Q4 2019 Earnings Call
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I like to have a conference over to your speaker today, Joe Mccreery head of Investor Relations. Please go ahead.
Thank you Jack good morning, everybody and thank you for joining us today.
Well begin the call with remarks from usually the southern President and Chief Executive Officer, followed by a review of our financials by Brad Code as Chief Financial Officer.
After the presentation will have acuity session for analyst and investors.
This on the call to answer your questions or Ed card has ATP and sales and marketing like Bush GDP of underwriting.
Then should catching chief digital and strategy Officer, James Pellet T C SVP of commercial and victory to ratio Chief Information Officer.
Before we begin I'd like to caution listeners that this conference call me provide management with the opportunity to discuss financial performance and conditions at home capital.
As such such comments may contain forward looking statements about strategies and expected financial results.
Various factors could cause actual results to differ materially from results projected in forward looking statements.
Accordingly, the audience is caution against undue reliance on these remarks.
Finally, a link to the slides accompanying thislife webcast is available on our website at home capital Dotcom.
Now turn the call over to use we decided.
Good morning, Thank you for joining us for our Q4 in 2000 2019 conference call.
This morning, we announced our financial results for the fourth quarter and full year 2019.
Earnings per share of 65 cents or 72 cents on an adjusted basis continued to trend of positive year over year earnings growth that we delivered in the first three quarters of the year.
Our full you'll earn out our full year earnings up to 29 reported and $2.49 adjusted fully diluted grow by 38% or by 50% on an adjusted basis over 2018.
Our share price more than doubled during the year, making us the top performing financial company and the TSX comps It index for 2019.
Our success in 2019 was made possible because Canadian soft home as a company that can help them build their financial future whether that men owning a home are creating a saving plan.
[laughter], our broker partners brought mortgage clients to home confident that we would listen to their stories and find a solution to help them become homeowners.
Our open customers brought us their savings confident that we would take the time to find the right financial solution for them.
And our employees, but it's the best of their enthusiasm creativity and determination to build our company for the future.
They are districts of this company and I'd like to recognize the work of the whole team at home this year.
Does the results were reporting today are made possible by their efforts and commitment to our core values.
Throughout the company our people were excited to build on the work we began in 2018.
2019 was a year of innovation at home capital enough progress towards our objectives.
Let me take a minute to review some of our many achievements for the year.
We reported strong growth in originations and our loan portfolio.
Those aren't just numbers, we helped a lot of individuals partners and families become homeowners.
We grew deposits through our own can channel.
This is another way, we're helping Canadians find flexible solutions to meet their goals.
We announced the launch of our home Trust Ignite program, which is the name we gave to our technology transformation project and we celebrated the first deliberate deliverables of this digital journey.
We launched a new mobile responsive loft broker portal to improve our mortgage brokers ability to communicate with us.
Our new CRM is also fully mobile for our sales teams to ensure they have the power of information wherever they are.
We moved to completely paperless underwriting and funding.
We migrated our datacenters to the cloud.
We delivered our first three implementations of robotic process automation.
And we introduced our new deposit origination system at our Toronto OIC in store.
This provides straight through processing of new G. I see purchases, eliminating a number of manual process and it gives our employees better tools to do their jobs.
Our customers received better service and we benefited from improved operating efficiency.
We will be expanding the system to our own other open stores and adding our SP and TFS eight throughout 2020.
On the finance side.
Early in 2019 home capital received upgrades to our credit ratings from both MP and DBRS.
We launched a first cross border placement of residential mortgage backed securities.
We bought back over 4.7 million shares during the year at a price well below book value and we announced a further hundred $50 million substantial issuer bid, which was completed in early January of this year.
In November we heard our we held our first Investor day since 2012.
For anyone who joined US at that event, you learned that the passion for growing the business and the commitment to our sustainable risk culture extends through the all areas of the company.
We will maintain our focus on delivering excellent start customers and partners in the markets. We serve we will continue to make home a trusted partner to Canadians into mortgage industry.
Looking ahead, we expect 2020 will be a year of continued progress and innovation due to some of the following.
Interest rates are expected to remain stable.
Employment data is still supportive of a healthy housing market, particularly in our target geographical areas.
Our ignite program will help us continue to deliver improved product and service options to all our customers.
We are preparing for further cross border placements of RMBS as we continue to support the development of the private RMBS market and diversifying our funding sources.
We are looking at earning an engagement and environmental social and governance or SG activities.
We're proud of the initiatives happening at home and we want to share them with all our stakeholders.
Yes. She is another way, we put our values into action and we plan to enhanced our communication in this area.
On January 17, the TSX approved the renewal of our normal course issuer bid.
We will continue to create value for shareholders through distis strategic deployment of capital.
And finally to address this week's announcement regarding the change on the mortgage stress test.
The Department of Finance has announced a change to benchmark rate used in the B 20 stress test for insured mortgages.
And osby has begun to consultation period as they consider potential changes to distressed debt for uninsured mortgages.
We view this positively as any policy changes that supports the goal of helping Canadians a team attain homeownership.
While continuing to ensure a prudent underwriting standards to protect financial institutions balance sheets benefits the entire mortgage system.
It is too early to gauge the impact will be on our particular segment of the borrowers.
I'll now turn the call over to Brad to discuss the quarter and the year in more detail.
Thanks for your street and good morning, everyone.
My comments will focus on our Q4 results beginning on slide seven.
Net income in Q4 was 37.2 million or 41.2 million on an adjusted basis compared with 35.8 million in Q4 of 2018.
This represents a year over year increase in net income of 4% or 14.9% after adjustments.
On a per share basis, our earnings increased from 46 cents per share to 65 cents or 72 cents adjusted.
Growing by 41.3% and 56.5% respectively.
We also grew our book value per share by 11% to $29.33 per share or $26 were 43 cents per share at the end of 2018, and we reduced our shares outstanding during 2019 by 7.6% through repurchases under our normal course issuer bid.
Slide eight shows the factors that contributed to the increase in earnings per share this quarter compared with Q4 2018.
Growth in net interest income was the largest contributing factor to our EPS growth.
Reduced share count accounted for 17 cents of the increase.
Hi, or non interest expenses reduced earnings by 17 cents, while adjustments associated with home trusts Ignite program increased adjusted earnings by seven cents per share in the quarter.
Summary of the adjustments related to the ignite program. This period is available on slide nine.
Total adjustments this quarter were 3.9 million a net income of seven cents and earnings per share, 4.3% it to the efficiency ratio and 0.9% in annualized return on equity.
I remind you that our financial results will be adjusted for the ignite program for the duration of the project, which we expect to complete by the end of 2021.
Slide 10 shows our classic single family originations for the quarter and the full year.
Originations in the quarter were impacted by some competitive pricing in the market as we've said in the past we intend to compete by offering superior service and disciplined risk based pricing rather than chasing market share.
We believe these competitive conditions were temporary.
For the year, our classic single family originations grew by 11.2% over 2018 levels.
Looking at our accelerator business, we refocused our efforts on this area in the third quarter 2019 that resulted in a return to positive year over year growth and accelerator originations in Q4.
Our total loan portfolio as shown on slide 11 grew by 5.5% during the year.
Slide 12 shows a change in our net interest margin during the last two years, our NIM reached 2.31% in Q4.
Our NIM expansion during the year was the result of higher yields across all asset classes and the benefit of a lower proportion of lower yielding assets in our mix.
Turning to funding on slide 13 deposits are open channel reached 3.4 billion at the end of 2019, an increase of 25.7% from the year end 2018 total.
As of yearend open represents 24.6% of our total deposits importantly over 80% of broken deposits and nearly 95% of total deposits are in the form of term funding.
We continue to place a high value on limiting the liquidity risk associated with demand deposit balances.
We've been pleased with the reception of our RMBS in the marketplace.
The characteristics of the series of notes have performed inline with our expectations.
We plan on being cereal issues of RMBS and helping to further develop the private RMBS market in Canada.
The influence of our sustainable risk culture continues to show in the quality of our loan book on Slide 15.
The Beacon score of our classic single family residential mortgage portfolio was 696 on originations during the quarter and 704 across a total portfolio at year end.
Single family uninsured mortgages originated during the quarter had a weighted average loan to value of 70.9%.
The average loan to value across all uninsured single family mortgages was 61.5% up slightly from 59% last year.
Looking at credit performance during the quarter Slide 16 shows that nonperforming loans as a percentage of gross loans are stable at 44 basis points across a total loan portfolio.
Within the portfolio single family residential mortgages nonperforming loans make up 31 basis points of the total.
As of the ended the year loan loss allowance covered 25.2% of gross nonperforming loans.
Provisions for credit losses during the quarter shown on slide 17 were down slightly to nine basis points of gross loans, while net write offs were four basis points.
Within single family residential mortgages net write offs were one basis point for the quarter and two basis points for the full year.
Slide 18 shows how we're effectively managing our liquidity.
In addition to maintaining a sizable portion our portfolio of liquid assets. We manage our exposure is such that near term deposit maturities are well covered by loan maturities.
Our capital and leverage metrics are on slide 19 at the end of 2019, our Basel III common equity tier one capital levels stands at 17.64%.
Well above the regulatory minimum level of 7% and down from 18.94% on a year over year basis.
Our leverage ratio is 7.07%.
Slide 20 describes returning capital to shareholders.
This has been an effective cornerstone of our value creation strategy.
At the end of 2018, we completed a substantial issuer bid were repurchased 18.2 million shares.
For $300 million or $16.50 per share.
Since that time, we repurchased a further 4.8 million shares and 29 team under NC I'd be for just over $94 million or 1985 per share.
And last month, we closed 150 million S&P repurchasing an additional 4.4 million shares.
Since December 2018, we have utilized over $540 million to repurchase shares repurchases have been a powerful value creation tool for home capital shareholders and we intend to continue on that path.
Aboard regular your regularly reviews, all options for deploying capital and investing in our business as a first priority for capital.
But as long as we're well capitalize and our shares are trading below our view of intrinsic value, we believe share repurchases to be our best method for sustainable value creation.
I will now turn the call back to use free for concluding remarks.
Thank you Brad the results. We reported is the product of strong execution across all our business units everyone at home contributed to our progress by committing to our values of knowing your business and executing with excellence.
I'll now ask the operator to pull for questions.
Certainly as a reminder, please press star one to ask a question pound to withdraw the question and please limit yourself to one question and one follow up re queue for any further questions Nick <unk> with BMO capital markets. Your line is open.
Okay. Thanks, Good morning wanted to start with a question on the net interest margin.
Just the yield on the classic single family residential mortgage portfolio I guess increased about 50 basis points, comparing Q4 nights into Q4 18.
Just wondering you can provide a bit insight on whether thats reflective of a deliberate repricing of that product or is that more of a function of mix going to some of the higher beacon business that you've been picking up.
Nick It's a mix of both I think in my earlier comments. We're we're looking at all of our pricing we do have mortgage by mortgage on a on a risk basis and.
We we had had a goal of increasing what that effective margin would be and certainly with the maturity profile of our mortgages. We are renewing at higher rates and lower rate mortgages are falling off.
Okay, and just one follow up then.
Based on pricing today, and the mix that you're seeing.
Could you could you give us a bit of a rough outlook for where that could get to like what we would we expect to see another 50 basis points this year or the upside little more modest now.
Well I think that would be a very aspirationally call for us, but I think more likely if you look historically the highest NIM the company's achieved in the past few years has been to 37.
So I would sort of overall keep that in wind and and as we spoke earlier in her remarks on that is a competitive market, we've been able to maintain our pricing discipline, a but we do have to react to market conditions, but we're we're comfortable with our current levels of NIM.
Okay. Thank you.
Jeff Kwan with RBC capital markets. Your line is open.
Hi, Good morning, I'm, just wondering you talked about the the Aussie and the department of Finance changes and what you think the impact will be but yeah any early indications on.
What you're seeing for spring housing season.
Jeff its use Rick can you repeat the last part of your question. Yes, just just in light of what what came up from the government like it might push back maybe some some buying activity, but just generally speaking what do you think in terms of the spring housing season, so far.
It's been very healthy supply is still quite low year over year.
Supply this year in GCA is lower than it was last year, so thats screening.
Some price increases.
So the refinance market is also quite healthy because when people can't.
Have difficulty buying a home they just make the decision to stay in their home and renovated and upgraded so that's healthy for the mortgage market and not linked to.
How many homes our for sale other than it fuels them to just do that so.
You mentioned the department of finance changes as I mentioned they are.
They have set how they're going to do it for insured theres, a consultation and how they're going to do it for uninsured.
When you look at the insured and what they've said it is slightly better than what it used to be so should create some opening of the market as well.
Okay and just one.
A follow up question is you had some good growth in the.
Oh can savings accounts I know you talked about what how that is relative to GE I see it with an open but thinking about total demand deposits as appose as far as a percentage of total deposits like where where do you have kind of that comfort level, if you're still able to get a lot of this growth coming through the various deposit channels.
I think.
Jeff Our current view is that we'll maintain our level of demand deposits as of.
In a consistent proportion to our total deposits.
Okay. So to Opex video ads as we grow at the same right.
If I can elaborate so as we grow deposits. We we may grow our demand deposit proportionately, but we're not looking to expand our demand deposit portfolio, we've been able to.
Add another source of liquidity with her RMBS and we plan on doing that and that's taken some pressure off of.
Well all of our other funding channels as we continue to Diversifier sources of liquidity.
Okay. Thank you.
Graham riding with TD Securities. Your line is open.
Maybe I could just.
Following that net interest margin theme you mentioned the past that there was higher deposit costs in Q4 18 given.
Yes to raise some money to fund the substantial issuer bid back then.
Is that still in your.
Your deposit cost overall and is potentially something that.
We will come out in Q1, or Q2, and then potentially be another sort of left to your overall NIM or has that already played out.
But it's a mix of both Graham.
Some of that about two two thirds.
Yes, and so and just during my back in December not only did we'd have the S&P. We also had a deposit don't mature.
And about at the time about two thirds of that funding was greater than a year in terms of maturity, but we do see over the course of the year some of those higher cost deposits have have fallen off.
We talked earlier about competition. So there may be some as that deposit costs drops.
There may be other competitive pressures that would cause us to lower our mortgage rates, we've been successful on maintaining those and we hope to continue but I think there is a balance there, but your thesis that.
Some of those higher cost posits will continue to fall off overtime.
Is generally correct. It's just a matter of what happens on the asset pricing side.
In relation to maintaining them.
Got it sure enough and.
You made.
Mention of.
Intrinsic value and Youll continue to be active on share buybacks relative to that what is your view of intrinsic value on on the shares and as it increased today versus where it was a year ago.
I think that we're looking at it over a longer term and based on our comments, it's higher than today's market price.
That's it for me thank you.
She on Tuncay with Stifel JMP Your line is open.
Hi, Good morning team I'm just wanted to follow up on the commentary about family increased competitive pressures that you are saying and the mortgage market could you talked a little bit about what the dynamics or that you're seeing there is a case of your larger competitors that are perhaps moving more downstream on the on the beacon skill or is it for more from your truck.
Additional competitors just wondering if it could go through the dynamics there.
She on high it's a U Street.
It's a little of it's a little of both there is some people who have.
Played a long time in the LTV and.
Fighting for volume there are.
Newer players were entering and as the experiment with entry.
They will play with rate to try to generate some volume.
So it's a little of both but we feel well positioned.
We would argue is not only about reagents about services understanding to particular marketplace and that we have a very good reputation in that area and it.
Helps us with with volumes.
Thank you treat I'm just a quick follow up question. So same question on the deposit side are you seeing also similar levels of competitive pricing and how does that make you feel about some I know you've spoken before about potentially doing one or two RMBS issues per year now as you establish out of the funding source.
With the competition level on the deposit side, how do you feel about continued use on the RMBS or has that changed at all.
Well I'll I'll start by answering in reverse order.
[laughter], we do plan to be a serial issuers of of RMBS and I think we've consistently said that we think we'll go to market probably twice per year subject to market conditions. So and recently there was just a.
Although I had a different structure there was another private RMBS that just was announced yesterday.
For around 450 million different structure than ours, and a little different.
Mortgage collateral in the pool, but nevertheless, now there is another participant in the market. So we think the more participants the deeper and more liquid that market will become in terms of deposits.
We have been successful and attracting what we want and need.
From and our open channel and that seems to be much more normal competition and you would have hurt us a previously in relation to the deposit boards.
That is just a daily auction I'll use the word auction to describe it where you anyone who is offering the highest rates will generally pick up the most money in.
Depending on our demands for liquidity, we will participate.
Accordingly in and it's us really want to have setting that daily rate and art Treasury Department does a great job and making sure that we're getting the liquidity we need from that source.
Thank you.
Again, if you'd like to ask your question. Please press star one Jamie going with National Bank Financial Your line is open.
Yes, thanks, good morning.
Good morning game Alright, Yeah first question just related to the.
Revisions in the quarter could you just to elaborate on what was driving the provision and other retail loans.
Well I think we.
We look at that portfolio and and we take our modeling and we think that there are some additional.
Risks, there and we've moved to higher stage three balances of would drive those provisions.
And even in particular that was driving that higher view of higher risk.
Yeah, I think you make you recall.
Back in Q2, we had changed some of our methodology in relation to looking through our counterparties to the actual underlying customer of that counterparty and that resulted in a pretty big.
Adjustment.
In that quarter and since then is the relative quarterly increases have been more.
More modest.
Okay. Thanks excuse me second question is just around the.
Again, just want to dive into the the yields earned on the on the classics mortgage mortgage portfolio.
Continuing to increase this quarter, you talked about more competitive pressures coming in.
Yeah, I'm, just trying to square that commentary with an increase in the average yields in that portfolio.
Is it.
What's driving that let's say 10 basis points quarter over quarter increases that primarily driven by repricing of renewal mortgages.
Or.
New originations coming in significantly higher than the previous portfolio.
Yeah.
Jamie.
Yes.
I'll try and I'll start and maybe Brad will add will add some comments.
What what drives NIM of course is.
What we can price on the business and part of pricing on the business is looking at the risk and the different beacon levels and location, we have a matrix.
That changes depending on.
Your LTV, depending on where you live depending on your beacon et cetera. So.
Sometimes we'll get the kind of business that gives us a higher NIM just because it fits in that bucket of our risk pricing mechanism.
The same time we.
I have chosen over a year ago to focus on a set number of of brokers and give them exceptional service, we want to be there their go to financial institution. So we have a regular relationship constant communication on what we're doing and and understand your clients and vendor and that's been a big part of driving.
Volume so.
Those two things as you say on renewals, we obviously when we knew we have like every other financial institution, we have the balance between.
Renewing and getting as many renewals as possible pricing it to renew as many renewals as as possible.
There are costs that we don't incur upon renewal under other cost that we do incur on renewal so thats all factored in.
For the last few months has been helping with the NIM as we're renewing the pipeline as you suggested I don't know from an add anything but no I think you've covered a history.
Okay. Thank you.
Thanks, Jim.
Graham writing with TD Securities. Your line is open.
Just looking at loan growth.
Into 2020 any sort of ER.
Expectation or target you did.
5% this year for your on balance sheet and your slot for loans under admin overall, maybe just some color on your outlook.
You know, we think we were not really economists.
We think it's a 2000 19.2, it's going to be a good steady year of demand in the geographic areas that we have the markets that we lend to which are new Canadians business for self Bruce credit seem to be all growing and seem to want to move into our geographic area. So we see it is continuing to steadily.
Hi.
Okay. Thank you.
Jamie line with National Bank Financial your line is open.
[noise], yes, thanks, just a one follow up on the on the credit card and.
Equity line visa growth in the quarter I, just want to get your commentary around how you see that product.
Driving growth of the of the overall mortgage portfolio and any commentary around potential impacts on the on new York's as Oscar you identify see walk as being a one source of vulnerability in that in the Canadian market.
Jim Sorry, you faded off.
It.
Make our phone a little bit lottery faded off a little bit of all starting up I don't fully answered your question.
Let me know.
Our we have.
Very good product and our home equity line visa.
It is.
A product that is in demand and we're going to marketed.
A little more aggressively this year, because we think it's a good products. Good profit very good for declined because they can move in and out a lot easier and have a lot of flexibility.
So.
What was the last part of your question something about the regulation I didnt hear that tailed off Jim.
Yes, sorry, just wanted to get some some of your views and commentary around he walks.
And let's say auto read danceable mortgages and.
The potential impacts that any changes there are two restrict volume growth in those types of products could have on on your business. So how important do you view equity line visas and he walks as a driver of overall mortgage growth.
Hi, It's Mike foresee I think when you look at the equity line visa product.
Matt.
Limits that we offer.
The the equity positions on steel I don't see any regulatory changes really impacting the demand for that.
Jamie there.
Nick <unk> with BMO capital markets. Your line is open.
Thanks, just one follow up question for Brad just on the increase in non interest expenses I think one of the factors you attributed that to and the Mdna was an increase in the stock price and the impact it had on stock based comp just wondering if you could quantify what that piece amounted to.
A roughly $5 million.
Okay. Thank you.
Jeff Kwan with RBC capital markets. Your line is open.
So just wondering if there's any updated thoughts in terms of.
If and when you might reinstate the quarterly dividend.
Hi.
Jeff The board reviews that every quarter and I think our comments are that were in our that we're focused on.
Yes, we we think we can create value for the long term for shareholders and that view right. Now is that we should be focused on repurchasing shares and that gets evaluated every quarter.
Okay. Thank you.
There are no further questions at this time I would now like to turn it back over to our presenters for final remarks.
Thank you all for your questions are and for your interest in home capital Group, We look forward to speaking with you again soon.
This concludes today's conference call. We thank you for your participation you may now disconnect.
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