Q4 2020 Canadian Western Bank Earnings Call
Good morning, My name is Joanna and I will be your conference operator today at.
At this time I would like to welcome everyone to see the baby's Q4 earnings conference call and cash.
On top and placed on mute to prevent any back on nice.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
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Thank you Mr. <unk> you may begin your conference.
Thank you channel [laughter], good morning, everyone and welcome to our fourth quarter 2020 financial results Conference call. My name is not riding on the senior Vice President, leading our financing Investor Relations team.
Like to remind listeners and webcast participants that statements about future events made on this call are forward looking in nature and based on certain assumptions and analysis made by management.
Sure results could differ materially from expectations due to various risks and uncertainties associated with CW fees.
Please refer to our forward looking statement advisory on slide number 18.
The agenda for today's call is on the same slide presenting to you today are Chris Fowler, our President and Chief Executive Officer, and Carolyn Graham, Our executive Vice President and Chief Financial Officer. Following their presentations, we will open the lines for a question and answer session I'll now turn the call over to Chris.
Thank you, Matt and good morning.
Let's see WP.
We will remember 2020 as a year our teams came together to support our clients and each other in an unprecedented environment.
Our team's response to this situation has been truly outstanding and.
Thanks to the diligent efforts, we proactively supported our clients true economic uncertainty you.
We also made significant progress on our own strategic initiatives, including the wealth management acquisition.
Also delivered another quarter of solid results in a challenging operating environment.
We entered this period of economic volatility from a position on stability and confidence due to the transformational changes we undertook over many years to strength and diversify our business.
Our strong capital and funding base and enable us to continue to invest in on street strategic priorities and support our clients when they needed us and most.
At peak, we supported over 25% of our loan portfolio with payment deferral.
Since then we have worked with our clients to resume normal payments and the percentage of outstanding loans with payment deferrals as non declined to approximately 1% [noise].
Three quarters of the clients, who remain on payment to flow arrangements continue to pay the interest portion of the contractual payment.
Our commitment to our clients as being prudent and we know what's in that range relationships for years to come.
Our robust enterprise risk management framework continues to serve us well and our credit performance remains strong in light of the economic conditions, we faced this year.
Were actively using the majority of our our European tools to manage credit risk as we navigate the current volatility.
Our original timeline anticipated approval to transition to a or B 2020 year end six.
Six weeks ago, we provided an update that or approval timeline will now include completion of an a or b parallel run well, we continue to report regulatory capital under the standardized approach.
We will use this next period to fully embed a R&D into our operations, including our enhanced stress testing capabilities.
We expect to complete our parallel run in 2021, followed by Finalization of us fees for review.
We continue to expect a higher beat to create long term meaningful and lasting value for shareholders and the shift in the expected timing of approval does not change our view.
We continue to make meaningful progress on all aspects of our strategic priorities.
Strengthening our digital capabilities, a key deliverable to enhance our client experience from.
Earlier this year motor financial launched digital on boarding so our clients can open an account virtually and transact immediately [noise].
In November we extended the end to end digital Onboarding to all current and prospective personal clients.
The wealth acquisition, we closed in the third quarter is a transformative step for us to become a leader in the Canadian private wealth industry.
The acquisitions fiscal 2020 financial results as well as client in team retention I'd be consistent with our expectations.
This quarter, we initiatives will initiate it a full integration from wealth management operations to provide a differentiated experience to our clients.
We also consolidated our equipment financing leasing business under common leadership to further enhance client relationships and leveraged our position as a 5 billion dollar equipment financing and leasing operation.
We believe these combined initiatives will augment full service client growth across our expanding national footprint, particularly in Ontario, and support our strategy for continued growth of lower cost sources of funding.
Our expansion to meet the needs of business owners in Ontario is supported by our first full service banking center in Mississauga, which has surpassed all our initial performance expectations since opening this summer.
I'm very proud we've been recognized as one of Canada's most admired corporate cultures and one of the top 50 best workplaces in financial services and insurance.
Our focus is to build a positive and inclusive culture to solidify CW be as a career destination for top talent. This.
This external recognition affirms we're on the right path.
Carolyn will provide a full update on our financial results.
I'd like to highlight two pieces the stand out from me as continued demonstration that our strategy is yielding strong results.
First the 20% annual growth branch raise deposits, including 4% growth in Q4.
This is our seventh quarter in a row with robust branch raise deposit growth underpinned by strong full service clients growth.
Second we continued to drive strong growth in Ontario, accounting for half of our 2% quarterly loan growth and 12% for the full year.
Both of these achievements marked significant progress towards our goal to become the best full service bank for business on as in Canada and position us to deliver profitable long term growth and enhance shareholder returns returns for years to come from.
I will now turn the call over to Carolyn who will provide details on our fourth quarter financial performance and look ahead to 2021.
Thank you, Chris and good morning, everyone.
Starting first lets just on 2020 as you see on slide four impact from market just on.
On a Canadian economy.
Thank you.
Continued to put downward pressure on our financial results compared to last year.
Fourth quarter common shareholders' net income and adjusted earnings per common share were 6% and 4% lower respectively.
Revenue growth was more than offset by non interest.
Stems from an elevated provision for credit losses on.
Uh huh.
Our pretax pre provision net income was up 2%, 7% revenue growth was partially offset by a 13% increase in adjusted non interest expenses.
We delivered a 3% increase in net interest income benefited from 6% on growth was largely offset by a 10 basis point decline in net interest margins.
Our non interest income was up 54% our net.
You don't see contributing by the well acquisition along on higher net gains on securities.
Non interest expenses.
The impact.
Oh and current related to organizational redesign initiative allows continued investment in our technology support over on this growth.
Organizational redesign initiatives will reduce operating costs and support accelerated delivery against our growth engine.
Transformation geographic diversification strategic priorities.
So by the way, we do business and improve our efficiency.
Excluding the on how well.
Opposition to approximately 4 million of nonrecurring.
The organizational design initiative.
Yes.
Yeah.
The 26 basis points total provision for credit losses per se.
Average loans seven days higher than last year.
15 basis points higher performing loan provision on their unrelated to the adverse shift on forward looking economic conditions.
By an eight basis point lower per average non impaired.
Determined on.
These patients for each individual account.
As shown on slide five compared to the third quarter, our common share cost net income and cash increased to 3% respectively.
Adjusted common shareholders' equity.
Yes, each increased 1%.
Total revenue increased 4% compared to last quarter.
Percent higher net interest income combined with 16% higher non interest income.
Our net interest income benefited from a five basis point sequential improvement in net interest margin.
Along with 2% loan growth.
While non interest income benefited from the full quarter contribution acquisition, along on higher credit related fees.
Actually offset by lower net gains on.
Sure.
Non interest expenses were 12% higher.
Excluding the wealth acquisition and non recurring costs related to organizational redesign initiative.
Interest expenses were up 7%, primarily due to the customary seasonal expense increases we typically see in the fourth quarter combined with continued investment in technology to support over on this growth.
Our provision for credit losses on total on 26 8.7 based on the low last quarter on lower provisions on impaired loans.
By increasing the provision non performing loans, primarily due to the continued evolution of the on top.
Hi, Dan.
For the full year pre tax pre provision net income increased 2% well on common shareholders' net income.
Yes, we're down seven and 6% respectively.
Adjusted common share holders net income and adjusted EPS were down eight and 7% respectively.
Good day decline in common shareholder day.
Reflects an elevated performing loan provision for credit losses, primarily due to the significant for shifting forward looking economic conditions.
Hi, just a lower net interest margin reflects the lower interest rate environment.
While non interest expenses increased 8%, excluding the impact of the bank acquisition and the non recurring organizational redesign initiatives on each.
Just expenses from 2%.
We continue to invest in our strategic priority on also tightly controlled our operating costs from the economic volatility this year.
On slide seven displays.
Average revenue growth this year in a very challenging environment.
Following an initial contraction on net interest margin in the second quarter on the results of the bank of Canada's policy interest rate reduction our net.
Interest margin stabilized in the third quarter.
This quarter, our net interest margin improved sequentially by five basis points.
From prolactin deposit pricing changes in response to market conditions, along with continued very strong branch based on the growth.
The net expansion combined with 2% loan growth.
In a range, 4% sequential growth in net interest income.
Looking ahead to fiscal 2021 day, we expect net interest margin in the range from 2.4 or 5%.
Relatively consistent with the fourth quarter of fiscal 2020.
Potential for quarterly volatility.
As we noted net after interest margin is affected by many factors, including further bank, Canada policy interest rate changes.
Deposit pricing factors changes to the cost effectiveness from accessibility of funding channel liquidity low level as well as both on growth and pricing.
We expect growth of non interest income across all categories in fiscal 2021 with the exception of net gains on security, which are not expected to be material.
Net income is expected to represent approximately 12% total revenue next year.
Our success in broadening full service client relationships across the country.
Keyed on key strategic objectives to grow and diversify findings on this.
This quarter marks our seventh consecutive quarter with its strong sequential increase in branch raise deposits.
Demand in those deposits increased 34% this year and now comprise 39% of total funding compared to 31% last year we.
We drove average deposit growth, 20%, which resulted in a 13% reduction in the outstanding balance on broker deposits, which now represent 24% total funding down from 29% last year.
Production in our reliance on the broker network Thats, our ongoing efforts to diversify funding sources and drive more branches deposits as we generate additional full service client relationships.
I will.
From market remains on libel and effective source ex term retail deposits raised over a wide geographic fees.
You'll see on slide nine net our total on increased 6% in the past year.
Reported by 13% growth from our strategically targeted commercial portfolio and 12% from Ontario.
Very strong general commercial growth reflects ongoing efforts to increase full service relationships across our national footprint.
We also achieved further geographic diversification on.
Karen representing almost half from loan growth in both Q4 and for the full year on.
Ontario based loans now represent 22% of our total.
On a sequential basis do you put on loan.
Growth in the fourth quarter was consistent with the previous quarter strategic retirement in general commercial loan benefited from strong growth in Ontario, and commercial mortgage is increased primarily due to strong new lending volume well capitalized high quality borrowers we continue to drive growth in Residentially mortgage.
Real estate projects on increased primarily from media participation.
At least partially offset a successful project completion.
Looking ahead to 2000 from our continued strategic execution positions us to capture increased market share on larger addressable market.
Due to uncertainty remains on how the next six months in particular will Apple with rising totaling 19 cases.
Delivery on the horizon.
In the coming fiscal year, we expect to deliver mid single digit percentage loan growth whenever true similar to this year.
Includes the continued focus on originating share low that offer both an appropriate return excess capital risk profile.
Hi, Ken on the credit quality of our portfolio and our permission from both impaired and performing on on your eye from nine.
Eastern secured nature of our lending portfolio, just on underwriting practices and proactive on all hallmarks on our historic success.
The fourth quarter provision for credit losses on performing loans calculated using our past performance as well as the forward looking view of macroeconomic factors total 16 bank.
Okay, just one basis point last year, and 11 basis points last quarter.
Total 31st our allowance for credit losses on performing loans totaled 130 million and.
An increase on 11 million or 9% over the previous quarter and $40 million or 46% compared to last year.
Basis point sequential increase in the provision on performing loans.
Primarily driven by an average shift in current and predicted borrower default rates as the impact of over 19 pandemic continues to evolve.
Our performing on allowance estimate is considering expectations from future macroeconomic factors per fully.
Paul increases in the internal growth rate.
Ongoing these factor.
We will continue to impact the allowance teacher quarters.
The provision for credit losses on impaired loans at 10 basis points declined from 18 basis point last year, and 22 basis points last quarter and compares well with our five year average of 22 basis points.
Gross impaired.
Over 31st total 250.
Or 85 basis points from slot.
And that's down from 283 million or 95 basis points last quarter.
The net decrease in impaired loans from last quarter, primarily driven by full or partial resolutions all with no significant credit losses.
Those resolutions included two significant Alberta based commercial mortgage connections LLC true energy loan several equipment financing exposures.
Our real.
Realized write offs remain low this quarter. Thanks.
Our history, even during periods of elevated levels of gross impaired loans.
Our solid credit performance reflects our prudent underwriting and the secure nature of our lending portfolio.
While there continues to be significant uncertainty and what lies ahead, we remain confident in the solid foundation of security on high quality credit portfolio.
Based on our current outlook for the Canadian economy.
Further interim day, we expect that our total provision for credit losses for fiscal 2021.
Will remain at elevated levels compared to 2019, but lower than the provision for credit losses, we recognized for the full year on fiscal 2020.
We also believe the composition of the provision for credit losses will shift.
The weighted more heavily weighted impaired loans, rather than performing loans fiscal 2021 for growth.
On slide 11, our dedicated teams remain in regular communication with our clients.
As Chris noted we've been successful on working with clients to resume normal payments on a percentage of outstanding loans deferring payments has declined from about 1%.
Reported those clients from.
Okay.
On the loans that have resumed growth scheduled payments October 1st approximately what percent were past due and less than one per cent repairs.
You should carefully monitoring fees loans on the entire portfolio from time to be.
We expanded our special asset management fees.
Our net.
Proactively with Orbitz experiencing financial debt.
On slide 12.
We identified a proportion of loans category to stage two for estimate on expected credit losses, which now totals 34 basis points to total loans compared to 23% last quarter and 6% a year ago.
There are three ways that alone will move from stage one stage two the first two relate to client specific factors items 30 days interveners or on our watch list.
The third factor is forward looking on model.
Based on a prediction of future downgrade in internal borrowing risk rating on two or more not just since we originally founded that loan.
Nearly 90% of our stage two balances at October 31st are driven by our modeled expectations at least 10% I borrower specific behavior.
Just a quick last quarter in contrast, a year ago about half of our stage two loans were driven by our models and the other half my client behavior.
We also see on lower blended loss rate in Q4 2020 compared to last year on the model given stage two loans tend to have better quality and therefore, a lower expected loss even over their lifetime.
Looking at Slide 13, our capital ratios remain strong and stable economic volatility.
Calculated using the standardized approach on October 31st our common equity tier one ratio was 8.8% tier one was 10.9% and a total capital ratio was 12.6%.
At 8.5% of our Basel three leverage ratio remains very strong.
Net one capital ratio is 30 basis points lower than a year ago.
Moving our wealth management acquisition.
And the ratio was unchanged from July 1st.
Quarterly bolstered our tier one and total capital level to our successful issuance limited recourse capital notes, making us the first bank from second.
A large Canadian bank issued this battle compliance your why instrument.
Chris previously noted extended and I on the site.
Uppermost provide on this far regulatory capital ratio in the mortgage measurement on risk weighted assets compared to the standardized approach it.
The approval extension does not change our near term financial up on adopt fees current industry restriction on the deployment of capital through increased dividends or share buybacks.
We will continue to assets, we use our ERP tools to manage credit risk. These two on time enhance our risk management and stress testing capabilities and better equity best to manage to economic downturns and allocate resources to target business segments that generate the most attractive risk adjusted return.
Yesterday, our board declared a common share dividend of 29 cents per share consistent with the prior quarter and up one cents or from the dividend declared here, though assuming asking restrictions from any in place.
To maintain our quarterly dividend on its current levels through the next year.
Speaking of fiscal 2021, our overall on overall outlook is provided on slide 14, we.
We know that the current economic policy.
On our planned investment in 2021, [laughter] support continued strategic execution to ensure we are well positioned for accelerated growth on the economy rebounds our.
Our 2021 bank cash performing well reflect a balance between continued investment in our ability to deliver an unrivaled client experience and recognition net revenue growth will continue to reflect the very low interest rate environment.
Economic activity.
We manage expenses and continue to execute on priorities align with our strategic direction.
Based on our expectations for continued gradual recovery of the Canadian economy any outlook on already provided for several of our key performance drivers in fiscal 2021, we expect to deliver adjusted earnings per common share and adjusted R&D relatively consistent with fiscal 2020, a strong CET one capital ratio.
An elevated efficiency ratio compared from our external historic experience as we continue to execute on our strategic priorities, including on holding your contribution from our acquisitions.
We will also extends the costs associated with operating as an AI RV day, including amortization of accumulated capital costs.
I'm going back on.
Turn it over to Chris to discuss our 2021 strategic priority.
Thank you Karen on this.
Strategic investments, we have made over the past 10 years support our solid results this year and have created great momentum.
We've been through economic cycles, before and know how to capitalize on the opportunities that emerge as the economy rebounds.
2021, we will further optimize our business to ensure we are positioned to deliver on our future opportunities to provide on rivaled experiences to our clients.
We'll continue to enhance or boutique full service client experience with a focus to optimize client facing interactions leverage the synergies created with or equipment financing leasing strategy and enhance our wealth management offering through further integration.
We will further advance business transformation and digital capabilities to ensure we are well positioned to accommodate an expected permanent shift in client preference towards digital banking on.
Success in digital Onboarding personal clients in 2020 will be expanded to on board small business and mid market commercial clients in 2021 week.
We continue to replace our existing online platform with a seamless end to end digital banking experience per business and personal clients complemented by our high touch personalized service. This will allow us to continue to diversify our business across Canada by attracting new clients, both within and outside our branch footprint.
Well further broadening access to lower cost funding.
Our expected transition to the air be methodology on regulatory capital and risk management, while delayed will enhance our growth potential with approval improved risk sensitive capital ratios will better reflect the strength of our bank balance sheet.
Combined with the launch of our digital capabilities, our people will make us more competitive support higher growth and achieve further diversification and enhance value of risk.
Moving this next step will be the foundational capability to realize their full potential across Canada.
With that operator, let's open the lines for Q on a.
Thank you.
Ladies and gentlemen, we will now.
On the question and answer session.
Do you have a question. Please press the star followed by the one on your Touchtone phone you well here with me Tom problem Technology Everquest Andy.
And if you on speakerphone, please lift the handset before pressing any Keith one moment. Please for your first question.
First question comes from many common at Scotia Bank. Please go ahead.
Hi, Good morning first question on credit so the impaired the PCL ratio came in really low.
This quarter, you talked about impairments, increasing as we move.
Into 21 late into 21, just wondering where you see that ratio.
Seeking out a in 21.
We.
No he sort of book to the overall total PCL ratio.
We think it will be.
Our between where we were in 2020, and a more normal and a more normal time.
How many heavily skewed to impair that don't have an exact number but we expect that the majority of the Tcl on 2021 will likely come on the apparel side.
Okay and just on the on the issue of deposits. So you keep highlighting a very strong demand brand trays deposits on trend.
Trying to disaggregate the success of your efforts versus just a broader trends that are boosting deposits on across a across a bank. So we're seeing very strong deposit growth. So just trying to get a sense of maybe the best way to ask is just how sticky do you feel those deposits are.
And as you look out to 21.
How do you see that growth progressing could you see a decline in deposits somewhere into 21, if the recovery really gets going on how do you how do you view.
Commercial deposits as we move further into 21, assuming assuming the vaccine rolls out and things look better.
Yeah, Great question.
Oh, we look carefully at where the growth came from in me.
20.
About two thirds of it came from new clients.
Which is very positive we also see good growth in full service client relationships, which means we're not only the lender of choice for those clients that we also have on this.
Operating accounts.
And so thats very positive signs for us our EPS.
Patients who are.
Overall based upon the growth in 2021.
Our non from buses as the very strong growth in fiscal 2020.
But still are expected to exceed loan growth.
Okay and then just.
Just on the on the subject of loan growth. So you talk about sort of mid single digits. Just wondering on in terms of competition by type do.
Do you see any change from what we saw this year in terms of strengthening in general commercial loans is there any sense that the pattern. We saw on 20 will be any different in 21, and you know if you could talk a sort of dynamics as we move later into 21 do you see anything changing in terms of where you are.
Expect the growth to come from.
I mean, the I would say that the.
Focus Weve had on building general commercial continues and the continued improvement in our capabilities with with digital front end. That's also is coming in 2021 will also enhance our ability to continue to support our on general commercial growth that is really a very significant focus we also looking to.
Greater wealth management operations as much as possible into a generating more clients in a bigger portion of their of their wallet. So its really lots of opportunity we see in front of us on commercial is great. We also look at equipment finance with our one equipment strategy to a total Oliver.
And finds operations under common management, and we see that will create synergy to but that will take time as we work our way through 2021.
Good solid there is that we're supporting that I think very effective.
On internal processes and strategy to enhance them.
And in terms of the return real estate project loans do you see any.
Material change in that in 21.
Well, we've got a really solid core client base and in the arm entering into a meaningful areas of Oh participation Vancouver, Edmonton Calgary Toronto.
We absolutely will continue to manage that that's always been a very important book for us.
And I think our borders of being very prudent in how they are looking at the market in determining how they they take their projects forward. So looking at the pro.
Project growth, we had a decline in our BCD book really with sort of slowdown in Vancouver, but an increase in Toronto. So we are very attentive to the clients and being very prudent in our participation, but we do like the book and will continue to ensure that we participate in the.
Uh huh.
On the in their profit prudent way.
Thanks, Chris.
Thanks Meny.
Thank you. The next question comes from Paul Holden at JBC. Please go ahead.
Thank you good morning.
On to ask your question on Albert on recognizing that it's not specific to on gas, but just you know province more broadly are you.
Are you starting to feel on see signs of improvement and Alberta.
Given.
Higher oil and gas prices on.
I guess, that's partly offset by Cove, it, but just wondering what you're seeing there in terms of recent trends.
I would say that Alberta is still is a pattern.
A pattern, where we were looking for you know more signs for recovery, we have stability in certain sectors absolutely the.
I think the stability of the oil price is positive so we do see some.
You know opportunities there we still have a.
Construction occurring with the TMX pipeline, we have construction on Capex. So the now is probably more B.C. The LNG, Canada is is proceeding the you know so if we if we kind of look at the core of the province it for US. It is overrepresented in our gross impaired loans loans, but we have.
On stable and have a lot of very strong client in Alberta that we can do support and we will continue to be very prudent and focused on how we continue to move up or forward.
Yeah, that's actually it took that's it that's a good segue to my next question, which is with respect to performing allowances given some of the positive development on on on oil prices and the likelihood we see a vaccine sooner than later.
Are there plausible scenarios, you potentially see where maybe you are over reserved on credit right now and you could see.
I was performing allowances.
Reverse at some point and 21 or 22.
Well I would.
I start from a position all that we are conservatively provides I'm very comfortable with where our allowances on the day on performing on and impaired.
Certainly.
Still.
From forecast that Weve used Freaky force still anticipate a slow recovery.
Things recovered.
Better than that or more quickly than that or the economic impact on the second way.
Which we expect to be less than the fees.
First was even better than anticipated that's all from possibility certainly we started.
Q on Q4 last year Q1 of this year.
That was the thing that was our allowance with a benign credit environment on expectations. So certainly.
Can we return to that.
Oh macroeconomic viewpoint.
Oh.
Well.
I understand okay fine.
Final one from me and I think this is an important one I understand it's just with respect to the.
Hey, I R. B and this test that's true 2021, I guess, what I need to better understand is is it sort of at a 12 month passed and then we'll see where it goes from there or how do I reviewed this in terms of just the longevity of running parallel systems.
Oh, yes.
You know, we're starting with my thoughts.
A parallel run.
We expect from not to take.
About a share.
Sure.
We continue to us on the plans together on all on the different components of that to fully implement any day used.
Okay.
And then we turn it back over to Rob.
Every commensurate.
Understood. Thank you for your answers Thats it from me.
Paul.
The next question comes from Gabriele Duchaine National Bank. Please go ahead.
Morning, just a follow up on on air be thing on apologies, if I missed the explanation, but why like the early on in the year. It sounded like we were going to get that this year and that was delayed or outside of co bid related the elements.
The big exception, but why was the delay.
Taking place.
Okay, but as as we work our way through it. It's a we are currently focused bank. So we have a number of models that we are ensuring to capture the risk sensitive nature of the businesses into which we land. So we're very focused on making sure that the matter under which are all on.
Our internal processes work.
Really goes identify and manage that risk to inform our.
Our ability to generate calculate our capital so what we get with the additional per.
Parallel run, it's just more time to to prove out the risk sensitivity of the models and show their ability to capture the.
The trends and in this pandemic environment.
So fine tuning refining the model thanks.
Yeah. It would just be it'll be as Carolyn said, they use tests, making sure that the operation is reflective of the condition of the portfolio and as the economy changes that has captured.
On the real estate project loan book and I know you addressed this earlier, but Oh and got through one where I don't think demand is so much the problem, but the cash.
Good supply would be the what's what and when I mean.
A man, that's what I'm talking about land development.
Plant.
Is that improving in any way.
In the next year in your view.
The project, obviously, if I look at our portfolio of bars, we have today.
You know I really as I said before they there they'd be very prudent on how they what they are deciding to take to market.
They've been looking at a secure locations that they believe flow.
Obviously support.
Client demand the you know so as we as we look at that we really believed that our key tier one borrowers are in very good position to <unk> to take advantage of where this market will be we see still continued good performance in the book.
But you know clearly just given where the economy is that people are just being more wary as they bring forward with new projects.
Yeah.
And then just to wrap up on the on the NIM.
Oh performance a couple of times about that on this year with great. The deposit the shift as it seems to be like a one of the main drivers here correct me if I'm wrong, there 'cause, it's replacing the brokered deposits and your funding structure.
Can you give me a.
On a pricing differential quantification like.
For every dollar of deposits, but you raised on the brands versus the brokers like what's the spread pick up there.
Yes.
The differential between.
Average branch right the entire bucket and broker isn't around.
[music].
Okay.
That's pretty consistent historically, though right.
On.
Pretty good historically.
Thanks, Ed.
On ASCII continue to expand our.
Noticed on demand.
Full service client relationships, we have the opportunity to expand that differential.
And just to wrap up how much of that growth over the past year came from the Ontario brands I, not just one, but it's a big province and.
And I guess, where im going with that is but we expect the frothy deposit growth to slow down, but given that you've got the geographic angle here, new geography that you can actually maintain on you know.
Pretty high double the growth rate for quite some time.
Yeah, so ill.
Branch opened in August still on.
And on and we're on so I would say from a.
Did that meet the deposits from the dot one branches.
From zero to.
I'd number that very large on our overall growth.
On the deposit for the year, but we are.
We're pleased with the interest of clients, who want to talk too much too long to engage with the folks that we have in that branch on and we're really pleased with that.
The first few months and what we're seeing there. So we know there's great force.
Alright, thanks on early happy holidays.
Okay. Thank.
Thank you.
Thank you. The next question comes from Sohrab Movahedi BMO capital markets. Please go ahead.
Okay. Thank you and just maybe two or three quick questions Ed.
Yes are you well.
Throughout the footprint and a different lines of business are you seeing a.
Billable long growth that your risk appetite is having you pass up on.
So.
I would say that we always have been careful on.
How we choose loans, we are very targeted in the areas on which we land.
The challenge, we're finding right now too is getting good quality ones were similar pricing challenge to that and decide whether we participate at a at the yield levels that are being.
Offered by the other bank. So I would say the answer that would be yes, we are continuing to be selective for making sure that are adhering to our GAAP appetite, but also from a lot of internal talk on a on pricing discipline as well.
Okay. That's good thank you and thanks, Karen I did I did I hear you correctly that.
This quarter, Inc.
Includes about $4 million up an elevated expenses that you expect will go away next year.
So well be described as organizational redesign initiative about 4 million.
In the fourth quarter.
Oh on that we expect to be reduction.
In our along from run rate the other half is being reinvested in both enhancing our number on our branches to deliver the what we call the branches and Alex.
Ill are nothing to do with us in branch and also reinvesting into our day.
Okay perfect. Thank you for that Clark and then last thing can you just repeat what you said about.
Hey, your expectations for EPS and all early next year.
So yes, there are only roughly consistent with 25.
But I'd like how so when <unk> are you talking about.
<unk> and EPS growth on the P.S. dollar.
Oh yeah.
Okay. Thanks.
Thanks, Rob.
Thank you. The next question comes from Darko Mihelic from RBC. Please go ahead.
Hi, there and good morning I'm.
I've got a question on the.
The stage, two loans and specifically a specific personal loans and mortgages.
61% in stage two that seems high.
And I realize I realize the model.
Result.
But nevertheless, it does seem high and so the question is.
Hey, if you perhaps walk me through.
The sort.
Sort of modeling that went behind it and then secondarily.
Are there any real world ramifications.
We're having such a high level in stage. Two for example, one would think if you really argue that concern.
With that level of personal loans and mortgage as you might turn to your sales force and say well.
Well six that attended the day mortgage as we used on the right, we're not going to do that.
So any help on that along those lines.
So I'm going to start so let me start with sort of [laughter].
The process of the models actors that.
True.
At relatively high level on phase two related to personnel on the mortgages.
Primarily due to the short relatively short duration of that portfolio about 55% our personal loans on mortgages are on the on.
The member value so they tend to be.
On to two years in term and the volatility that we're seeing in the macroeconomic factors.
Specifically on employment and GDP, which are the two primary factors for that model the volatility over the next 12 months.
And so there is.
The two men is coming from the volatility in the next 12 months, we should it doesn't capture the recovery that comes after that 12 month period.
So that's primarily the factor that's driving.
The increase on the larger balance and Kim.
Mm Hmm.
Thanks.
I mean, let Chris answer the one about whether the business change.
But we've not seen a commensurate increase in past due balances related optima weve seen really good progress and then bringing their payments on I guess on payment fertile down on that.
Hi, guys restart payment so we aren't seeing.
Indicative sign in the book to.
To corroborate that modeled outcome in that in the states to balance.
Yeah, and that's a that's a key overall on stage two we have a.
87% of stage two balances on our model driven and ER and that is I mean, it's interesting outcome as we are in this pandemic. So it's a on an.
An area that we're managing it and but coming back to our personal loans and mortgage is on the ARPU side, we have been focused on how we do the underwriting and ensure that we are focusing on what we would call or all day plus book, where we've got.
Key income.
Income confirmation structures key Btwenty compliant stories and a real focus on how we manage that at a low loan to value as well we've had a very strong historic track record in this book, we're not seeing from a gross impairment perspective, and net charge offs perspective, any change in that book, which historically has been.
On the net charge offs from on four basis points. So it's been a strong book, but we are continuing to monitor our underwriting and then to current on point. The model is capturing the duration of fees models in a very volatile economy.
And then the only other fees I just I just come back to circle back on Darko is that.
This part Oh I'm.
On our historical loss ratio.
LG is very low so we'd be having a larger proportion in stage two on the driven out a materially higher allowance for credit losses.
No I can appreciate that that's not sort of what I thought, but what about real world ramification. So if I have 10 mortgage is coming due for you know in in January does that mean six out of 10 of them are you going to kind of you.
Do something different.
Does it change any behaviors.
Well not necessarily because I mean, if the if it goes into phase two if there's a two notch change in the risk rating and they could go it still could be well within our our our bad debt acceptable grading. So it's not that these are all turning into loans that you would look to not renew.
So it's just it's it's a function of how them on the works as opposed necessarily.
That's true is that you would like reduce your retention rate on existing mortgage so that that's a great question, yes, it's interesting the weight on work so theoretically any loan that was originated Jeffrey Cohen Merrill.
Should be shown signs of pressure potentially moving to stage two just by virtue of on the <unk>.
Yeah, well on the optimum on mortgage is when we revisit them on renewal and consider offering another commitment to those borrowers.
On stage, one stage two allocation starts from.
Total Harrison on whether there is on.
Expected two notch downgrade starts from when we have underpinned that moving again.
So if the economy improves from their mortgages should be stopped firmly on stage one.
And have little risk on moving to stage two on the future.
Thank you for that and on a follow up with.
It is my understanding that the optimum portfolio or is it not the optimal portfolio now I'm getting a little confused I have to go back and look at my notes, but.
For the a or B model.
I thought that it was the mortgage book that was in a very advanced state is that still true and does this have any sort of read through.
Or a or b.
No you're right after the mortgage and leasing on the two portfolios on the models were put into use first.
On the on that.
Got it side.
My model all came into play on the same time, when we went live.
So I wouldn't I wouldn't say that's true.
Okay.
All right. Thanks, very much hey, Thanks circle.
Thank you. The next question comes from on the more precise Cormark. Please go ahead.
Thanks, I just had a really quick point of clarification on an earlier answer I just want to be clear with you with respect to the outlook for PCR, because it's a little bit different than I would've thought so based on where we stand today on 2021, we should expect rising impaired pcls, but that's not necessarily going to be offset by performing releases I just want to make.
True, but I'm clear on that.
Well the effect on our overall PCL.
To moderate down from our overall <unk>.
All right.
Effect should return to normal pickup, but we do expect it to moderate.
One level.
If we look at 2019.
All of our 22 basis points full year PCL was related to on impaired loans and non was related to the allowance for.
On the Formula on slide.
2020, Weve seen a material portion on the PCL from 20 to 24.
On to works of performing well on less.
Lastly on towards the hair in 21.
They're to be assets.
Yes over the year.
So, although we expect total to be down from.
Fiscal 2020, we do expect the impaired portion of the Tcl true.
True 2021 to be higher net.
Right.
We expect that growth and parents will continue to tick up what we saw in the global financial crisis that on our parents peak day here. After the economy return. So we do expect that they will decline, but we'll be working with over the next year or two.
It would be more card pcls.
But within a total provision that we expect to trend down from the 2020 now.
Okay. That's great. Thank you.
Thanks Omar.
Thank you and your next question is a follow up from Gabriel Dechaine at National Bank. Please go ahead.
Right I I, just want to follow up on sort of line of questioning.
He said the eat you up number next year will be consistent so you did to it on your three this year than just the mechanism would be somewhere around that number I'm just trying to.
I understand that because the way I look at your exit rate on margin higher fees.
PC all.
The dollar value Peafiel total bank, there should be lower than this year loan base to higher from us, It's a big ramp up in expenses on <unk>.
On the I'm struggling a bit with.
A lot of growth message.
So.
We expect NIM to hold constant on <unk>.
For what we did.
Moving on in fiscal 2020 before interest rates fell on we'll be having the right on.
Mhm.
Yeah. So.
Loan growth as we mentioned in size. It here you talked about yes, we do [laughter] to be higher we're going to Uh huh.
Finally, we have five months of the wells this XOMA fiscal 2021.
We.
In addition, we have begun to.
The cost of operating as an add on bank and we have also begun to amortize that.
The cumulative capital cost is that program. So that's about an 8 million dollar.
These two are run rate on an ice for the year, so about $2 million per quarter.
That's true yeah, so our guidance around the efficiency ratio is trending a bit higher.
Then on me alright.
Okay that helps a growth for the clarification.
Thank you.
Thank you there are no further questions at this time I will now turn the call over to quick follow on for closing remarks.
Thank you operator. This concludes our question and answer period, well now turn the call on just to conclude and I would like to take a moment to thank our investors for their continued support and our teams for their tremendous efforts as we navigate the challenges of the current environment. We continue.
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