Q3 2020 Home Capital Group Inc Earnings Call
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David Brown.
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Two one to 90 603697.
Thank you very much I will get you ended the conference is now in progress.
Thanks.
Finally, a link to the slides accompanying this live webcast is available on our website at home capital Duck curve.
With that I will hand things over to you three.
Thank you Jill good.
Good morning, and thank you for joining us today for our third quarter results Conference call. This year our earnings call is taking place on Remembrance day.
Every year understanding we take time to remember and to honor men and women, who have served and continue to serve our country to secure for US all the privileges of freedom in peace.
Maybe I'll remember to keep a moment of silence at 11 am and neuron or.
I Hope you all continue to be in good health and good spirits through these unprecedented times homes.
Homes reporting another quarter of solid results today as we continue to manage through the impact of COVID-19 on our economy and our industry.
I will speak with you about some of our accomplishments this quarter.
Progress on deferrals.
And our ignite program.
And Brad will take you through the financials in more detail and we will conclude with a question and answer session.
As a company owned trust has a lot to be proud of this quarter.
Originations reached nearly 2 billion a meaningful increase over Q3 last year, reflecting strength in both our residential and commercial segments.
We delivered a net interest margin of 2.51%, while keeping noninterest expense lower on a sequential basis.
Combined with the recovery of provision for credit losses, we reported earnings per share of $1.12 cents and an increase of 67.2% over the same period last year.
We delivered return on equity of 14.7% and increased our industry, leading sea EG, one ratio sequentially to 19.35%.
We concluded the disposition of the point of sale component of our retail lending portfolio.
And we continue to make progress towards our strategic objective objectives, including our ignite project as we prepare a company to be a leader in the financial industry of the future.
All this happened, while keeping to health safety and security of our partners customers and employees.
Our performance this quarter is directly linked to the continuing resilience of the housing market.
All our major residential markets are reporting increase in sales volumes and prices.
The more time people spend working from home the more it becomes important to have a home that fits that lifestyle.
Instead of choosing a home to look instead of choosing to live somewhere close to work people are choosing to live where they can get work done.
With the background of the pandemic and recent resurgence in COVID-19 cases subsequent to the end of the quarter in some of our major markets, having a whole Miss your bubble Andrew sanctuary takes on an even a greater importance.
At home, we recognize the purchase of a home is probably the most important financial discipline decision someone can make.
Becoming a homeowner is an enormous commitment and people do not enter it into it lightly.
It does it bring it represents an investment of much more than just money.
When someone buys a home they generally do whatever they can to keep it.
Our experience with deferrals during this year makes that clear and I'll provide more details on the next slide.
You may remember from earlier calls that we initially allowed lending clients to defer up to two months of loan payments beginning in Q1 this year.
As of the end of April 23% of our loans in terms of dollar value or under deferral.
At the time, we reported Q2, the total has fallen below 8% as of July 30 Onest.
Today, we can report to you that the value of loans is now less than 1% of all our total loans outstanding.
The work, we have done to find appropriate solutions for our lending clients has successfully helped him through distemper early Archer.
Nearly 98% of loans that were previously granted deferrals have either been discharged or resumed regular payments.
Borrowers are highly motivated to stay in their homes if at all possible.
At this time, we're not accepting any new pandemic related deferral requests outside our normal lending practices and the remaining principal balance is not material to our operations.
The deferral program was a coordinated effort by lenders insurers and regulators to provide support to Canadians effected by the onset of COVID-19 conditions.
It was timely appropriate and effective I.
Im proud of homes participation in this program.
At the time as our people were transitioning from home, we were able to move quickly and smoothly to implement a deferral program that conform to our own risk appetite.
Slide six gives an update on our ignite project.
We have adapted to remote working conditions and everyone is working diligently to move this project forward.
Significant achievements so far this year include.
Our deposit automation system for home or dash system for straight through processing of deposits has been launched and rolled out across multiple channels channels in the company.
This improves the customer experience with rapid turnaround of GE IC transactions.
We implemented several robotic process automation activity throughout the company, where repetitive transactions can be automated for efficiency and accuracy.
Examples include processing of deferrals proper.
Property tax disbursements and renewals.
We created a number of business intelligence dashboards within the company for advanced data analytics and insights having access to improve analytical tools makes us more agile improve our decision, making and supports our sustainable risk culture.
We launched a new customer relationship management system for our marketing team, replacing our old legacy marketing information.
Ignite represents a multi year journey for all of us at home.
We have progressed in our implementation timeline in spite of the additional demands of managing the deferral program and navigating our pandemic related disruption.
Our digital transformation is delivering the operational and service capabilities, we need to grow and thrive in the banking world of the future.
I will now invite Brian to discuss our financial results.
[laughter].
Thanks, Gary and good morning, everyone.
The presentation continues on slide eight.
We continued to perform well and have seen significant increases in net interest income net income and return on equity.
Hi, diluted net income per share increased by 67% year over year to $1.12 per share.
On an adjusted basis, the year over year growth and net income per share was 64% to one dollar an 18 cents the.
The increase in net income resulted primarily from higher net interest income and the release and provision for credit losses.
The increase in reported diluted earnings per share reflects the increase in net income and the decrease in the average number of common shares outstanding.
The decrease in the average number of common shares resulted from the repurchase of shares under the Companys NC I'd in Q3, 2019, and NC IB and S&P in Q1 2020.
Our book value increased to $31.28 and our annualized return on equity was 14.7% for the quarter 15, or 5% on an adjusted basis.
Our pre tax pre provision income was up by 27% compared with the same quarter last year as total revenue growth of 17% was offset by only 8% growth in our non interest expenses.
Our efficiency ratio was 47.2% on a reported basis and 44.2% on an adjusted basis compared to 51.3% and 47.8% respectively.
Slide nine shows the combined contribution of all these items to our year over year growth in net income per share. The most significant contribution to the 45 cents increase was improvement of 26 cents in net interest income through both margin expansion and growth in assets.
There are oversold credit provisions contributed 15 cents.
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We had an improved quarter of originations in both residential and commercial portfolios. We continue to build our loan portfolio in a competitive market with growth of 2.6% year over year.
As of September Thirtyth commercial loans made up 10.9% of our on balance sheet loans compared with 11.8% in the prior year.
The high quality of our loan portfolio as shown on slide 12 concern.
Consistent with our risk appetite and prudent underwriting.
Within our single family portfolio, our lending clients had a weighted average FICO score of 726 at the end of Q3.
The uninsured portion of our single family residential portfolio is secured by real estate at a weighted average loan to value of 60.1%.
Our net interest margin for the quarter was 2.51% as shown on slide 13.
We continue to pursue a risk based pricing model on our loan portfolio, while experienced a decline in pricing on our deposit products.
Our net cost of funding reflects a balance between offering competitive pricing on our loan and deposit products, while holding a prudent level of lower yielding liquid assets.
Our third quarter net interest margins improved by 11 basis points over Q2, and by 29 basis points over the third quarter of 2019.
Consistent with our strategic objective to diversify our funding sources homes deposits through our proprietary open channel continued to grow both on an absolute basis, 18.3% year over year.
And as a share of homes overall deposit funding from 24.2% to 27.7% as shown on slide 14.
Okay and share of our total deposit funding has grown every quarter since the end of 2018.
Consistent with our prudent approach to liquidity risk management term funding represents over 80% of deposits gathered through okay.
The next slide details our credit provisions for the quarter and the year to date.
Provisions for credit losses are calculated using forward looking economic model source through a third party provider as well as management expectations of future performance.
The primary contributors to the $7 million release of provisions related to loans that were repaid during the quarter in the commercial and other consumer retail loan portfolios as well as the impact of an improvement in the forward looking unemployment rate assumptions used in the estimation of expected credit losses.
Our year to date provisions are primarily the result of changes in forward looking macroeconomic data and the probability you probability weightings assigned to different outcomes.
As we have said in the past the forward looking nature of IRS nine means there will be quarter to quarter volatility in provisions as economic forecasts and model data our updated.
Changes in economic conditions. During 2020 have provided an example of that volatility.
With the reversal in credit provisions this quarters provisions were negative 16 basis points of gross loans as seen on slide 16.
This compares to a positive 43 basis points in Q2 of this year and nine basis points one year ago.
Net write offs totaled nearly 24 million this quarter and $26.2 million year to date.
$22.2 million of that or about 93% of the quarterly figure was attributable to the sale of a portfolio of loans within the H. fat rental segment of our other consumer retail loan portfolio.
We see this level of write offs as specific to that counterparty and not representative of the remaining portfolio.
Home discontinued originating all eight fact rental financing more than two years ago.
The remaining gross HVAC rental loans on our balance sheet total about 50 million down from about 116 million at the beginning of the year net write offs in our core residential lending portfolio are in line with historical experience for the quarter and for the year to date, while net write offs in commercial lending are trending better for the same periods.
Our allowance for credit losses at the end of the quarter totaled $78 million was 72% of that attributable to performing loans stage, one and two loans.
This is a decrease in allowance of roughly 31 million from Q2 of which 7 million is attributable to the reversal credit provisions and the balance attributable to write offs.
The total allowances chairman through the use of a model, which incorporates three probability weighted forward looking scenarios and include the management overlay.
The inputs to those scenarios are provided on slide 17.
The impact of using the three scenarios adds almost 10 million to what the allowance would be using just the base case forecast.
Our allowance related to performing loans classified as either stage, one or stage two totaled 56 million at the end of the quarter a decrease of $20.2 million from the end of Q2.
This is attributable to net write offs the assets the recognizer repaid referenced earlier to updated inputs to our economic models.
Our performing loan allowance under our first nine will continue to fluctuate as predictions of the impact of COVID-19 on the economy our updated.
We consider our loan portfolio to be well provisioned.
Net nonperforming loans on slide 18 totaled just over $82 million or 47 basis points of gross loans. This compares with 42 basis points as at the end of Q2 of this year and 49 basis points as in Q3 of last year.
Our liquidity and capital metrics are on slide 20.
We continue to hold over $1 billion in high quality liquid assets with access to additional short term funding is needed.
Our cetone capital ratio of 19.35% at the end of Q3 increased by 87 basis points in the quarter and a 171 basis points for the year to date.
We have a strong capital ratio well in excess of our regulatory minimum and are committed to being prudent stewards of this capital in this period of economic uncertainty.
We are confident in our ability to continue to generate solid returns for our shareholders, while working towards our strategic objectives.
And now I will turn the call back to use free for closing remarks.
Thank you Brad.
While we are pleased with our results we have reported today cannot be ignored the continuing uncertain that our economy is facing as a result of COVID-19.
When we entered the lockdown conditions, we had no way of knowing how long they would last.
Look we have demonstrated today is that we're able to work effectively in any condition.
We will continue to do so for as long as necessary until the risks to public health has passed.
When the circumstances are favorable to reopen downtown we will do so with the safety of our stakeholders in mind and in accordance with guidance from health authorities.
Until then we will challenge ourselves to use this time to execute on our strategic priorities continue along our digital roadmap learn from our experiences and build a company that is stronger and more resilient than ever.
No matter how long it takes we have the financial resources the capability and the results to continue our important purpose of helping Canadians owned hotels.
We thank you all for your support.
Ill now ask the operator to poll for questions.
Thank you.
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Withdraw your question please press the pound or hash key.
Our first question. This morning comes from Shihan Tuncay from Stifel. Please go ahead.
Hi, Tim good morning.
Just a couple of questions from me, let's start with the NIM, obviously begins here for the quarter and I think it's the best.
NIM performance and a very long time, so what could change as we saw in the yield curve post the election results on the virus vaccine nodes.
You think this level of NIM around 2.5%, where do you think how comfortable are you with the sustainability of that going forward and how the impact you're seeing on mortgage rates on deposit rates at this time.
Hi, John its Brad.
So far we haven't seen a negative impact on NIM, although as you mentioned some of the forward looking curves are different we havent had a chance to react or we will react to those as some of those forward looking.
Curve items get shot incorporated in life mortgage our commitments, but for now we continue to see higher rate deposits roll off to be replaced with lower rate deposits and to the extent.
Our underwriting teams are able to price our products at the current spreads then.
We may see some slight declines in NIM, but.
We're also able to or have been able to maintain it over the past couple of months.
Okay. Thanks for that abroad, and then maybe a question for you three so we are through just wondering have you managed to hide in here. This summer I apologies. If you mentioned this in my remarks, but have you could you talk about any of the changes you've made to your underwriting standards you know today versus where you were you know.
At the beginning of Q3 any any changes on any big changes with respect with respect to that.
Sure Shannon.
We did make some changes almost immediately.
In the early days of the pandemic and.
While we still virtually still 11, where we land in major urban centers, there were certain pockets that we pulled back.
The LTV from let us say in certain section, we do 80% we moved back to 70 or 65% are as appropriate. We also in the verification of income we're always very prudent and verifying income, but even took a harder look in certain industries.
Indices that requiring the gathering of people for instance, we took a harder look on that we have to be satisfied and even more than our normal ways.
On the commercial side very similarly, again in certain pockets we looked at.
And so where are we comfortable or uncomfortable and as well on the small commercial side.
Again, we would look at income in a in a different way and what kind of work.
Industry is at what kind of business as it does the gathering so there were a number of things we pulled back on.
But I'd say, we didnt change geographically just within those geographies.
Harder look at income in some LTV differences.
Thanks, Susan if I could just sneak just one last question for me with respect to deferrals. Obviously, you know a big decline could you talk to at all what the LTV is of the remaining balance.
And that's with them deferrals.
Are you advising any of these folks to simply sell their home into a strong housing market. How are you how are you looking at.
The balance is currently outstanding and deferrals.
Got it John as the the Ltvs are consistent with our overall portfolio same with FICO scores they may be slightly lower than than average, but we havent seen any significant issues with that the pro program and as you've seen.
That number has come down not dramatically from from its highs and as you. Three noted we are very happy that we are able to help our customers through a very trying time and again, our offering assistance to them and trying to order.
Organize their financial situation so that.
They can now come back strong in terms of being able to make their payments and their overall credit situation.
Okay. Thank you very much.
Our next question comes from Stephen Volkmann from Raymond James. Please go ahead.
Hi, Good morning, everyone. Just a couple of good question or a couple of questions sorry.
The first one is the the other consumer retail loans H block is the goal to get that down to zero would you are you I know you stopped the truck loans, but any other consumer loans is the goal just to get to zero.
I'd say over over some time, yes.
We did sell some of it that which we have we are not lending further we continue to administer the portfolio and over time, they would go to zero.
Okay. Thanks, and then just the second mean your originations in the classic pretty equal to last year, an improvement over the last quarter. So I mean, what's your outlook in terms of housing. There. There is some concerns that housing prices have risen even and I'd say the suburban market that maybe you guys.
London is a little bit overheated. So just wanted to get your views for for what's going on this quarter and your outlook maybe for the next couple of quarters.
Yes, these times its feels harder than ever to to to have outlooks.
Things seem to seem to change a lot I don't think any fund.
Financial institution would have predicted back in April the way the market has.
Shaped this year.
So to answer your question.
We don't see much evidenced in the near future anyway, that's going to be any different.
Low interest rates are going to continue.
People with jobs seem to be saving more than they planned or not traveling they're not going to restaurants.
And people have changed what the definition of a home is.
Many many have decided that they want to backyard don't mind working further because working from home doesnt affect that so those those.
Demand items seem to continue.
So I don't know exactly what's going to happen, but it looks like the momentum will continue for a little while yet.
Okay. Thanks, very much guys.
Our next question comes from Graham writing from TD Securities.
Please go ahead.
Hi, good morning.
Good you flagged that in your your provision in your base case implies I think that your overprovision by almost 10 million.
The world plays out according to what's your base case model assumptions are.
What is your expectation for.
The potential for further.
Credit loss provisions to be released is that something that.
Potentially phase back into earnings over the next year or so.
Thanks.
The way to I'm going to answer that question that you asked if the base case persisted so basically that would mean that we win.
Have absent any pork orally portfolio growth, we wouldn't have any further provisions what.
What may change, though are the base case assumptions. So we will continue to use different probability weighting scenarios, but if the underlying assumptions change and that base case changes as well as any of the other weightings. Then there is an opportunity for potential reversals and as we said theres.
With the volatility to the extent that things would it.
Deteriorate then we would also be in a position to.
Unfortunately have to or were in a position to increase provision so.
Again, I just want to be clear so if if nothing changes in the portfolio stays the same that we wouldn't need any further provisions.
And if any of the inputs change and we've seen.
That they become slightly favorable.
So far this quarter than there is an opportunity to see further recoveries absent any increase in the overall portfolio.
Okay.
Understood.
And Hum.
How about those borrowers that went through that deferral process.
Obviously, you know most of them are.
Our off deferral are you expecting any.
Careers or any pressure from this cohort in particular or do you believe that this this cohort should perform in line with the rest of your portfolio any color there.
Yes, as I actually three as I mentioned many.
Our either back on repayment or have been discharged there is a small number that have gone into arrears.
It's a.
It's less.
Less than maybe I would have imagined Bakken Bakken.
Back in April, but we're working with them as we would in a normal process. So.
The good news is most are coming out very very well, but there is a small portion we.
We continue to work with those who have gone from arrears that small amount that's gone from arrears into sorry from deferrals into arrears.
And to help them out help them as we would with any client that goes into it so surprisingly small tight.
Understood.
That's it for me thank you.
As a reminder.
One in order to ask a question.
Our next question comes from Kevin Kline from National Bank Financial. Please go ahead.
Yes, thanks, and good morning.
First question is right.
Related to the out of the commercial mortgage increase in gross impaired loans on Parallon. So I am not sure. If you addressed this on the prepared remarks, but can you just give us any more color as to what drove that that quarter over quarter increase.
Yes, sure Dan we had we had some loans that we interpret as is becoming nonperforming and.
As as it related to the current economic circumstances, and we're comfortable that we're well provisioned on those laws.
Could you like what is it about that current economic situation like what what changed from Q2 to Q3, if you know whether underlying economic assumptions would have improved.
Well each each individual loan like commercial loans are generally larger than residential so any one particular circumstance of.
Commercial law and would result in changes.
To their staging and that's how we would approach it.
Okay.
Looking at the the securitization.
NIM Big bump in the CMHC, driven net interest margin for securitization portfolio.
How sustainable do you think that that spread is or that margin is is this just a temporary impact can you kind of have to get through that the mortgage is that were originating a few months ago and are now getting securitized or is that something that's sustainable.
I think short term up yes, meaning.
Over the next quarter or so and then obviously, we'll we'll see where those changes what to happen in the future Jake.
Okay. Hi next one is on the operating expenses can you just refresh us on what you're expecting from.
From the ignite a program spend and that and where you think.
Operating expenses ex the ignite program are going to trend here over the next few quarters.
I think well this this quarter in the next few quarters are going to be where the majority of our spend will be coming on the SAP implementation. So our current forecasts are that will be consistent with.
This last quarter.
That as in both both evident and the I guess.
Yes, so the.
The aggregate spend for non interest expenses will be approximately what it was this last quarter.
As a run rate.
Right Okay.
Alright, that's good for me thank you.
This concludes returning a portion of our call I would like to turn it back to you through the founder for final comments.
Thank you everyone for joining our call we wish you stay safe and healthy and we look forward to speaking to you after our Q4 results.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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