared to 24 basis points last year, and 19 basis points last quarter.
The provision for credit losses on performing loans three basis points compares to two basis points last year, and one basis point last quarter. The first quarter provision nonperforming loans, primarily relates to a slightly higher proportion of the portfolio in stage, two which under <unk> fresh nine requires the recognition of lifetime expected credit losses.
Thank you for credit losses on impaired loans in the first quarter 15 basis points includes consideration of the new impaired loan formations. This quarter and compares to 18 basis points last quarter and 22 basis points last year.
As I noted, we manage impaired loans on a case by case basis and happy viewed each individual impaired loan exposure.
Slide 10 demonstrates our success in executing on key strategic objectives to grow and diversify funding sources, we delivered robust branch race deposit growth at 18% over the past year, including 26% growth have demanded noticed a positive.
About half of this growth came from our banking branches third from motor financial and the remainder from CW Beatrice services are on strategy growth in brand trust deposits will be supported by digital onboarding capability for personal banking clients in motor financial this year.
By our remaining digital and branch channels over the next two years.
Our robust branch race deposit growth contributed to a 15% reduction in the total balance of broker deposits in the past year and an 8% sequential reduction.
The reduction in our broker reliance on our reliance on the deposit broker network is another of our strategic priorities, but I do want to know that this funding source remains that reliable and effective way to raise insured fixed term retail deposits over a wide geographic base and has proven to be a deepened liquid funding source for us.
We increased our total funding raised to the debt capital markets by 31% from last year and this channel now represents 14% of total deposits up from 11% last year.
Characterization funding recorded as debt on our balance sheet increased 12% to support originations of equipment leases and residential mortgages.
Slide 11 highlights our solid track record of net interest income and total revenue growth along with the changes in our net interest margin.
By the competitive operating environment, we continue to win and expand client relationships grow our business presence and deliver steady increases in revenues and earnings.
Compared to last year net interest income was up 4%, reflecting 7% loan growth, partially offset by a seven basis point decrease in the net interest margin.
Consistent with our strategy become the best full service bank for business owners in Canada, we've shifted the mix of our loan portfolio to a higher proportion of comparatively lower yielding but highly strategic relationship based general commercial loans.
Largely offset the margin impact my also delivering a favorable shift in our funding mix driven by strong branch race deposit growth and a decline in higher cost broker deposits.
This positive shift in our funding mix came in at time of intense deposit price competition and overall higher funding costs. The reduction in our net interest margin year over year and sequentially also reflected a one basis point negative impact related to the perspective adoption of IRS 16, new lease accounting standard which require.
Where's the recognition of interest expense on lease liabilities in prior years all lease related expenses were included in premises.
On a sequential basis, our net interest margin decreased one basis point.
Support for net interest margin was driven by very strong growth in brand trace deposits, which largely offset continued competition driven increases funding costs and the one basis point negative impact of adopting IRS 16.
Looking forward as a result is the timing of long ago and ongoing shift in our loan mix I expected growth in annual net interest income may moderate slightly on a full year basis.
You'll see on slide 12 that our efficiency ratio of 45.5% was consistent with our expectations and compares to 44.4% last year and 48.2% in the previous quarter.
Compared to last year efficiency ratio increased as non interest expense growth, reflecting our strategic investment in people technology and infrastructure outpaced revenue growth.
Improvement from last quarter reflected this seasonal decline in non interest expenses.
Operating leverage this quarter was negative 2.6% compared to positive, 0.4% last year and negative 3.4% last quarter, reflecting the same factors that's the efficiency discussion.
As we've noted before we expect quarterly volatility of operating leverage to continue reflecting the timing of execution of our strategic priorities. We continue expect to deliver slightly positive operating leverage on a full year basis with an efficiency ratio relatively consistent with our 46% three year average.
Slide 13 shows our strong capital ratios at January 31st and calculated using a standardized approach our common equity tier one ratio was 9.1% tier one ratio was 10.6% and our total capital ratio was 11.9%.
At 8.4%, our Basel III leverage ratio remains very strong.
Yeah, RMB approval, we expect a reduction in our risk weighted assets, which would increase our regulatory capital ratios, putting us on a more <unk> and put us on a more equal footing with their competition and expand our addressable market.
We do not expect the material impact to our financial results in fiscal 2020.
But as Chris mentioned, we are excited about the potential for enhance long term value creation that the transition to ERP opens up for us.
Yesterday, our board declared a common share dividend of 29 cents per share up two cents or 7% from the dividend declared a year ago and up one cents or 4% from last quarter.
With that I'll now turn the call back to Chris Thank you Caroline.
Motive financial clients will receive our first delivery digital banking in May.
We are making the investments required to improve client experience across her group to support continuing growth and strong financial performance. We're very close to achieving 30 30 30 diversification objective for BC, Alberta in Ontario, we set a number of years ago to materially diversify author client.
Base and broadening our geographic footprint.
Please see is our largest geography, Ontario is the strongest growth and Berta continues to provide sound business opportunities.
Through continued strategic strategic execution, we're positioned to capture increased market share within a larger cross Canada addressable market our pipeline of new lending is robust and we continue to target delivery of double digit annual growth were prudent.
We remain on track to deliver strong net earnings in line with her previous expectations.
Excited about the transformational opportunities in the year ahead, as we rollout digital banking and mover or be application into the final stage for submission with regulatory approval expected prior to the fiscal yearend.
A significant progress our teams are making to transform our funding and capital management entered diverse for client base will accelerate our growth I'm confident that are transformation will support increased long term value for all those who choose CW b or clients are people and our investors with that I'll turn it back over.
Matt Thanks, Chris and that concludes our formal presentation for today I've still got Scott can you. Please open the line for the question and answer period.
Yes. Thank you ladies and gentlemen, we will now begin the question and answer session. As a reminder, should you have a question. Please press the star followed by the one on your Touchtone phone you like you were three.
Acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the pulling process. Please press the star followed by the too and if you're using a speakerphone. Please lift the handset before pressing any keys.
Your first question comes from many Grauman Slimmer Securities. Please go ahead.
Hi, good morning.
Just wanted to follow up killing them would you mentioned about because the timing of loan growth.
The expected increase in net interest income may moderate so just wanted to.
Clarify what you meant by that and what are you assuming in terms of.
In terms of the rate outlook when you when you make that statement.
So in our in our 2019 annual report, we talked about total revenue and high growth high single digits.
We really when a loan growth is slow in the first quarter as it was geared more towards the remaining three quarters of the year that we'll have a revenue impact. So we've just moderated the the comment there on the outlook for net interest income.
On the margin perspective, we've not changed our expectation for one bank of Canada rate coming in here.
And in terms of the outlook for the long for loan growth you expect.
We do expect them to move back to the.
Well, we see that in Q2 or.
Okay.
Yeah, we're positive about what we have in the pipeline. We're positive about the loans that have been approved and waiting for their clients to two requests funding of them.
And in terms of the build in stage two is that just tied to the commercial mortgage exposure.
Something else that's driving that.
It's it's event then drive to stage to the majority of that increase was simply due to.
Client characteristics. So there are a certain number of hard thresholds that if a client passes they move into stage two there was a little bit coming from the.
The macroeconomic forecast and the impact on conditional P.D., but individual client characteristics, where the majority of the factor.
And then and then finally just on taxes.
There was another tax cut in Alberta on January 1st So I'm just wondering in terms of outlook for the tax rate that.
Should we assume that that's there's still more of a benefit coming.
Starting in Q2.
So our all year.
Full year guidance that we had in our annual report would have included the expected Inc. increase of this second January Onest reduction.
Thank you.
Thanks Manny.
Your next question comes from Gabriel Ashamed of National Bank Financial. Please go ahead.
Just want to follow up on that.
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So the criteria that moving to client into stage, two one would be being on our watchlist. Another one would be a hard a hard deadline of 30 days past due.
You in there and potentially other characteristics.
Are we talking about a handful of.
Borrowers are.
Broader group.
You know, it's only about a 1% shift and the total portfolio between lesson stage to this quarter versus what's in stage two last quarter. So.
Yes, it would it yeah, it's a it's across the portfolio.
Watch with not a member.
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Okay.
I would say it's it gave its is nothing crazy was there's definitely a change the.
I think we had a three basis points this quarter, one last quarter in to the prior quarter yet in the Oh. This morning loan allowance you know, it's it's a it's a number that will move around I think the I first nine a process does create more volatility in this number but no it's not from a credit perspective, we.
Clearly follow these very closely.
From the on the information that's in the quarter game, there's the information on the gross impaired both by province, and by type of portfolio in the depth of the IRS nine note, where we actually break the portfolio between low risk medium risk. So watch list you can find the watch list in there and then you also have the characteristic.
Uh huh do but not impaired loan in the notes as well and you can see there that that has remained relatively constant from the prior quarters.
Okay.
And then those impairments one.
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The other one of the separate borrower.
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Impaired provision this quarter.
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So we've taken a you know we leave take a hard look at every single loan that's in the gross impaired category and record. The specifics we think are appropriate against them. So.
So we have taken.
A specific against some commercial mortgage exposures in this year in this quarter.
And then just to wrap up.
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You're talking about timing of loan growth.
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Real estate project loans.
The best Telecom is that payout and and they are and that's that's a positive things. So we looked at loan.
Loan funding. So we also has very strong loan fundings are our Q1 loan fundings was the third highest in the last eight quarters with but offset by loan pay downs in terms of that particular book, we've actually had good originations over the last two quarters, but of course, they fund over time I'm. So we continue.
Due to be actors in that market, where we had strong tier one borrowers and we're comfortable that we will see a.
Resumption of of loan growth there, but again, it's all a timing thing we had quite a volume of loans that we advance through 2016, 17 weeks, which have come to completion and our repaying. So we're it's strong portfolio and an area that we consider.
Hi, fundamental to our credit exposures.
Thank you.
Thanks good.
Your next question comes from Doug Young we teach out then please go ahead.
Good morning, Jeff I'm, a few things just on the stage two migration is there and a lot of questions.
My questions have been answered on that but.
Is there any put together category or is there any particular region, where you're seeing more.
On your business loan.
Just one category, but it can you break it down maybe a little bit more granular.
I'm not really anything that jumps out off the top of my head. If we can go back and have a Logan circle back with you done, but there isn't anything that's.
Top of mind, yes, there's no particular I mean, we clearly from a gross impaired loan perspective. These are a commercial mortgages that has come into that category, but beyond that there's no. We don't see any systemic change and the portfolios. There essentially the normal course of Oh, the floor credit as you know some companies be.
Im challenge and we monitor its in reported appropriately sorry did you say it was more in the commercial mortgage side is that the go gross impaired loans are Oh, sorry, I'm talking just the H one too.
And then just on the the two mortgages that when.
And to through your formations have you can you talk a bit about the coverage ratio on that or have you talked about that.
Those so we had.
In those two.
That is when we talk quite a bit he was in the process in a throughout the second quarter.
One of the loans in there for US we're in default when the issue occurred they of course became impaired given the receivership that.
As ensued in that program, we will follow our way through those loans and manage our exposure is appropriately.
And then the other case again it was a another borrower who ran into two challenges and became impaired.
As we looked at the.
Value of security against loan advances, we feel very comfortable in the level of specifics that we haven't place. The pcls, we put up so we looked very deeply into these loans to ensure that we appropriately.
Provided and we're comfortable with our exposures.
Maybe just asking like you're not expecting any further adjustments on this in future quarters, you think you've done a thorough enough.
Rob on that.
Yes, okay.
Unlike things can change Doug, but in case on all the information we have today, we're very comfortable with the numbers Weve recorded.
And then just on the funding sounds and you're doing looks like you're doing a great job in terms of branch rate the buys that.
Feels like you're benefiting from that from a cost of funding perspective, but that being offset by higher deposit rate cost due to competition. As you mentioned is their promotions in your system that you know some of that.
It is kind of falls away in future quarters or is this something that you expect you got to benefit from actually been raising more the branch rate deposit increased competition kind of take takes a little bit back away from that.
You know the see overall strategic priority to strengthen the franchise to grow brand trust deposits to develop more multipart product client relationships. This is this resulted absolutely on strategy for that so we're very pleased it has never been our practice to offer.
What might be called promotional rates, where they are high for a short period of time, and then drop back down.
But yes, so we have gained a reputation for.
Posting attractive rates and holding them steady over time.
You know, we get lots of questions about our motive savvy savings account and that is one of the accounts it falls into what we call administered rate accounts, where.
There don't move in accordance with prime, but we have the ability to change them.
As the market changes as an asset yield curve moves.
Okay.
And then just two number questions.
I hear that you're still aiming to get positive operating leverage in fiscal 20, and then can you remind us what your outlook is relative to what you just.
For the rest here thanks.
So operating leverage we are still anticipating slightly positive operating leverage and recognizing that they will be volatile from one quarter to the next.
And on the NIM forecast, what we talked about at the a at year end was that we have been in a band of 250 to 60 for quite a period of time, our expectations were for NIM for the year to be somewhere in the middle of that band and we delivered to 54 in the first quarter.
No it's still early on but that sorry, yeah. We've we've.
Moderated the net interest income outlook I touch but.
Still remain comfortable on the NIM site.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the way.
Your next question comes from Nigel Susan with very tight. Please go ahead.
Thank you good morning.
20, so a good morning, I wanted to circle back on a impaired loans you took in the formations this quarter I want to pivot to actually will be a the total number of accounts classified as impaired.
So when I look at that number its 67 this quarter. So that's about little over 10% increase.
Quarter over quarter and you've highlighted.
Two or two commercial mortgage account striving formation. So could you speak to what the lean to the increase in total number of account those smaller files and.
How much of the formation that you took without fuel data to.
The commercial mortgage so you mentioned.
So oh, the overall increase in gross impaired loans.
Probably three quarters to 80% of it was really related to those two connections that we've talked about.
On the number of loans that are impaired the tough my head I believe the majority of that number increase relates to residential mortgages.
On a personal side.
And and the other increase would be just smaller dollar yeah individual smaller on outstanding.
Got it and that's like a squeeze one last question then on the on the outlook for a.
Performing loan losses, if we know with recent market volatility if there's more commodity price pressure could you maybe just speak to out a bit higher level, how does that impact your performing loan losses going forward.
Yeah, so specifically the price of oil if we look at that only as a single metric.
This factor in a couple of our models, but it's not the major factor. So the more significant impact would be the knock on impact that could have on GDP or unemployment. Those are the two most significant mapcare macro factors that impact our models.
Thanks, that's very helpful. Appreciate it.
There are no further questions at this time. Please proceed.
Okay, well, thank you Jessica and thank you everyone on the line for joining us and for your continued interest in a CW b, we look forward to reporting or second quarter financial results on May 28, and with that I wish you all good morning. Thank you.
Ladies and gentlemen, this concludes your conference call for today. Thank you for participating and ask that you. Please disconnect your lines.