Q4 2020 Bank of N.T. Butterfield & Son Ltd Earnings Call
Good morning, My name is Andrew and I will be your conference operator today at this time I would like to welcome everyone to the fourth quarter and year end 'twenty and 'twenty earnings call for the bank of N T. Butterfield <unk> son Ltd.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Noah fields.
Butterfield head of Investor Relations.
Thank you operator, good morning, everyone and thank you for joining US today, we will be reviewing Butterfield <unk> fourth quarter and year end 2020 of financial results on the call I'm joined by Butterfield, Chairman and Chief Executive Officer, Michael Collins, and Chief Financial Officer, Michael Schrum. Following their prepared remarks, we will open up the call.
For a question and answer session.
Yesterday afternoon, we issued a press release announcing our fourth quarter and year end results. The press release, along with a slide presentation that we will be referring to during our remarks on this call are available on the Investor Relations section of our website at Www Dot Butterfield <unk> Dot com.
Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance.
For a reconciliation of these measures to U S. GAAP. Please refer to the earnings press release and slide presentation.
Today's call and associated materials may also contain certain forward looking statements, which are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements.
On slide 26 of the presentation and we are also included a list of potential factors relevant to the implications of COVID-19 for the bank additional information regarding these risks can be found in our SEC filings I will now turn the call over to Michael Collins.
Thank you and.
Thanks to everyone joining the call today.
And we'll begin our discussion with a look back at the full year and provide some observations on the bank experienced in 2020, and then provide an update on COVID-19, I will then turn the call over to Michael scrub of our CFO to provide a detailed review of the fourth quarter financials.
Turning now to slide four.
As a whole for 2020, I am very proud of Butterfield performance and the resilience of the business model.
And of near Zero interest rate environment, we produced net income of $147 million or $2 90 per share and coordinate income of $155 million.
Or $3 <unk> per share.
Which equates to a core return on average tangible common equity of 17, 3%.
NIM finished the year at 242% with an average cost of deposits of 21 basis points for the year.
We continued with a 44 per share quarterly cash dividend and completed a three 5 million and share repurchase program, where the most activity during the second and third quarters.
We also improved our capital profile with 100 million dollar flow.
And a quarter percent qualifying subordinated debt offering in June.
Butterfield business model, which focuses on maximizing returns while closely managing credit and operational risk prove successful during this period of uncertainty.
The global pandemic tested us across all jurisdictions and the <unk>.
Bank continued to perform well or.
Our technology and collaborative culture allowed us to maintain safe and.
To update services for our clients by decisively moving between the office and remote working environment as conditions required.
Our conservative credit profile consists of 65% residential mortgages with relatively low ltvs no out of market lending of loan to deposit ratio of just 39% and.
And and investment portfolio, consisting of 97% U S government and Federal Agency Securities.
The historically low interest rates and 2020.
A lot of renewed focus on improving efficiency.
As a result, we implemented a bank wide restructuring program to lower head count as well as moving non client facing positions to lower cost service centers wherever possible.
We were very pleased to complete the integration of ABN Amro Channel Islands of acquisition. This year. The channel Islands continues to represent a growth opportunity for us both organic and through potential acquisitions and.
In 2021, we are launching retail lending products to complement our U K mortgages business and to activate a portion of our sterling deposits over time.
We expect this business to be similar and underwriting standards and character to our loan portfolios and Bermuda and Cayman.
We plan to develop the book organically and anticipate it could grow to around $500 million over the next four to five years.
Finally, I would like to recognize the additions to our executive management team during 2020, which now benefits from fresh perspective, and deep experience to the role and trust compliance and operations risk communications and human resources.
I am proud and confident of our management team and believe we have the right people in place to grow Butterfield and reaches potential turning now to slide five.
Here, we provide some context and an overview of our core markets and how the bank continues to manage through the pandemic.
Bermuda Cayman and the channel loans continue to have active domestic economic activity.
Over much of the travel and tourism industry is operating well below historical norms.
The vaccine rollout is progressing well and.
And all jurisdictions have active government sponsored vaccination programs.
We expect the visitor numbers will continue to improve as we move through the summer and fall of tourism seasons in 'twenty and 'twenty one.
As we discussed last quarter.
Following the mortgage assistance programs, we had implemented of calling program and Bermuda to better understand <unk> status and the ability to restart payment.
I am pleased to say that the actual customer payment rates have exceeded the indications from the program.
At this point, we are seeing short term delinquency of less than 1% of the total residential loan book and continue to work closely with customers to determine the best way forward.
We are encouraged by these initial results we recognize that the pandemic continues to impact customers and will maintain close monitoring of the mortgage books and Bermuda and Cayman.
Our commercial lending book remains solid and has not been significantly impacted by COVID-19 related issues.
Direct hotel and restaurant lending continues to be Ltd, well underwritten and performing loans and I'll now turn the call over to Michael Schrum to provide a detailed review of the fourth quarter.
Thank you Michael.
I'll begin on slide seven we provide some highlights from the fourth quarter.
We ended 2020 with the most profitable quarter for the year with net income of $42 $1 million core net income of $42 9 million or 80, 686 cents per share and.
And core return on average tangible common equity of 19%.
The net interest margin was 2.25% for the quarter and the average cost of deposits.
Proved to 12 basis points.
Turning to slide eight net interest income continued to be impacted by lower market rates and particularly the reinvestment book yields on securities and lower the maturities.
Prepayment speeds and our investment portfolio moderated slightly in the fourth quarter compared to the third quarter. However, there was still elevated with $329 million of pay downs compared to $339 million and the prior quarter.
Investment yields were down 15 basis points, and the fourth quarter compared to the prior quarter.
New money yields averaged 1.46% and the fourth quarter of $4 seven basis points higher than the prior quarter.
During the fourth quarter, the blended rate for loan originations was $3 six 6% for $201 million.
All of those of new loans down from 393% $456 million of originations and the prior quarter.
On slide nine you can see that noninterest income was up one 9% compared to the prior quarter due to improving economic activity across our jurisdictions and increases across asset management banking FX and trust business lines.
The bank's contribution from piece continues to represent stable and capital efficient earnings for the fourth quarter fees were 38% of total revenue.
Slide 10 provides a summary of core non interest expense, which improved by two 6% in the fourth quarter compared to the prior quarter.
Expenses fell as we start to experience the benefits of the cost restructuring program and the third quarter, which achieved the expected reduced run rate.
In addition, lower technology costs, and indirect taxes improved which was partially offset by higher marketing spend on <unk>.
Creased, along with improving economic activity.
We continue to target a through cycle cost income ratio of 60% and we expect to remain in the mid sixties. During this ultra low part of the rate cycle.
Slide 11 summarizes regulatory leverage capital levels that we can.
<unk> to be in and <unk>.
Excellent capital position with capital ratios well in excess of regulatory requirements.
<unk> been pleased to note that our tangible book value per share has also increased eight 8% over the past calendar year.
Capital management remains an important value driver for the bank.
We continue to manage capital with an emphasis on protecting the sustainable quarterly cash dividend and rates.
44 per common share.
In addition, we maintain capital levels to support organic growth and our core markets as well as M&A opportunities.
Share repurchases subject to market conditions also continues to be part of the plan and EPS growth and of board of directors of authorized a new share repurchase program for up to 2 million shares for the coming 12 months period.
Turning now to slide 12.
Butterfield continues to manage a strong conservative and highly liquid balance sheet.
At the end of the fourth quarter on the loan portfolio represented only about 35% of total assets.
Whereas liquid assets were just over 60% of total assets.
Deposit balances ballooned to $13 3 billion at the end of the fourth quarter from 11 $9 billion at the end of the previous quarter.
We do expect some of the increase will be temporary and that the deposit balances will normalize over the next few quarters.
The bank has maintained a low risk density with risk weighted assets to total assets of 34, 4% down from 36, 7% last quarter.
On slide 13, we show the Butterfield asset quality remains exceptionally high with limited credit risk and its investment portfolio that is 99% comprised of triple a rated U S government guaranteed agency securities.
Non accrual loans were down slightly versus the prior quarter at $72 $5 million of one 4% of gross loans.
The net charge off ratio ticked higher due to the secondary market sales of one commercial loan that crystallize the loss of provision of previously recorded under the seasonal model and.
The old World NCR ratio remains very low.
The implementation of the seasonal accounting standard was well managed for our bank and has resulted in improved credit quality overall.
So of Butterfield the model has been responsive to portfolio performance and varying macroeconomic forecasts as expected.
On slide 14, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis.
Butterfield weighted average life of around $4. One years continues to offer some income protection against the impact of near to medium term low interest rates.
The unrealized mark to market gains on invested securities was $183 $2 million at 31 December 2020.
Similar to the past few quarters Butterfield continues to expect a potential increase and net interest income in future periods, and both up and down and parallel rate scenarios.
I'll now turn the call back to Michael Collins.
Thank you Michael I am proud of Butterfield performance during 2020, as we were able to achieve of core return on average tangible common equity of 17, 3% during a global pandemic and ultra low interest rate environment and at a time when our own markets, we're facing economic contraction and it was.
With confidence and the strength of our business that we were also well positioned to contribute and support local communities at a time when many people faced great uncertainty.
We were proud of to offer of the mortgage deferrals and offer our communities food security programs and other targeted charitable actions I would like to express my thanks to our clients staff and business partners for all of your support and contributions throughout the past year.
I believe Butterfield is well positioned to benefit from the anticipated economic recovery in 2021.
We continue to focus on building the world's leading offshore bank and trust business and aim to maintain top quartile risk adjusted returns with meaningful non interest income contribution limited credit risk and emphasis on efficiency and shareholder conscious of capital management.
And with that we'd be happy to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speaker phone. Please pick up your handset before pressing the keys.
And at any time of your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Michael Scavone.
Of K VW. Please go ahead.
Hi, good morning, everyone.
Good morning, Michael.
So with the with the TCE near the bottom of your target levels of your regular regulatory capital very healthy.
How should we think about the amount and the aggressiveness of your capital deployment strategy and and also on this point can you just discuss your deployment priorities and if youre seeing any opportunities for M&A.
Yeah. Thanks, Michael It's Michael Schrum, I'll kick off just on that sort of be of use side on that and I can tell.
Collins can talk a bit about the M&A charge you saw we obviously measure both tangible.
As well as regulatory capital sort of quite right and regulatory capital and benefited from a slight mix.
Shift in terms of getting out of a subordinated debt issued mid tier.
Which of your sons of yet.
The efficacy of the existing capital stock cheaper for us.
And also allowed us to continue and obviously with the buyback program and that was fairly substantial last year, particularly executing and Q2 and Q3.
And the priorities are.
I think as we stated early on is to protect the dividend that we havent come on line, which is we view as very sustainable payout ratios and around 60% of share.
On a property due to pro cyclicality of of reserve builds from seasonal and obviously rates being much lower.
And at the beginning of last year.
Secondly, obviously too.
To help the organic growth profile.
And our home markets, and Thats, Bermuda, and Cayman and why do we see opportunities.
And also accounts for any risk of migrations and and risk weighted assets on the regulatory side that might come from.
And from <unk>.
Experiencing additional credit issues, which so far we haven't.
And then thirdly, obviously, we look at M&A, that's accretive and.
Criteria on.
Fairly strict.
And we really don't just for banking assets and our home markets, where we can get some synergies and also obviously private trust companies.
And provide stable capital efficient fee income.
And at reasonable multiples and.
And Unfortunately, we look at.
On share repurchases and we were pleased to see that the board has approved and other.
Our repurchase program for the for the next 12 months and 2 million shares of up to 2 million shares.
And I'm sort of that'll be executed obviously subject to market conditions.
And if you look at on.
On price to book at the moment.
We're conscious of obviously your tangible book dilution.
Relative to share repurchases.
Still.
Sitting on a fairly deep discount on the on the P relative to peers.
So you know I.
I would say you know look at the last couple of years of buybacks and obviously, we will execute that.
And some went on to tangible.
So on compounds as sort of a net.
Bottom to the middle of the range of $6, one obviously ex cash it's on.
And off hire.
And I was probably driven by and OCI impact from Postretirement medical.
Fences, having doctor and loss on the.
Annual valuation cycle, so we're monitoring that as well.
All of the overall capital strategy. So nothing has really changed the same priorities as last year.
And obviously, we now have the firepower to.
Exercise side as well I'll, let Michael just talk about them and I.
So we are happy to finish the integration of ABN Amro.
Last year, and if you remember it provided us with three things first it was provided for the growth growth platform and the jurisdiction, where we have very low market share, obviously in Bermuda and Cayman and we've got sort of a 35% 40% market share so it's harder to grow.
Secondly, we reduced our concentration risk and Bermuda and.
And thirdly of created relative balance sheet parity of amongst our three banking jurisdiction and so strategically that that did a lot for us on.
And last year, obviously conversations we're pretty slow given the pandemic.
And we have a sense now that people are starting to get vaccines, and it's alright, and think about travel and starting to think about.
Transactions more across our jurisdictions and so we are.
Having some conversations but we're always very cautious about.
And thinking about whether they're going to come to fruition or the pricing as of right or.
All of Us where we want it to be so we are having conversations that strategies of the same several distressed companies across our existing jurisdictions and sort of overlap of acquisitions with a particular focus on Singapore, we'd like to build scale there and.
And secondly.
Overlap of acquisitions, and our existing jurisdictions, whether it be Bermuda, Cayman and or more likely the channel islands and so we continue to have conversations and we think this could be of Goodyear or to bring its operating as a conclusion, we're always cautious because of it we're very focused on due diligence and AML.
And where we operate so we will discontinue and having them and having those discussions.
Great. Thank you for all of that color.
And then.
My second question relates to the margin.
Should we expect the continuation of the slow.
<unk> downward and your books mature and continue to mature and this low rate environment or there are are there any further opportunity to offset our and at least stabilize they compression within 2021.
Yes, that's correct Greg Great question, So I'll, just try and unpack that a little bit starting with loan on assets. Obviously those of front book backlog as you know, we amortize all of our loans on balance sheets and manually underwritten.
Full recourse now and so you see that none of them, you'll kind of stabilizing even though it gave us a little bit of detail around the most.
Most recent loan originations, which was $3 six six and the end of last quarter, so down a little bit on the front of oxide.
Relatively stable overall and as you look at the whole at the non book as a whole we.
And we do expect some modest mix shift as we launch the residential lending opportunity and the channel Islands goes on.
Sterling loans, which would be on a slide and slightly lower rates, but again that will take some time organically to come through there and it would be activated out of our cash balances and activity. So.
So that should be helpful.
In terms of cash pretty much flow out there.
Five to 10 basis points.
You know, we're obviously watching the statistic current discussions on sterling rates and terms of where they might go and the future.
But that's probably that's probably reasonable there and thats been fully realized 60 willing to short and of the curve.
And then finally on investments.
And if prepayment speeds on obviously.
Pretty elevated.
Elevated throughout.
Throughout 2020.
Moving to approximately.
Five percentage of total investment book rollover, a quarter, which is which is almost double of what we saw in prior years combination there of a vet.
<unk>.
Very flat yield curve.
And then obviously on the opposite side of that we are deploying excess cash from the ABN Amro and to the Securities book, So you see of volume of.
Positive volume.
Impact from that so overall I'm expecting some stabilization and as long as sales of reasonable sort of 10 year and a sort of normal sloping yield curve that we've seen more recently.
But obviously at the short end of the curve seems to be a floor at FERC.
And longer period of time sort of medium term stabilization.
Around what are we all just kind of expect.
Okay very helpful. Thanks for taking my question.
The next question comes from Alex toward all of Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
So first off I was hoping you could give a little bit more color around the large deposit inflows that we saw on the fourth quarter and I guess, what drove that and then why we expect those two to move off balance sheet and sort of the timeframe for that to happen.
Yes, it's Michael Schrum, So I'll talk a little bit about it you can see on the average Collins study and it's pretty much two and towards the end of the quarter really a combination of.
Of retail deposits, but I would say slightly unusual flows into retail deposit base and that it was driven.
Poppy bye.
And the deferrals that we've put on mortgages here, where people were obviously keeping their payments and putting into bank accounts are again overtime I would expect some of that to flow out.
And came and mostly driven by.
And now the pension withdrawals, which is kind of a one off.
Fiscal stimulus that was provided there.
And again over time that could migrate into private real assets property or could migrate back out I think to some retirement portfolio portfolios I'm.
So again little uncertain day by day, our retail deposits, which is obviously very helpful and the other half roughly is related to sort of what I call Hot money. So.
Hedge funds flows and came in and capture of insurance on them.
Deposits and Bermuda, which typically follow sort of a premium kind of cycle at the end of the quarter and there's quite a lot of activity and the asset management space and.
And towards the end of the fourth quarter, but again I'm not and I, we're not banking on those deposits I think some of that will flow out of over the next couple of quarters, yes, it's difficult to hear and obviously, because we have our RMS and talking to corporate clients and encouraging them not to put a lot of deposits on our balance sheet, you know over a year.
And but it is difficult and advance. These are good clients and you can't and that's certainly turn away deposits, but we've been reasonably successful we'll retain some of it.
And as Michael said, we're not expecting to retain all of it.
Okay, and then just thinking about.
I guess.
The amount that potentially could flow out and then going back to the strategy of flattering cash and to investments.
Has that changed at all and this rate environment and is the goal there just to kind of consistently you'd still put whatever it is of 100 $150 million of cash and two.
And to securities per quarter or is there of different target such as just aiming to keep NII flat over the next couple of quarters.
By deploying cash.
Yeah, I mean, nothing's really changed in terms of the core balances. So so as we think about what's the behavior of lives nature of the underlying deposits.
And watching the AVN piece for over a year now and we feel we have a good handle on the on those client relationships, obviously, the sort of key to integrate our systems and get them onto one platform there.
So you will see that that's continued throughout the fourth quarter, so over and above the.
The maturities of would get from the investments, which obviously would keep rolling into lower rates. We're also deploying ex extra capex sort of clip of 150 around around out of quarter.
So on strategy hasn't really changed obviously as deposit base has increased quite a lot of it will just have to wait and see if that sticks around and what we can do with that.
You know, it's been pleasing, obviously to see 10 year, and a little bit little bit higher.
And so that that helps both slowdown and prepayment rates and also.
And it helps to reinvestment rates.
Got it and then.
In terms of the loan growth strategy, and the channel Islands, and 500 million over five years.
Is it fair to assume that by the end of 2021, you will be around $100 million is it a pretty straight line ramp up and just sort of how should we think about overall loan balances when we consider that potential growth versus other.
Loan categories, and I know, maybe a little inflated based on stimulus or around the pandemic or other items that are.
Other loan balance as it could actually potentially flow off the balance sheet.
Yes.
A lot of discussion.
Really just in the launch phase right now and so we lost.
And half of whatever but you know it would be fair to probably think of that.
Is it sort of tapered.
You know and annual increase we haven't really we're not really of loan growth story per se, but I think it's exciting nuclear angle.
Deploying some excess sterling and particularly as you look at the alternatives.
Of the Sterling at the moment of the secondary market or even kills.
Which of pretty pretty flat to zero.
Some of it will just depend on the reaction we get into the market and reception so far and obviously conversations are positive.
It seems to be some pent up demand there from.
You know there are other players high street banks and the market there as well and.
And we're.
And I'm not sure exactly how and how it's going to actually filter and but I think the.
So far so good.
Yeah and Alex.
And that obviously has to turn on the channel Islands and tier of full service bank on both sides of the balance sheet to look more like Bermuda and Cayman and also to dampen a little bit the percentage the U K and central London loans as a percentage of our portfolio we want to.
And it's been of great great portfolio, but obviously, we don't want and 50% of our overall loan book, So growing and the channel Islands will actually help quite a day, but as Michael said I think it'll it'll ramp up a little bit more slowly this year as we get into it.
Okay. That's helpful is that a broker driven market the way that the book and the U K is or is it more of a <unk>.
Originate and branch type of.
On product.
Yeah.
Yes, so there's a number of buildings, it's not a broker markets of direct underwriting market.
But it's there.
There are a number of buildings traditional building societies and.
Property brokers that operate as well as underwriters and that market.
And so there's quite a bit upfront.
Product available and we're obviously looking mostly.
At the same types of character on.
Writing that we do for Bermuda, and Cayman, and so would be sort of and the whole loan underwriting.
Yes, it's a lot more of like Jumbo mortgages, I guess and it actually interacts really well with our corporate management company of relationship. So if you have captured managers are of fund management companies of trust companies. We know a lot of the executives and all of these companies and once you start launching.
Mortgage is the corporate relationships often term into mortgage relationships personally as well.
Perfect. Thanks for taking my questions.
Thanks next question.
The next question comes from will Nance of Goldman Sachs. Please go ahead.
Hey, guys good morning.
Yes.
And well maybe COVID-19.
Maybe just a follow up on some of the growth initiatives and just how to think about how that impacts the margin over time I mean can you just give us a sense for kind of like what.
And what are you paying on Sterling deposits now and I heard you that the or charging.
And that the reinvestment rates on Gelson, something close to zero and it just seems like a decent amount of money to be able to kind of lever out at some kind of incremental margin and so just any thoughts on and how that can impact the margin and is.
Is that do you think that can be a net positive or is that going in your mind to kind of just largely offset declines in <unk> and <unk>.
Securities portfolio, and maybe run off of some of the higher yielding loans and legacy gestation.
And.
Yes, great Great question of work so it's a net.
Net positive, but it's almost too small and it's too small to offset over half of your periods and so you know once we get to sort of a.
More of a portfolio of basis, obviously that will be helpful. In terms of stabilizing.
And.
I think.
And from sort of types of rates us most of them much of prime Central London, So you're talking on the 350 gross.
Sterling so it'd be helpful to activate cash obviously day.
And <unk>.
Current.
Rates for.
Secondary market assets and Sterling is zero to 50 a day.
Super flat and it's almost like.
And then I'm talking about negative rates so.
We are not.
Not paying up for Sterling deposits I would say, but obviously there are overall client considerations. Following a b and there are some of our funds that we have that we service, both and Guernsey and Jersey that half of Sterling and tall of deposits. So it's more of a relationship based pricing.
But clearly it's a challenging and I think it's a challenging environment and secondary market I think the.
On the residential lending program will definitely be accretive on the margin side, but if you look at the volumes given that we're doing this organically. Obviously we were also.
Talking to other players and the market.
You know, we're pretty particular about the underwriting standards I would say.
So it's almost it's going to be too small and it's gonna be helpful, but not <unk>.
Totally offset if that makes sense.
Yeah, no that makes sense and then.
And maybe a follow up on on the question on the strategic discussions earlier I think you just mentioned that you'd like to take the channel Islands to look more like the Bermuda and Cayman jurisdictions and sort of in terms of being like a full service bank. I mean can you maybe just expand on on what the vision is for the footprint there.
Hi, how are you thinking about like the pieces you have in place today do you need to acquire more in order to make that happen can you build it organically. It can it be kind of brick and mortar light and I'm, just curious to kind of entering a new market and wanting to take market share. What your thoughts are on like how to build that infrastructure over time.
Yes sure.
We've been in the channel islands actually for years, and so we've had a presence there for quite a long time jerseys and new market for us to guarantee we've been there for for a decade. So we know the market very well it is a market and corporate market very much like Bermuda and Cayman.
And company's Bermuda is more captive and reinsurance companies came and Avi.
And so we hedge funds and captives and Guernsey and Jersey or of our both capex, but more funds and trust companies, but it is.
All of the same sort of management company structure. So our systems at our Rins are geared to servicing that business.
So we understand it well and and what we've done with ABN as I said is two we've gotten to the point, where we've actually balance to our balance sheet. So to speak of our risk exposures across the tier three jurisdictions well.
And it can be evenly.
And at the same from an earnings perspective. So came in 2020 made about 56% of our core net income.
For me to 31% and the channel Islands, and 14% and even though the balance sheet are of similar size.
Simply because.
And the channel islands are much more competitive from a pricing perspective, so that all makes sense. So I think we're kind of where we need to be to allow the channel islands to grow organically. Some of our focus right now is much more on the fee businesses on the trust side to try to build scale.
Across our jurisdictions, but particularly in Singapore, and that's not to say of.
And there was a decent sized bank and Jersey that were to come up for sale again theyre not of lot of natural buyers. So I think we would be interested but I think we've kind of got the platform, where the channel allowance can grow organically now and all three jurisdictions kind of grow together, so that we actually have a balanced portfolio of and we're not completely.
Many of them on one out of like Bermuda.
And.
The only thing I would just add to that is exactly right. The reason why we're growing and on a product by product basis. Here is we want to keep it bricks and mortar lives right and so there's a bit of proof of concept.
We don't need lots of branches to do residential lending platform and it could be a slick online form filling and processing.
And we're aware obviously of the competition there in terms of the true retail and.
Merchant acquiring is driven by HSBC parties and that west.
Lloyds et cetera. So.
That's one of the reasons.
And this isn't opening a whole bunch of branches at the moment, that's that's net stock with.
And stuff, that's most accretive for us.
Got it Super helpful and if I could just squeeze on of housekeeping note can you just kind of market to market on where we are on the fee income side, how depressed that is just from an environmental standpoint and.
Is there you know if activity levels kind of normalize across the various jurisdictions is there how much do we have to go and kind of whats the right run rate going forward.
Yes, I mean, it was great to see the fourth quarter increased obviously across the board.
Mostly from domestic activity. So domestic activity I would say is probably elevated and the fourth quarter of people aren't traveling and the spending here. So you get of that.
Domestic Christmas shopping.
Boost as opposed to and Amazon and shipping and <unk>.
And of boost.
For Christmas and so that's been and good what's missing is obviously the term related tourism related credit card fees that we normally get and the fourth quarter, particularly from Cayman.
And I asked him.
And on capacity, it's been severely reduced churn and program. So that's been that's been muted dispute few smaller positive items and banking fees and and.
The fourth quarter on as well.
But I would say, you're probably going to see.
You know the run rate is a decent run rate of those fit.
Small on the trust fees in terms of activity based fees too there was some.
Recovery and that property of good smaller than we would see on a run rate.
Syed and.
You would probably see of substitution from domestic activity in the merchant and acquiring side to credit card and tourism related.
And within the banking fees once once the borders open and when we get the vaccine passports.
Great Super helpful. Thanks for taking all my questions.
The next question comes from the tumor.
<unk> of Wells Fargo. Please go ahead.
Hi, good morning.
Wanted to follow up on the M&A and line of questioning.
And I guess and looking at the channel Islands.
Migrants there organically is good enough to launch kind of product by product I guess, what's the rationale for looking at some of these larger deals that they do come up is that and expense story I guess may be the rationale for doing a larger deal and the channel Islands right now.
So first and foremost I think.
And we talk about our market shares and pricing power, and Bermuda, and Cayman and being market share of $35, 40%, what's been attractive about both Guernsey and Jersey is we think we have a small market share had and still have a small market share in both jurisdictions and so we will and can grow organically, where we cant as well and Bermuda and Cayman So even.
And after the AVN acquisition.
We estimate our market share and Guernsey.
And we're all on the on the corporate side and private banking and trust side would be about 15%. So theres a lot more banks, obviously and the channel Islands, Bermuda and Guernsey, so even at 15%.
That gives us a platform, where we can grow organically, but if we were to.
Find them attractive acquisition that would be nice to be 30, 30 and 40%.
And what we're saying is at 15% and Guernsey, It's a platform where we are.
Last we can grow organically and we will be opportunistic about whether there's an acquisition Jerzy even more interesting and sense of it I think our market share. We're guessing is about 1%.
There's about 120 billion and Sterling and deposits. So it's a huge banking market.
And we only have a 1% market share. So I think jersey would even be more interesting on the acquisition side I guess the point is across both.
Guernsey and Jersey, we have enough market share that we can grow product by product organically, but if there were.
Very attractively priced bank debt were to come up for sale, we definitely would be interested and so our point is we don't need to do it but if it happened we would look at and Opportunistically.
Okay and Thats good color. Thank you.
And maybe looking at the reserve this quarter, Michael Scott can you maybe just go through.
Kind of what changed quarter on quarter, how much of that $7 million decline was driven by the commercial loans sale and I guess as we look ahead is this kind of a good foundation for the allowance or is there incremental opportunity to further release reserves.
Yeah, Great question, So a couple of things there.
Most of the B C.
And see some model and that reflects the improved obviously macro GDP outlook.
Which is sort of forecasting.
V shaped recovery and Q2, I think were being cautious and we'd like to see the vaccine programs.
Actually taking root and and seeing what actually happens is good news on.
On the on the domestic side, obviously on almost all borrowers resumed normal payments in Q4, so that was great to see.
Phil obviously, continuing to monitor of doctors still not.
Out of the pandemic yet.
So I think we.
And we should think about seasonal as opposed to the.
Backward looking model.
Reflecting on improved sort of credit on outlook and macro outlook.
The actual.
Release was.
About half and half so you see it tick up and in Seattle, which was the sale of the loans.
And that crystallized of law assumes and lower rated corporate loan and we also had a small silver and legacy loans from when we used to of a pump and operation.
Just kind of cleanup exercise.
So.
As you think about risk.
Sort of going forward.
Objective of six of those obviously to reflect the.
Future GDP outlook, and particularly the U S GDP outlook as well as the experience on the portfolio that feeds back into the model.
It's been.
Quite a year in terms of macro GDP forecast.
Which is causing more probably more volatility and continues on.
<unk>, which was not the intent.
When <unk> was implemented and so it's sort of hard to predict but I think we feel that the reserving battle and you'd be adequately reflects the underlying credit conditions and current.
The macroeconomic outlook.
To the extent of that becomes better and that would.
Result, and obviously from some release of.
Generally speaking if you if you look at the coverage ratio of et cetera, and we feel very comfortable that it reflects the underlying conditions of the loan book today.
So I know that wasn't been direct question, but I am sure Thats.
It's a difficult thing to predict a few challenges.
Right now Thats good color I appreciate that and one last one from me just looking at the expense base and you guys did a good job kind of.
Modelling that out are calling that out for the fourth quarter.
Is the expectation here that we should continue to expect expenses to migrate lower over the course of the year or some of these new initiatives going on to weigh into that trajectory.
Yes, I mean, I think we're sort of the editor of the three it's probably an appropriate run rate following of cost restructure of program. There is a bit more staggered release of benefit that's coming into Q1, but it's a bit of backfill and coming into that as well.
We do keep a sharp focus on expenses and this ultra low part of the cycle.
And I think you know mid sixties efficiency during this part of.
The rate cycle.
And we're wherever you're gonna stay but it is also worth remembering that we.
We're not subject to a corporate income tax we pay all of our taxes and the <unk>.
Fence line, which kind of start kind of 4% to 5% dilutive effect on the cost income ratio.
And we keep a sharp focus on and it was obviously you got it.
To execute on.
Restructuring program, but I think it was the right thing following the health crisis.
Yeah and our.
Full full run rates and terms of our cost reductions will hit in Q2. This year. So we as you know we did substantial voluntary departures early retirements redundancies and 2020.
Wouldn't see us repeating that in.
This year.
We obviously are very focused on operational risk and.
We don't want to cut into bone, but I would say, we will continue to focus on and Halifax, as our service center and continuing to move operational.
Non client facing positions to Halifax, and perhaps and going for four of five years. We of 150 people up there now and it's a really good model will continue to to support and moving.
Positions from higher cost jurisdictions to Halifax.
Great. Thank you for taking my questions.
Again, if you have a question. Please press Star then one.
The next question comes from David Feaster of Raymond James. Please go ahead.
Good morning, everybody.
And I just wanted to start on on your asset sensitivity of it clearly youre very accurate.
Clearly you're very asset sensitive at this point you guys have demonstrated that just curious how are you.
On the plane and manage your rate sensitivity it looks like Youre staying pretty short on the securities book, but just given your leverage to rising rates does that maybe give you a bit more confidence to take some duration on the securities book to get some yield and maybe drive some of it accelerating NII growth.
Yes.
It's been interesting to see as people start talking about negative rates and what potentially that impact could be in terms of us charging negative rates to customers and then now.
And Richard but I think again the strategy hasn't really changed from keep flattering out what's maturing and the reason why the duration is pretty short and I think why we wanted to put the weighted average life on there as well and and.
And the unrealized mark to market position is obviously, we're fighting against the prepayment speeds, which are very very materially elevated I would say, partly fueled by refinancing rates and new.
You know new originations and the U S market so of MBS prepayments speeds of just been.
Very elevated in addition, and also to the buyer out options that have been offered.
Each of those securities. So we keep to Slobbering out what's maturing.
And then I think the pace of flattering and out the ABN.
Is has not changed and we should match the behavior of duration of the underlying deposits as we grow of the dataset around the AAV and deposits.
As we get into and again, we're not of mark to market shop. So.
We don't sort of speculate on on.
On behalf of sensitivity just naturally occurs because we are of very low.
On loan assets to deposit ratio and don't ask me to total asset ratio and Thats just a function of the markets that we're in.
But.
To the extent of we are starting to see some creeping up and.
On a more normal yield curve, obviously that does provide some opportunities for us to think of bit more tactically you're bound of deployment.
But.
For the time being and suddenly over the last year, it's to spend on a case of of moderating the impact on reimbursement rates and prepayment speeds through the readout of ring and.
And we will continue and continue to do that but we obviously constantly review of the books from also a booking of tactical opportunities.
Okay. That's helpful. And then just it was great to see the increasing and AUR.
AUM and the quarter just curious how much of this growth was from market increases and increases in underlying assets, whereas nuclear.
New client additions and maybe just kind of how that translate and asset management fees going forward.
Yes, so about about half so about half of the book.
On the <unk> side as the money funds that we run.
And Bermuda and that's really too on the house.
Some additional optionality for for hot money, and particularly of our customers who want to balance their exposures from on balance sheet AAA rated money fund.
So thats just fees that we generate from our estimate of a subsidiary of the other half of it it's really in the discretionary bucket and brokerage fees. So that's responsive obviously to changes and market market valuation so about 50%.
Okay.
Okay, and then could you just give us kind of a pulse of the market and Bermuda and I guess across your footprint the health of the declines and the housing market and maybe where we are and the recovery.
Yeah sure so starting with Bermuda.
From a COVID-19 perspective, we've got 10 active cases, so there was a bit of a spike up around December but its kind of right down and again the testing is really efficient and and it's worked really well.
Mall place and you're surrounded by.
Miles of saltwater so it tend to be able to control. It so it covers and good shape.
The public sector of fiscal position and Bermuda is elevated and I would say just in terms of national debt and deficit some of it.
And it caused by Covid, but we came into the crisis with a reasonable amount of national debt. So there's less government flexibility in terms of spending.
And I would say as Michael mentioned, the local market has been pretty active because people are traveling so.
And just like everywhere else people over and out going into restaurants outside of that sort of thing. So that's kind of mask some of the things some.
Some of the underlying pain of not having tourists here sorry.
And so I think when tourism comes out we'll pick things up surprisingly, we're maybe not surprisingly housing.
The market has done quite well.
Whether you're in Vermont, or Bermuda, and Cayman and people are looking for.
Places that are safe and clean and have very few of Covid cases, and not just now but for future Pandemics and so we've seen a lot of interest both locally and internationally and Bermuda real estate and came to real estate.
So I'd say, we're holding our own and Bermuda, but that recovery is going to be pretty tough came and just doing a bit better simply because they came into the crisis with no national debt.
And much lower deficits, so their and their GDP has been growing more quickly than Bermuda I think they will come out of the crisis of more easily same story on the housing market housing and came and was doing really well even before the pandemic. So I think there and continue do well.
They've got about 35 active cases can do a component of it is 10 channel Islands has 400 active cases.
So a bit more obviously closer to the U K, but they've also got.
110000, new people and New Jersey, and 60000 day.
And in Guernsey sort of its three times the size of Bermuda and <unk>.
And together, so a bit more cases guarantees a bit more shutdown right now economically again both.
Currency and Jersey, and extremely well managed both politically and economically so no national debt.
And so came into the crisis well from our fiscal position.
GTT has done well before.
Fund sector continues to do well so I think there on great shape, so across the board and I think I think our jurisdictions of actually handled it pretty well yeah. We do think it's a bit of a fake spring and the sense that because theres. So much domestic activity that is kind of mask some of the underlying issues that will come out.
Even as tourism sort of starts back up but.
And in some sense, we feel like we may have missed a part of that but.
Each islands of different in terms of where its fiscal situation is and some can spend more than the others.
Island has borrowed money to handle the pandemic and in terms of incentive.
Spending and getting money out of the community and we've been pretty much part of all of those facilities, which has been great. So I would say looking back.
And March last year, we saw I think we would've thought it would've been much worse than that and it's actually been.
That's great. Thanks for the color thanks, everybody.
This concludes our question and answer session I would like to turn the conference back over to Noah fields for any closing remarks.
Thank you Andrew and thanks to everyone for joining us today, and we look forward to speaking with you again next quarter of a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
And with those changes.
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