Q3 2020 Canadian Western Bank Earnings Call
[music].
Good morning, My name's colon and I'll be your conference operator today at this time I would like to welcome everyone to CW Bees financial group's Q3 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a quick.
In an answer session if you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then the number two thank you Mr., Matt right you may begin your conference.
On and good morning, everyone and welcome to our third quarter 2020 financial results Conference call. My name is not riding on the senior Vice President, leading our finance and Investor Relations team.
I'd like to remind listeners and webcast participants that statements about future events made on this call our 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 CW bees business.
Please refer to our forward looking statement advisory on slide number 17.
The agenda for today's call is on the second slide presenting to you today or Chris Fowler, our President and Chief Executive Officer will provide an update on the proactive approach we have taken to assist our clients. During these challenging times and to continue to execute on our transformational strategy.
And Graham our executive Vice President and Chief Financial Officer will follow up with further detail on our third quarter financial results well then open the lines for the question answer session before Chris returns to provide his closing remarks, I'll now turn the call over to Chris.
Thank you Beth and good morning.
We delivered solid results this quarter.
Her teams continue to work diligently to support our clients prudently and proactively manage any impact koby attaching pandemic.
Ladies economy financial markets.
We also continue to execute against our strategic priorities on all fronts as we prepare for the opportunities tomorrow.
On June 1st we closed our strategic acquisition of GE, well the on Fracing associates, leading wealth management providers.
The transaction is fully aligned with our strategic direction.
I will enhance our ability to provide full suite of wealth management services.
Ended geographic footprint supporting our continued growth strong client relationships across the country.
With a significant portion of our new client base and Ontario. These businesses will help us accelerate full service client growth.
Just open our full service branch in Ontario on August four Oh, the Mississauga branch. In addition to other branches. We relocated this quarter feature a new client inspired design with open adaptable and collaborative spaces that are tailored to you unique needs.
Of our target business owner clients.
This quarter, we delivered a milestone on or digital roadmap, which will support our strategy for continued growth. The branch raise deposits. The launch of a fully digital onboarding promote a financial allows clients to open an account virtually and transact immediately.
This will be followed by digital Onboarding for the remainder of her personal banking clients in the fourth quarter of this year and expand tour business clients next year.
We have not slowed on any timelines or progress on our digital transformation wrote down.
We believe that the targeted capabilities, our digital program delivers augment full service client growth across our expanding national footprint.
Each of these achievements are key steps on CW. These journey to be a disruptive force in Canadian financial services and deliver breakout growth in the years to come.
Turning to slide four we were reminded by events across North America. This summer that highlight the challenge as people continue to face in our communities due to systemic racism.
Let's see WP as part of our core values, we put people first and believe that inclusion has power. So this quarter, we enacted expanded measures and support in the fight against systemic racism, we acknowledge your gaps in our own commitments and we will tackle it with intention.
As public health measures to contain the spread of covert 19 began to relax. This quarter, we continue to provide safe and healthy environment for our clients and her team members.
Our dedicated teams remain in frequent communication with our clients to support them to the reopening a provigil economies and we've seen significant reductions in payment deferral arrangements.
As of this week, 64% of the deferrals. We previously granted have returned to full scheduled payments.
Under 10% of loan balances currently remain under some form of payment deferral with over half of those making interest only payments.
New deferral requests has slowed to a nominal amount and we expect continued success in working with our clients to help them resumed normal payments.
We have fully tree, our star loan book to find the right solutions for our clients and assess evolving risk profiles with a focus on portfolios, particularly affected by the current economic challenges.
Exposures, we continue to pay close attention to include the hotel in restaurant sectors that represents just under 5% of our total loans the office and retail real estate real estate sector at approximately 4% and the oil and gas production and oilfield service sectors that represent under 1% and 2% respectively.
We have insignificant exposure to air travel.
Our exposures within these industries remain stable are well diversified and supported by high quality resilient borrowers that we have handpicked.
We deeply understand their business and the individual exposures. Nevertheless, we continue to carefully monitor them and the entire loan portfolio for signs of weakness and will follow our normal practice to work closely with borrowers experiencing financial hardship.
As you can see on slide five our disciplined strategic execution has built a strong and stable Foundation STWB.
We expect our continued focus to transform our business and adjust digital capabilities supported by our talented teams will enhance our differentiated full service client experience and position us for accelerated growth as the economy stabilizes, thanks to our teams passion and dedication to support.
Our clients and advance our strategic initiatives, we will be ready for the future. Despite today's volatile operating environment. We continue to expect approval to transition to the advance internal ratings based approach for regulatory capital and risk management before this fiscal year end.
Utilization of the eight I or be approach is expected to result in improved capital ratios that better reflect the strength of our underwriting and balance sheet.
The transition to a or B will also help us compete on a more level playing field against the large Canadian banks and position us to deliver higher growth and profitability within enhance view of risk.
Achievement of a or B is a foundational capability for us and will enable us to realize our full potential across Canada.
I will now turn the call over to Cherilyn who'll provide more detail on our third quarter financial performance.
Thank you, Chris and good morning, everyone.
As Chris mentioned on June 1st we closed the acquisition of the businesses of GE wealth and Leon Fraser and associates, our financial results. This quarter included two months of operations from these businesses.
Which contributed 6 million to wealth management noninterest income and 8 million to non interest expenses, which included 2 million of onetime integration and acquisition costs as well as the amortization of acquisition related intangible assets.
We continue to expect the acquisition to support adjusted EPS share earnings per common share modestly at first which further accretion beginning in fiscal 2022.
The acquisition also increases our contribution of noninterest income to total revenue.
Proximately, 12% for fiscal 2021, with a negative impact on operating leverage into fiscal 2020 and 2021.
As you see on slide six the impact of market disruption related to the Coleman 19 global pandemic on the Canadian economy as put significant downward pressure on our financial results compared to the prior year.
Our third quarter common shareholders net income and earnings per share were lower compared to last year, reflecting an elevated estimated performing loan provision for credit losses due to an adverse shift in forward looking economic conditions combined with a reduction in net interest margin, reflecting the lower interest rate environment.
Our pretax pre provision income was up 3% compared to the same quarter last year at 4% revenue growth, partially offset by a 5% increase in adjusted noninterest expenses.
We delivered an increase in net interest income as the benefit of 5% loan growth was largely offset by a 20 basis point decline in net interest margin.
Noninterest income was up 37%.
Merely due to wealth management fees contributed by the acquisition along with higher net gains on securities. The increase in noninterest expenses related entirely to the wealth acquisition.
Our continued investment in our teams and technology to support overall business growth was fully offset by reduced spending in certain expenses in light of the current operating environment.
Excluding the impact of the acquisition our efficiency ratio was 45.7% this quarter compared to 46.5% last year and our operating leverage was positive 1.7% compared to negative 1.1% last year. We achieved this performance despite the headwinds on revenue while we maintain.
Targeted spending to support our key strategic priorities, including our transition to AI, RB and our digital transformation.
Slide seven calculates are encouraging sequential fine up financial performance net earnings rebounded strongly from the preceding quarter, primarily due to a lower estimated performing loan provision for credit losses and higher net interest income.
Compared to the prior quarter common shareholders net income and deluded EPS increased 21, and 20% respectively.
Adjusted common shareholders net income increased 24%, while adjusted EPS was up 23%.
Our total revenue increased 6% compared to last quarter.
Merely due to 5% higher net interest income as well as 10% higher noninterest income that reflected increased wealth management fees from the acquisition, partially offset by lower net gains on securities.
Our net interest income increased sequentially as a result of 2% loan growth two additional interest earning days at a stable net interest margin that I will discuss in a moment.
Noninterest expenses were 7% higher entirely due to the impact of the acquisition.
Excuse me.
On a year to date based on slide eight pretax pre provision income was up 2%, while our common shareholders net income and diluted earnings per common share were down seven and 6% respectively.
Just a common shareholders net income and adjusted cash EPS were down nine and 8% respectively. The year to date decline in common shareholders. Net income was driven by the same factors I discussed for the quarter year over year comparison.
Turning to slide nine our third quarter net interest margin of 2.40% reflects a full quarter impact of the consecutive bank of Canada policy interest rate cuts in March 3rd quarter net interest margin declined 20 basis points from one year ago and was unchanged from last quarter.
Yes.
During the third quarter, the negative impact of the interest rate cuts was fully offset by lower funding costs.
Through proactive measures to adjust the pricing of certain deposit product balances maintenance prudent levels and liquidity.
[laughter].
Term deposit rates also trended down in the third quarter, reducing the funding cost of both branch and brokers starts deposits.
We expect our fourth quarter net interest margin will be roughly consistent with the current quarter.
That said our net interest margin is affected by many factors.
Including further banks, Canada policy rate changes competitive deposit pricing factors.
Changes to the cost competitiveness or accessibility of funding channel liquidity levels low growth.
Adjustment to loan pricing and the ability of our clients to recommence contractual payments following the completion of payment deferral period.
Yes.
Thanks.
Sorry about that.
Slide 10 demonstrates our continued stuff.
In executing on key strategic objectives to grow and diversify funding sources.
This quarter marks our sixth consecutive quarter with a strong sequential increase in branch race deposit.
Compared to last year demand to notice deposits increased 34%.
And now account for 30%, 37% of our total funding.
Compared to 29% last year.
We drove total branch raise deposit growth of 22%, which resulted in a 14% reduction in the balance of broker deposits.
Broker deposits now represent 26% of total funding down from 32% last year.
The reduction in our reliance on the deposit broker network reflects our ongoing efforts to diversify funding sources and drive more brand trust deposits as we generate additional full service client relationships.
I do want to emphasize it the broker deposit market remains a reliable and effective source of fixed term retail deposit raised over a wide geographic base and has again proven to be a deep and liquid funding source.
While the market disruption related to covert 19, initially impacted the cost effectiveness as a broker deposit channel pricing began to normalize in the third quarter in response to policy interest rate cuts and the implementation of facilities put in place by the bank in Canada to support the liquidity for financial system.
You'll see on slide 11 that our total loans were up 5% over the past year supported by 12% growth from our strategically targeted general commercial portfolio with 10% growth in Ontario.
It's very strong general commercial loan growth reflects ongoing efforts to increase both service relationships across our national footprint, while growth in Ontario reflects contributions from our businesses with a national footprint, including CWD maximum CWD franchise finance STWB nationally.
On a sequential basis, 2% loan growth in the third quarter was consistent with the previous quarter.
New funding this quarter, primarily consisted of loans that were in our pipeline prior to this period of disruption, which remained within our risk appetite and prudent underwriting guidelines.
Credit utilization trended down during the quarter, partially offsetting new loan growth.
Ontario accounted for approximately 40% of total growth increasing 3% from last quarter, primarily driven by general commercial and real estate project loans.
Looking forward based on current conditions, we continue to expect mid single digit loan growth for fiscal 2020.
Turning to slide 12, the credit quality of our portfolio and our provisioning for both impaired and performing loans under I first nine continues to reflect our secured lending business model disciplined underwriting practices and proactive management all hallmarks of our historic success.
Third quarter provision for credit losses for performing loans calculated using our past performance as well as a forward looking view of macroeconomic factors totaled 11 basis points.
That compares to 27 basis points last quarter, and a three basis point recovery a year ago.
At July 31st our allowance for credit losses on performing loans totaled 119 million, an increase of 8 million or 7% compared to the previous quarter.
Third quarter provision for credit losses on performing loans reflects a shift in our macroeconomic forecast compared to April thirtyth predominantly from a slightly longer recovery in the Canadian unemployment rate.
We continue to calibrate the macroeconomic variable used in our first nine models to the average of the economic forecast at the large Canadian banks.
The impact of Coven 19 on the economy and the timing of recovery continue to evolve are performing loan allowance for credit losses is estimated considering expectations for future economic factors portfolio defaults or increases in the risk ratings are performing loans.
Ongoing shift in these factors will impact the allowance balance in future quarters.
The provision for credit losses on impaired loans at 22 basis points as a percentage of average loans remained stable with both the prior quarter and prior year.
The next slide shows our current and historical trends of gross impaired loans and write off.
Gross impaired loans this quarter totaled 283 million or 95 basis points as a percentage of gross loans and remained relatively stable compared to 271 million and 93 basis points last quarter. The net increase in impaired loans from last quarter was driven primarily by the downgrade of one well secured equipment financing bar.
Grower, partially offset by resolutions in other portfolios.
As you can see our realized write offs were low this quarter and we have remained low through our history, even through periods of elevated levels of gross impaired loans with the exception of a unique situation in 2016.
We were prevented by fermenter regulators from realizing our security rights in our oil and gas portfolio.
While the current economic challenges are unprecedented our solid credit performance in the past in both healthy and challenged economic times reflects our prudent underwriting unsecured credit model.
While there remains considerable are considerable uncertainty and what lies ahead. We are confident our secured and high quality credit portfolio provides a solid foundation as we continue to navigate this period of economic volatility.
Our strong capital ratios at July 31st appear on slide 14, with the change from last quarter, primarily reflecting the 30 basis point investment for the wealth acquisition.
Calculated using the standardized approach our common equity tier one ratio was 8.8% tier one ratio was 10.2 and our total capital ratio was 12.0% at 8.1% our Basel three leverage ratio remains very strong.
As Chris mentioned, we continue to expect regulatory approval of our formal AI or be application within fiscal 2020.
We expect this transition to boost our capital ratios as risk weighted assets will be calculated using more risks sensitive models.
Yesterday, our board declared a common share dividend of 29 cents per share consistent with the prior quarter end up one cents or 4% from the common share dividend declared one year ago.
Given the uncertainty of the economic outlook, we continue to perform multiple stress test using our AI RB and I have first nine tools to stimulate the if the impact of a more severe and prolonged period of challenging economic conditions throughout our geographic footprint.
Considering the results of the stress test and the uncertain economic outlook, we remain confident in our ability to deliver positive earnings for shareholders. While we maintain financial stability, our current dividend strong capital ratios and very low leverage with that Collyn, let's open the lines for the Q any.
Thank you think.
Ladies and gentlemen, we will now become the question and answer session.
Should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear a three total comp acknowledging your request and your questions will be pulled in the order they are received.
We wish to decline from the pulling process. Please press star followed by two if you're using a speakerphone. Please flip the handset before pressing any keys one moment for your first question.
Okay. So your first question comes from many Gruman of Scotiabank. Many please go ahead.
Hi, good morning.
A question about margins first.
I know that.
In the Q2 calls you talked about how.
NIM was down about 10 basis points from the Q2 average so presumably since then.
Duration has gotten a lot better so I'm just wondering.
Whether the.
Margin results for Q3 surprised you in sort of what's happening going from April decline.
Up to being flat for for Q2 as a whole.
Yes, primarily the on the asset yield perspective, we continue to see what we had expected when we last spoke.
A quarter ago, so asset yields declined reflecting the full impact for the quarter of the at the bank of Canada rate drops, but we saw more positive movement on the on the deposit in funding side than what we had conservatively anticipated a quarter ago. So in particular, we saw movements in what we call.
Our administered rates to the competitive landscape began to tick down and we.
We proactively adjusted our rates as the market dead and then in the brokers space, we started to see.
The rates respond to the bank of Canada reduction quite significantly over the course of the quarter.
So where we were conservative at the end of last quarter and commented that would there there were a number of factors at play that would impact what NIM was end.
They went in our favor this quarter and looking forward. We continue we where we are comfortable that.
Q4 should be around the same 2.40 as Q3.
Thanks for that and then if I could just ask about.
Write downs and how you foresee that's evolving over time and when you.
Reasonably expect to see a peak in that.
Okay.
If we just I'll start and then maybe Chris can chip in Japan, if we just look at.
It has happened in the past coming out of the global financial crisis, we saw gross impaired loans peak about a year after the economy turned.
And so write offs would be about that same period.
Yes, so so many.
I think we're probably just as we come through the summer we've had a big reduction in our payment deferrals people coming back online I think we come into the fall and there is a level of uncertainty of what the fall will bring wind.
Expected reduction of government support programs.
We're very much following our clients very closely to determine what those impacts may be so where we'll continue to follow and be very close to our clients to understand impact.
I think it's a fluid situation, we're very comfortable where we sit today, how we've established star.
Our.
Our performing loan allowance were very.
Very confident where we sit with our specifics.
And we'll continue evaluated.
And just on the subject of deferrals do you have any appetites are you considering extending deferrals at all is that in the realm of talks about as you see it.
Well, we're trialing our loan portfolio client by client.
We've we went into this process being very proactive and did that review of our clients to see the impact of quoted on their business and we peaked at about 12, just over 25% and we're down to below 10, as we look at clients coming out a deferral. We are looking at each of them individually. Some we've given.
Say, one month extension on a deferral we.
We just haven't jump straight to six months on clients. So it is a very client specific individual decision we've done.
Yeah.
Based on the environment. This client operates within security coverage, we have is and just to make sure really be confident in our credit quality.
Thanks.
Thank you.
Your next question comes from Sohrab Movahedi.
Please go ahead.
Hey, Thank you maybe just a quick follow up thanks, Alan you.
You mentioned that.
Some of your expectations around the funding.
Last quarter.
To be.
Maybe too conservative relative to the administered rates and.
The brokers space do you think you also being that's conservative in the guidance, you're giving on Q4.
Oh.
Hi, Doug.
I think we remain we're comfortable with.
As we look ahead as we look at the maturities in the broker market.
We're comfortable with that with where we are.
Again, there continues to be.
Uncertainty perhaps.
Marginally less than the funding space with where things have moved in the last 90 days, but again.
As Chris mentioned, the fall period, what happens as.
As schools reopen across the country will.
Sort of show what occurs in the economy, So I'm I'm comfortable that were.
We are aware.
Comfortable and confident with that with everything that we see today.
Okay fair enough and.
And just still sticking with that I mean, I think you mentioned that said the new branch Mississauga, just kind of came online maybe a couple of weeks ago. If you.
If you could go to your slide 10, where you said what's happened to mix.
Funding for example last year versus this year.
You are going to fast forward by year is it's fair to.
Notwithstanding the fact that the broker term deposits for example.
It's still a very good source of funding diversification I mean is it conceivable that we could see another 500 basis points relative kind of reduction in the composition of brokered deposits in that in the overall funding default.
Okay.
I think that would be a Greg outcome I wouldn't bank on it.
You know what we've seen.
What we're watching for in Q4 is.
The piece that we're watching for in Q4 is that.
Property taxes, and corporate and personal income tax payments that usually occur earlier in the year have been deferred to August 31st in early September So we're watching deposit balances carefully too.
To see what occurs there.
12 months loan growth about a third of our branch raise deposit growth over the last 12 months has come in the trust services.
Notice deposits again.
That.
Our does that increase came from a movement from equities into cash so if the equity markets.
Normalize and investors are cautioned comfortable stepping back into the equity markets that may trend down a little over time, but we've not seen anything material happening yet.
Okay, I figured I'd just add that.
That.
Our intention on.
Our branches deposits really is how we are interacting with our clients and we just delivered our first product digitally with our motive.
Client Onboarding and we are converting all the personal accounts to digital onboarding.
In this calendar year, and then next year the commercial clients will be digitally onboard is so we have.
A lot more boats aren't going to shoot Tim when more deposits and our focus is that expanded and more diversified funding base and we're just seeing great.
Great.
Performance there.
Perfect and just.
Maybe a couple of quickies on that on the credit I mean, you.
You show I think on your slide 12.
On total.
Provisions.
Q2 may have been made maybe maybe the peak is still around right.
And you show that in 2016.
I guess, which would have been the last time.
The spike.
It was around 38 basis points. So can you just haven't had chance to dig it up here do you remember what proportion of 2016 loan book.
Was in Alberta versus where you are at today.
Good question. So on your Slide 11, you say that yes. We go back 10 years Daliberti. So yes, I just want to him I'm curious.
Just wondering.
[music].
I think we were in the 36% rang the higher Thirtys, yes, yes, yes, okay. So so the competition is it's fair to say, Chris that probably within the footprint not that this is anything new but Alberta is probably the one with the with the most precarious gonna economic outlook.
Well I think the challenge in Alberta, clearly is the oil and gas story and that is a big contributor to economic growth here and it is clearly it's slow and.
That we still have many clients that are operating very profitably within that business, but growth is really the issue that.
Isn't happening in that industry. So.
In terms of.
Looking at what the future would be and Thats, where we have seen the.
Sort of relative reduction of Alberta in our loan portfolio and and the increase in Ontario, NBC as percentages. So.
We are still very focused on or Alberta clients. We have many very strong wins here, we will continue support them.
But we have seen growth being stronger in other provinces.
That's really helpful. I guess I just wanted to kind of.
I think what the numbers are dialing that you are better reserves today, even with net.
Thank you all are up the loan book coming from that's probably the sensitive.
Robin anyway, right now right versus 27, okay. Thank you very much great. Thank you. Thanks.
Your next question comes from Paul Holden from CNBC, Paul. Please go ahead.
Hi.
Yeah.
For your first question related to those.
Hi.
Hey, Matt <unk>.
Process, we've gone through.
If you're willing to share more color.
On the tree.
What are the categories, those deferred into and kind of what percentage of the Franco.
Yes.
Okay.
Well, it's Paul.
[music].
It's really we have account managers that lead those relationships we have.
Certainly asked them to be very on top of each individual client.
And so we've got our commercial and then our our retail they've done direct call outs. So we make sure on the commercial side, we're understanding there.
Financial reporting there.
How thats looking from a revenue perspective for them. So the deferrals are really tied to that on the on there on the retail side. We also have a team that is making dropped calls to our our residential mortgage borrowers seeing where they said understanding what their situations are.
So it's really a client by client approach that we've taken and.
As as reported our reduction in deferrals is is meaningful and and as we kind of look forward, there's still more reductions to come it's working where we're positive as the economy has started to reopen that there is.
The results of the deferral, I think where it's very timely for our clients in the.
Economic shutdown that occurred and as we're reopening we're seeing.
Our ability to come back to full payment and so again there is uncertainty in the future as we look into the fall, but we are maintaining a very close relationship with our clients.
Oh, I'll ask a different way maybe in particular to the business loans that are still on.
But.
What proportion of those.
Impacted by ongoing shutdown.
What percentage would be.
Revenue.
Earnings.
Shutdown.
Well, so if we look at our our our accounts that are in the.
In the deferral category, we also have over half of than they are paying interest so as much as the.
So.
As much as we have.
Deferral still in place.
We have gone back to those clients and they are maintaining interest payments current which is certainly very positive just not making principal payments and and that as we tied to revenue so weve identified.
Areas that would be more cove, it impacted and we said hotel in restaurants sector, We said the office and retail real estate sector and.
Separately, the oil and gas both production and service.
On the production side, we have no deferrals in place.
But as we look at each of those we are working with them and clients that are able to answer SAR and we are working very closely to ensure that.
We've got a line of sight into there.
Into their abilities to continue to to move forward with their with there.
With their companies and you still have none of our accounts that have come off deferral have gone directly.
You too.
Watching impaired at this point and our arrears in that category is under is in the range of 1%.
It's it's in that as you can imagine it's an area of of very focused.
Activity in the bank to be on top of our clients.
All right.
Okay.
Good question.
With.
Origination.
Line.
Okay.
You mentioned that.
This quarter was.
Results for related to prior period.
Our.
Thanks, Brian.
So I'm wondering what the origination pipeline.
Today.
Based on your guidance for growth.
I would get them pressure probably suggests somewhere around.
1% sequential growth.
But.
Let me know Thats wrong, if that's right.
Right.
Okay.
Yes, no I think your perspective is correct it's.
It's a challenging time to be marketing clients.
In our focus has been to ensure that declines we have today are.
We're meeting their needs in understanding their finance positions and and our goal of course is with our productivity is to create options for companies that are feeling that well served by their bank. So we're definitely.
Making sure that we're open for business, but the rate business.
Very prudently underwritten.
Thanks.
Thank you. Thank you Paul Paul.
Your next question comes from Steve Theriault from a capital. The please go ahead.
Thanks very much.
Hi, good morning, everyone to if I could start running I just wanted to follow.
I wanted to start just following up on something you said Carolyn to source in terms of the delay in property and corporate let's kind of interesting you normally see a seasonality there earlier in the year I know you've kind of alluding to that seasonality.
Could get pushed out into Q4, and maybe we'll see some.
A little bit of headwind on deposits as both kept pace.
Well property taxes in Western Canada at least I, usually do at the end of June.
So we do see some you know that that has been pushed out this year.
And then personal income taxes end of April usually now it's early September corporate tax for December year ends or do returns and final payments are due six months out there. So the end of June so we sometimes see at the end of June where there is a shift in deposit balances and we factor that into our liquidity planning.
And we're just not quite sure what the impact will be we're not quite sure how many.
How many depositors have deferred their payments the Atlas optional payment deferral. So we're just remaining.
With strong liquidity so that we.
Our prepared for what might come but at this point where.
Yes, but it's again this part of that.
Conservatively watching in thinking about the current environment and what that might mean for operations as things continue to evolve.
Okay. That's helpful. Thanks, and then.
Did I hear you say that the Walt acquisition would negatively impact operating leverage if I heard that right is that like a short term thing is that it is a statement on mix or is it more just be integration charges on a reported basis, maybe unasur there I'm not sure. So.
Well has a different efficiency ratio structure than the core banking so.
Overall, it will have a small impact.
Right now sort of this quarter, particularly for quarterly operating leverage we'll see that for the next four quarters until we do a full rap.
And until we have the business in the previous quarter and in the future quarters. So we will that's why we say for fiscal 2020 and 2021, we expect to be reporting the differential with and without wealth in the operating leverage.
That makes sense.
Or just the timing and it'll it'll roll off in due course.
Okay, Yes, and then the last one I had was you've got the branch in Ontario, freshly opened maybe it's a good opportunity to talk a little bit about how you're going to leverage that overtime and I guess kind of related you're close to that or be approval sure sounds like are you are you starting to.
Compete for more of that business that would typically be limited to some of your larger competitors or does that need to wait you got the models up and running but does that need to wait for actual approval.
That I guess part of the the whole the rationale in the strategy around the branch in Ontario.
Well, so areas for whole balance sheet, the Ontario strategy as our diversification into that.
Obviously very robust market, we're really happy to open it weve engaged a great team and Mississauga with some really strong people we've got the.
That on the ground branch is is the meaningful opportunity for US is is that full client.
Full service client opportunity and and that's where we see that just moving our franchise into Ontario.
And it really will complement the existing businesses. We have there because we can now also look to provide full banking services to to the customers and clients of.
Of Maxine and National leasing a franchise finance, so we see lots of wins for the Ontario branch and and and the future. We really see the ability to grow as strong as a or B I mean that will help us compete of course on at a more level playing field with the big banks in the denominator in our returns.
Capital will be lower which will then allow us to look at lower risk rated clients and price them very effectively so we see tremendous opportunities that air be provides us from a balance sheet perspective from an underwriting perspective from a pricing perspective from a risk manager perspective every part of our business is touched by it.
And it's an opportunity for us too.
Just run or bank differently and.
We're looking forward to the opportunities to do that.
And looking at those lower R.W.A. clients. That's that's something that gets kickstarted sort of in 2021 after the formal approval, yes, yes, yes.
Okay.
Thats good for me thank you.
Thanks, so much Steve.
Your next question comes from Darko Mihelic of RBC Darko. Please go ahead.
Hi, Darko you're on the line.
Hi, good morning.
Hi, good morning, good morning.
It is all developed now we put our mute that's one of them you apologize.
So just a few questions here.
First I wanted to just get a sense from you.
So thinking about the deferral programs, but even not the deferral Craig you just outside of the deferral programs you can give us a sense of of how many of your.
Borrowers are participating in government programs.
And.
Is there an element there of concern when those programs and can you just rough idea.
That might be helpful.
Well weve.
I know that we've we as we look at the.
The big cap program.
This credit availability program that we chose to participate only in the DC portion and that the BDC one required administration that with.
We didnt have embedded in our core banking system. So we are participating the FTC, we've got about $27 million approved there. So that I think is helpful for those clients from a liquidity perspective.
And we are actively looking to see where that can help clients as we look at.
Different.
Clients and there.
Current financial position and where they what the what they're facing.
I don't have the data on clients it would say using weighed subsidy or anything like that but I.
I would expect that like.
Most companies out there the owners and managers have looked at what is available for them.
In these different.
Our programs that the government has put out there.
So, but I, but dark I don't have the specific data on who's using exactly what I just know what we've provided into the client base.
And just to be just to be clear Christmas. It's nothing because you don't know, which as you don't have the data or is it but you. Obviously don't know how many of your borrowers are participating in the weight subsidy program, where are our branches, we know that yes.
Part of the travelers pressed for sure Thats part of the trios process I don't have that data personally and.
It's.
I would say that the government programs to be very helpful.
And the amount of uncertainty in our economy and I can tell you that we were on this from day. One we had a program called TWB has your back we reached out to all our clients. We make sure. They were fully aware of all the government programs I just don't have that in front of me right now, but I would say that.
Our clients as all the banks clients would have.
Appropriately taken advantage of.
The measures that are available.
Okay. Okay.
And just to dig a little deeper it so I think I've heard you say.
That 1% of those that came off deferral is that right, 1% or sort of like a little bit behind them payments, which is a big number but.
Is that the way.
Thats in the range yes.
We have a non of none of the accounts coming off.
Deferral have gone into watch or impaired.
Okay.
But I get our many of them they too.
So.
The clients still on deferral as we talked about last quarter, we have allowed to move into stage. Two if that was where the conditional probability of default and the models moved them so about 22% of the loans.
The one deferral are in stage two.
Our total stage two at the ended the third quarter, 85% of them are in stage, two again because of the models rather than because of client past due behavior.
So I don't have an handy I think it's immaterial the ones that have come off deferral.
Yes, they're not they're not as significant contributing factor there.
Okay.
So.
So the ones that have come up deferral are they are representative sample of what's left or or is it possible.
The remaining 2.9 have characteristics or or or possibly could show.
Hi, or delinquency when they come up deferral in Q4.
I would think Darko, it's mostly timing focused we have a significant number coming up.
At the beginning September as well that would be coming off deferral.
It's as we went into the process of setting up deferrals again, we have that program. The drip call out program I mentioned and.
Spoke individually to clients tree authorized their credit situation and put in place.
And we started with a 90 day.
Deferral program, and primarily they've theyre coming off these and the.
I think it's really affirming the underlying credit quality that that we've historically maintained over many years and we will continue to be very focused on that.
Okay and in the I guess, the the proportion I mean.
Maybe you can we look at it this way.
Limiting and just asking you.
You said, 85% that are interesting too.
Or maybe just that let me just.
Just I get the number straight.
Those that are in stage two how many are deferred how many art. When is there any is there way to think of it that way.
I'm just curious.
What might be.
In stage, two that's actually not deferred I guess effectively.
Let us come back to Darko I, just don't have we've got the numbers to piece it together.
Let us come back to you, yes sure everybody just following up on one thing I was having difficulty hearing you.
Welcome.
The revenue impact of the acquisition.
I think you mentioned some sort of a proportion of net interest income versus noninterest income and I wanted to ask if the 5.9.
Million of non interest income if that.
Normal representation of the kind of revenue impact.
That's that's a representation of about two months.
But when we look at what what the businesses have traditionally earned the revenue per month that would be indicative sell prorating that over so the proportion that I gave at 12%.
Non interest income to total revenue that's our projection for fiscal 2021, when we'll have the full 12 month impact of the wells contributing.
Perfect. Okay, that's exactly where thank you for that and and have a great weekends.
They start dropping circle.
Your next question comes from Gabriel Shane from National Bank.
Please go ahead.
Good morning, I'll be quick Darko Uh huh.
Yes, I want to that so I mean, right when I go up there.
Transitioning and thanks for confirming of going up in Q4 I guess.
Yeah.
Can you remind you kind of say you then we're expecting that for years to pave the capital uplift.
We're still as you can imagine through the review process. We are actively working with us be through this and continue to discuss yeah. So it's not something that we are.
We're talking about publicly at this point when we when we have approval, we'll have more well we'll share more information.
Okay. Good for me thanks.
Thanks, Steve Thanks.
Your next question comes from Doug.
From the Jourdan Dunn. Please go ahead.
Hi, good morning, and.
I apologize I'm going to go back to the deferrals just hopefully.
Likely here, but.
Chris It sounds like this you expect this to wind down call. It in the next three months or so is that is that a fair statement.
Oh, yes for sure yes. The program is six months and yes. So the total program six months. So yes, we would be we expect to be wound down in the next quarter.
Do you have the LTV for the loans that are in deferral.
Well that would really vary based on the different category their end.
I think.
When we look at each individual client and we determine the tree arching of it and determining.
How it is we look at alone deferral I mean, it comes into what is the.
[music].
Kind of that repayment profile.
And clearly when you've got a strong.
TV come into it. It gives you more latitude in terms of not requiring principal payments, we've got to as I mentioned, we have both 54% of the deferrals are paying interest.
So again those are just.
Part of the tree she's looking at what your security is adequate.
What youre.
As you look into the.
Into three or four or five or six month period, what impact that has on the loan horizon. So we're comfortable with structures, we put in place for the clients that have been granted payment deferrals.
I know some of your box that that our interest and principal payments like some of them you're about halfway through so your LTV would be 50% to 60% I mean, I know, it's I know, there's a broad book in as many different things that go in there, but it would would that be a reasonable assumption that's in the 50% to 60% range or is this just not something that we can get too well be hard to get.
To that because if you like if we think about the equipment finance loan that might be true when they amortized to zero over four to five years, depending on the original term.
Theres books of business like our hotel business, where we started 50% and it goes down from there.
We have books of business that like for instance, our residential mortgages starts at 68% for example in terms of last quarter. So it all depends on the decline to industry the underwriting structure for each individual infat. So.
Overall, we are as you know a conservative lender and we've had a very strong underwriting structure and.
A very.
Three months or.
Three to six months severance no payment is not material change in the.
In the.
Credit quality of that borrower.
Okay, and then just on the migration if I look at your.
Some of nodes that looks like the performing loan pcls.
Looks like the net Remeasurement there was about 12 million of performing Pcls related to that can you maybe carolyn talk about how much of that maybe related to migration versus management overlaid versus model updates and and have you updated all your pvs for all your portfolios.
Up to date in terms of what we're seeing in the marketplace today.
So the I'll start and come back if I Miss pieces of it that.
On the PD side, our PD is our four I have for US nine our updated each quarter with the conditional probability of default based on the macroeconomic factors. So they are updated to include the most current projections around the macro forecast.
There would be some.
There would be some recognition of the shift between stage one in stage two that would be included in there.
And just sort of the exact nuances we could come back to you on I don't have them I don't have them top of mind.
Yes, we could we can take that optimize wouldn't mind digging a bit into just the migration.
The migration and then the management over there because obviously the macro environment today is probably is very different.
And Ken is fluid and changing so I just want to absolutely can take that offline and then allowances.
[music].
Now the only other thing I was going to say is that we continue to have a.
Positive management overlay added on top of the risk based calculations for the provision.
Have you quantified what that management overlap.
We have not quantified yes, it's just part of our overall governance process around the provisioning.
Okay.
And then just allow lastly, just trying to figure and there's many different ways. We can look at allowances and try to measure the.
Try to quantify what that allowances and get comfort with that allowance. So if I looked at it total allowance as over LTM net write off its about 3.4 so.
Some of your Big six bank appears to be lower than that some would be much higher than that is that is that a rate ratio right way to look at it I mean, what do you look out I know you've got all the models behind it but from an external.
Considering how would you approach that is that a reasonable way to think about it.
You know it's interesting through this like you were looking at every.
Every possible metric that.
Anyone comes up with and try to assess whether that is is additional confirmation that adds to our comfort level with the overall provision we think carefully about.
[music].
We also think about in particular around stage to what's contributing to stage two.
I I mentioned that 85% of the loans that are currently in stage two are in there because of the conditional probability of default and our view of macroeconomic forecast so they tend to be.
Better risk great credit quality loans. So the provision per dollar of loans that are put in stage two by the models tend to be less than loans that are in stage two because they are past due we're on our watch list, which end up with a higher risk rating and so a higher dollar of provision.
One for.
For every dollar Red Lion stage too. So if we look at that composition of what is causing our stage two balances 85% of them. This quarter are there because of the models, it's 80% in the second quarter.
Between 30, and 50% a year ago, and so a year ago more of the loans in stage two were there because they were past due or on the watch list. So we had more provided per dollar of loans in stage, two a year ago compared to today and that makes sense looking at the underlying.
Loans and the risk ratings on them.
Okay.
Okay. Thank you very much thanks, Doug Thanks, Doug.
Your next question comes from Nigel Souza Veritiv.
Investment research Nigel Please go ahead.
Thank you good good morning, I just had two quick follow up questions for you.
First on deferrals and I look at a stage one versus these two it looks like the bulk of the declined hurdles.
Stage, one phone and I know, you're and I understand that you're looking to that portfolio in detail in describing it but.
How should we interpret that stage one bounds currently do you expect.
The majority, where we stand today, the majority of those loans to roll off without.
Elevated delinquency risk how should we think about it.
I guess, we would at this point the information is as clients reached the end of their first at the 90 day deferral period that for what we know now they would behave like the ones that have rolled off already so we do have a significant block again coming up the first week of September when their payment is due.
Okay. So that's really helpful. And then my last quick follow up is just on the write off rate you already touched on that.
Obviously, but I was hoping if you could maybe green made relative to to previous cycles. I mean, you pointed to why it was elevated in 2016, but.
Now as you go through this cycle.
We don't know what the number of impairments could potentially be but you expect loss rates on impairments too.
Continually run lower than previous cycles or what are your expectations as we go through this.
So I would say it that's something that's very hard to predict right. I mean, we carefully watch asset values. We think about you know our assets holding their value when they go too.
As we realize our security and we go to dispose of the assets.
And I would say, it's still early days in that process with this.
Period of economic volatility.
What I would just add Nigel that.
Just keep in mind that we are secured lending model. So that when we look at write offs. It is based on us having collateral behind the loans and we think we are the quality of our loan portfolio continues to be very strong we've got a more differ.
Yes, I'd by geography book of business than we did in 2016 and certainly than we did in 2008 910 and.
Again, we're very disciplined underwriters in terms of.
We take for security, how we value it.
At origination of alone.
And and we monitored closely so.
It's a good question on write offs I think every bank will say.
They are on top of monitoring and we are too I think it says obviously a crucial because that means ultimately that that matters and we are making sure that we understand all the exposures.
Yes, Thats really really helpful. Thank you.
Thanks Nigel.
Thanks.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
Yes, Thanks, Colin I think that's it for question. So we'll go ahead and conclude our question and answer period and turn the call back over to Chris for his closing remarks, thanks, Matt and thanks, everybody for your continued interest in CW B, we continue to navigate the impact of coded 19 on the economy and execute on us.
Solid plan to transform our bank to increase the value for our people our clients and our investors.
Our dedicated teams have worked diligently to prepare CW be transition to the advanced approach for capital in risk management.
Leveraging a or B approach is expected to result in improved capital ratios the better reflect the strength of our underwriting and balance sheet and better equip us to manage to economic downturns and allocate resources to target business segments that generate the most attractive risk adjusted returns.
Transition to a higher be will also help us compete on a more level playing field against the large Canadian banks and position us to deliver higher growth and profitability within enhanced view of risk.
We have challenged ourselves to expanded capabilities and materially strengthen and diversify our business.
Every year, we've improved our processes and added new tools to expand those capabilities.
We have diversified with a significantly expanded presence in Ontario, and a broader base of general commercial loans and equipment financing and leasing.
We also expanded or funding sources through winning full service client relationships to deliver very strong growth in our branches deposits.
Our RV journey to date has provided us better tools and increased capabilities to manage credit, which will further support our reputation as a secured lender with a strong underwriting and loan management reputation.
We are prudently and proactively managing our response to the impact to covert 19 on the economy, while ensuring we are well positioned to capitalize on the tremendous opportunities in front of us I would like to think our staff for their passion and dedication.
Thank you I look forward speaking with you when we report our full year financial results in December with that we wish you all a good morning. Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.