Q2 2021 Canadian Western Bank Earnings Call
Ladies and gentlemen, this is your operator for today's conference scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Good morning, My name is Michelle and I will be your conference operator today at this time I would like to welcome everyone AWP second quarter financial results conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks.
There will be a question and answer session. If you would like to ask a question. During this time simply press Star and then number 1 on your telephone keypad. If you would like to withdraw your question. Please press the pound key thank you.
Now I'd like to turn the call over to Mr. Patrick Gallagher, you're making begin your conference.
Good morning, and welcome to our second quarter 2021 financial results Conference call. My name is Patrick Gunnar and I'm, The Vice President, leaving our strategy and Investor Relations team I would 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.
Results could differ materially from expectations due to various risks and uncertainties associated with the CW piece business. Please refer to our forward looking statement advisory on slide number 2.
The agenda for today's call is on is on the third slide presenting to you today are Chris Fowler, our President and Chief Executive Officer Road, our executive Vice President and Chief Financial Officer.
Following their presentations, we'll open the lines for a question and answer session I'll now turn the call over to Chris who will begin this discussion on slide 4.
Thank you Patrick and good morning.
Our teams continue to deliver financial performance that surpassed our expectations this quarter.
While we benefited from a lower provision for credit losses compared to the same quarter last year, a major driver of our strong financial performance was growth in net interest income.
Pretax pre provision income increased 11% compared to the same quarter last year, and we significantly increased our full year earnings per share expectations. This quarter.
Our focus to support our clients by investing in our capabilities and product offering is creating solid growth opportunities for CW be especially as the near term economic outlook improves.
We're seeing signs of a strong economic recovery that could provide additional accretive opportunities within our risk appetite to surpass our baseline loan growth expectations.
To provide capital flexibility to take advantage of these potential opportunities we plan to establish an aftermarket common equity distribution program.
This program will provide a flexible and efficient tool to grow our regulatory capital base if needed in parallel with strong levels of loan growth to drive incremental shareholder returns.
We also continued to make strong progress on our strategic priorities, which is reflected in the growth and further diversification of our funding sources. This.
This quarter, we increased lower cost branch raised deposits, 2% sequentially, which supported continued net interest margin improvement and revenue growth.
Our total loans were up 3% compared to last quarter with robust growth across all provinces and the strongest activity in our commercial mortgage and general commercial portfolios.
Within these 2 categories, we continued to support existing clients, while also adding new full service relationships with strong credit profiles.
Our strategic focus on geographic diversification resulted in continued general commercial growth.
Loan growth in Ontario, driven by effective collaboration between our Mississauga banking center and our other lines of business that lend in Ontario.
As the economy recovers, we will be well positioned to accelerate our growth and capture increased market share in the province fueled by our planned opening of a second full service banking center in fiscal 2022.
Throughout the quarter, we have gained significant insights as we continue to use our AI or be tools and processes across our business and have identified opportunities for enhancements that we expect will improve our efficiency and effectiveness as an ARV bank.
We plan to implement these enhancements and expect to extend our previously communicated timeline for Resubmission of our AARP application beyond the first half of 2022.
Believe this approach will result in a more favorable long term outcome for our teams and affirm dusters.
We also continued to execute on the development of our digital client offering which will provide end to end digital banking to complement our proactive relationship based client experience in the second half for 2021, we will commence a limited initial rollout of our virtual C O O a digital solution powered.
By Explainable artificial intelligence. This innovative digital tool will provide small business owners with access to real time information on their financial health and relevant insights to accelerate their business growth.
Our enhanced and targeted digital capabilities will enable us to continue to grow and diversify our business across Canada by winning new clients, both within and outside our branch footprint, while further broadening our access to stable lower cost funding.
This quarter, we were recognized by great place to work is 1 of the 50 best workplaces in Canada for the second consecutive year.
We're proud to be recognized as a career destination for top talent or teams continued to make significant progress on our ambitious strategic agenda during the exceptional circumstances of the past year.
There's no question that our people are core to our success and receiving this award is especially gratifying as it is based on confidential feedback from our teams.
Ill now turn the call over to Matt, who will provide greater detail on our second quarter performance and improved outlook for 2020.1.
Thanks, Chris and good morning, everyone. So.
So turning to slide 5 on a full year basis branch raised deposit growth of 18% reflects our continued focus on full service relationships day.
And notice deposits, which are our lowest cost source of funding increased 34% compared to last year and now accounts for 42% of our total funding. We also continued to build greater funding diversity on the strength of our capital markets program with 2 senior deposit notes totaling $750 million issue during the quarter at historically low credit.
Fred's.
Our efforts to grow and diversify our funding sources drove a reduction in the outstanding balance of broker deposits, which now represent 21% of our total funding compared to 26% last year.
Looking at slide 6 our total loans increased 7% in the past year that was supported by robust growth across the country are 24% growth in commercial mortgages, primarily reflects strong new lending volumes in British Columbia, and Alberta with high quality borrowers that remain within our risk appetite. We also drove 9% growth in our strip.
<unk> targeted general commercial portfolio, including 15% growth in Ontario, total, Ontario loans grew 10% compared to last year and now represent 23% of our total loans.
7% growth in Alberta, primarily reflects general commercial loans and growth in commercial mortgages.
On a sequential basis, we delivered very strong growth in commercial mortgages, approximately 2 thirds of that growth related to strong existing CW be clients and we've had success in maintaining the lending relationship uncompleted real estate construction projects, our general commercial growth. This quarter was very well balanced across numerous industries with clear.
With very strong credit profiles.
This loan category is a strategic growth area for us as it provides excellent opportunities to increase our full service client relationships.
As slide 7 shows we delivered very strong second quarter results. Our common shareholders' net income increased 40% and pretax pre provision income increased 11% compared to last year now, let's supported by strong loan growth and higher net interest margin. Despite the low interest rate environment adjusted.
Adjusted earnings per share increased by 24 cents from the same quarter last year. We did have a 17 <unk> contribution from our lower total provision for credit losses, and that was primarily driven by a net recovery of $5 million and our estimated provision for credit losses on performing loans compared to a charge of $19 million last year.
Higher net interest income compared to last year contributed 22 cents to EPS and reflected the benefit of a 13 basis point increase in net interest margin and 7% annual loan growth.
That was partially offset by the impact of 1 fewer interest earning day this quarter.
Excluding the wealth acquisition higher non interest expenses reduced EPS by <unk> 10, as we continue to invest in our strategic priorities and incurred the costs associated with operating our AARP tools and processes.
We also paid the first semiannual coupon payment on our series 1 <unk> during this quarter, which reduced EPS by <unk> <unk>.
Lower gains on security sold this year reduced EPS by <unk> <unk> as in the prior year gains were higher as we rebalanced our security portfolio to reflect a significant shift in interest rates.
Our sequential earnings performance as shown on slide 8 and reflects a 1% increase in total revenue. Despite 3 less interest earning days this quarter.
Our common shareholders' net income decreased 9% and pretax pre provision income decreased 3% compared to last quarter.
Adjusted EPS was reduced by 9 primarily due to a 5% increase in noninterest expenses as expected and the semi annual L. RCN coupon payment made during the quarter, both of which had a 5 cent EPS impact.
As shown on slide 9 our net interest margin has continued to build since the third quarter last year.
During the second quarter, our net interest margin increased by 6 basis points compared to the previous quarter. This reflects the positive impact of proactive deposit pricing changes that we were able to execute while also driving strong branch raised deposit growth.
We had a onetime 2 basis point benefit associated with balance sheet management activities corresponding to a shift in our funding mix. The NIM expansion this quarter combined with 3% loan growth more than offset the impact of 3 fewer interest earning days to generate 1% sequential growth in net interest income.
Turning to slide 10, the second quarter provision for credit losses on total loans of 20 basis points was up 2 basis points from last quarter.
Our performing loan provision for credit losses was a recovery of 7 basis points compared to a 6 basis point recovery last quarter.
Compared to the same quarter last year. The total provision for credit losses was 29 basis points lower driven by a 34 basis point decrease in the performing loan provision for credit losses, primarily due to improved macroeconomic forecast associated with the ongoing economic recovery.
Our allowance for credit losses on performing loans totaled $121 million and as previously.
We noted that was a decrease of $5 million compared to the previous quarter the for.
Forecast to use it in our estimation of the performing loan allowance. This quarter was slightly more optimistic than the outlook. We used last quarter. The credit performance of our borrowers through this quarter was stable with overall levels of delinquency that remained well below where they were just prior to the emergence of the COVID-19 pandemic.
We continue to maintain an appropriate level of performing loan allowances for credit losses based on the current volatile economic conditions ongoing shifts and macroeconomic factors changes in the level of portfolio defaults or changes in the risk rating of our loans will continue to impact the performing loan allowance in future quarters.
At 27 basis points, our provision for credit losses on impaired loans was 3 basis points higher than last quarter and 5 basis points higher than the same quarter last year gross impaired loans were 95 basis points.
Total loans up from 93 basis points last quarter and last year.
Our realized write offs remained low which has been consistent with our historical experience even through periods of elevated levels of gross impaired loan formations.
Our strong credit performance reflects our prudent underwriting the secured nature of our lending portfolio and our disciplined management of impaired loans through to resolution, while limiting realized loan losses.
Based on our current outlook for the Canadian economy. Just described further in our MD&A, we expect for the second half of fiscal 2021, a total provision for credit losses and basis points within a range between the high Twenty's and low thirties and that will be mostly attributable to impaired loan provision for credit losses.
That said, we acknowledge the current operating environment is unique as is the path forward considering potential shifts in COVID-19 infection rates restrictions enacted by public health authorities and changes in government support and stimulus, which makes the expected level of impaired loans and expected losses difficult to predict.
Our capital ratios have remained relatively stable over the last year as noted on slide 11 calculated using the standardized approach our common equity tier 1 ratio was 8.7% 10 basis points lower than last quarter, and 40 basis points lower than a year ago. The change from last year was primarily as a result of our wealth management acquisition.
The change in this quarter was primarily as a result of our very strong loan growth.
Both our tier 1 and total capital ratios are significantly above prior year due to 2 <unk> issuances and we plan to fully redeem our series 7 preferred shares on the next redemption date available of July 31.2021.
Yesterday, our board declared a common share dividend of 29 cents per share consistent with the dividends declared last year and last quarter.
Looking forward on slide 12, while we expect the trajectory of the economic recovery will be dampened in the near term continued vaccine delivery has provided optimism for a strong economic recovery once restrictions are loosened under.
Under the assumption of a gradual recovery of the Canadian economy, we now expect to deliver full year 2021 percentage growth of adjusted EPS in the mid teens, primarily as a result of stronger net interest income and lower provisions for credit losses than previously expected.
Higher net interest income is expected to be driven by stronger loan growth. We now expect to deliver loan growth in the high single digits on a full year basis. In 2021 net interest margin is expected to fluctuate around 250 basis points over the second half of the year not from the assumption of relatively stable funding cost.
We do expect continued branch raised deposit growth, but at a lower level than the first half of fiscal 2021 as strong growth from expanded full service client relationships is expected to be partially offset by declines in deposits due to increased business and consumer spending through the expected economic recovery.
With stronger net interest income growth, we expect our efficiency ratio on a full year basis to finish between 48 and 49% as we continue to make the planned investments in our strategic priorities for our clients and also including the expenditures associated with our <unk> parallel run as.
As Chris mentioned earlier, we're seeing signals of a strong economic recovery that could provide additional opportunities to surpass our current loan growth expectations, while remaining within our risk appetite to provide the capital flexibility to take advantage of these potential opportunities we plan to establish a $150 million at the market common.
Equity distribution program. This program will provide a flexible and efficient tool to grow our regulatory capital base if needed in parallel with stronger levels of loan growth to drive incremental shareholder returns.
With that Michelle let's open the lines for Q&A.
Yes.
At this time if anybody has a question. Please press star 1 on your telephone keypad I cannot be strength Glenn on your telephone keypad for the first question comes from Paul Holden from CIBC. Your line is open.
Thank you good morning.
There's some confusion out there regarding the a T M, which you just referred to and so it's probably worth drilling down on that a bit just so people understand.
At what level it might be used so I guess, that's my first question and my estimates suggest that if you're growing loans at something over around 8%, that's kind of where you might need to tap into new equity capital. Maybe you can verify if that's a reasonable assumption or not or what the right assumption would be.
Yes, good morning, Paul Yes.
Yes, you are absolutely within the ballpark.
The level of loan growth were expecting that high single digit.
I mean, that's something we can deliver within our existing capital base and so we feel really good about that the purpose of the ATM is for those situations, where we look in and we're starting to realize or we are very certain that our pipelines are strong and delivering loan growth above those levels.
It looks likely so that's what we would be looking to use the ATM for I would be to match it to loan growth for generating above our current expectations in order to maintain our capital ratios in or around current levels.
Understand.
And the other math was running I was just to maintain your capital levels figuring out you know, let's just use the 150 million Max how much of additional loans that might.
Correspond to so given given your current loan or a W. A to C. T..1 I figure, it's roughly an 8 to 1 ratio in other words $150 million of equity you would get you roughly $1.2 billion of loans does that.
Again on the right right ballpark or yes, your math your math on that solid I mean, the actual <unk> consumption of course will depend on the mix of loan growth.
But expecting the current mix continuing as a reasonable assumption.
Okay. That's great. Thank you and I guess, the last point of clarification I think I understand this 1 but I think it's important to clarify.
You're repaying $150 million of process, but still planning a $150 million up to $150 million of a T. H T M.
Those are not.
Mutual exclusive decision because your regulatory limits there are regulatory limits excuse me on press and L RCI and so.
You couldn't just simply keep the press and not do the ATM is.
Is that correct.
It's a decision that are there are 2 independent decisions. So our call to redeem the series 7 preferred shares as if you just look at our capital stack right now our CET 1 it's about well, it's 170 basis points over regulatory minimums are tier ones 270 basis points over our total 240 basis points over.
So the redemption of our series 7 shares is to reset the middle and end of that stack.
Down to what we think are more appropriate levels and also in recognition that the series 7 perhaps theyre quite expense of spreads 547 basis points over.
So also quite expensive.
We view the <unk>, we raised they were replacement capital for these <unk> shares and we were able to do that on a fairly accretive basis. So that was the thinking there just a bit of a timing lag between when we issued the LR <unk> and then the redemption of the perhaps.
Got it okay I'll re queue. Thank you.
And your next question will come from John Kim from day share again your line is open.
Hi, Good morning, just maybe a further clarification on the ATM I mean, what would your what would you be willing to take your set 1 ratio down to before you felt you needed to tap it or are you at that level, where if it actually went down 10 basis points.
You you would feel compelled to kind of tap into that ATM whats that trigger point.
Yeah, Doug we are in no imminent danger or imminent risk I mean, we like where we're sitting right now when we look at what's in front of us.
We've been comfortable at this level through Covid, we've been hanging around this level. So the intent would be to to maintain it and around this range based on what we see if we do see a little bit of volatility around that that I mean, that's okay.
And that's why we like this program I mean, it puts us in the driver's seat it allows us to be flexible and mindful of the loan growth that we see as it actually occurs or as it's very solidly in our pipeline.
And the fact, we're not looking for it on an emergency or rush Acs also allows us to be very thoughtful about when we're issuing.
How much we issue at once when we do it.
At what price they just it puts a lot of tools in our toolkit.
And a lot of flexibility to be very opportunistic with debt and the fact, we're in a good capital position right now adds to that optionality flexibility and ability to be opportunistic.
Okay. So you like where you are now, but if you started to move lower from this level. That's when you would start to kind of.
You would start to click into the ATM essentially.
That's right, yes, we saw loan growth there that we are realizing that was starting to drift us lower than yes. This this would be the offset is we would look to.
Issued the incremental shares to match up to that incremental loan growth.
And then just for their I thought and maybe you can correct me if I'm wrong like I went back in time in my memory here and I thought you didn't eat into your side, 1 quick because clearly at a 7% loan growth this quarter year.
You reduced your set 1 ratio as that was the explanation in the MD&A, but I.
That didn't occur until it was loan growth was in.
You know the low the low double digits before is there structurally am I wrong on that and is there structurally been a change.
And in your in the capital.
Yeah change.
Change in how that works.
Yes, I mean the.
The grind on CET, 1 from loan growth will be dependent on where we're growing our growth. This quarter. I mean, it was very commercial focused and I mean, our commercial loan growth at all virtually all of it attracts a 100% risk weighted assets.
If we had a more usual mix with.
Retail residential as a component in there it would've been a a lower grind on capital of course, you would have noted.
That our retail residential continues to go backwards this quarter so.
It's a case of composition of loan growth first of all I think the other big factor is just the level of profitability as well I mean, NIM is a little bit compressed not much considering the low interest rate environment, but it is a bit lower.
And what it was pre Covid as is our provision for credit losses, a bit higher as well.
We're also making strategic investments.
In intangible assets, which are a grind to CET, 1 as well so it's the mix of all those things that I do agree with you, though we're now at a point, where if we're generating purely commercial loan growth.
We're not in that double day jet or just above double digit before we consume capital it is a little bit of a lower level.
Okay, and then just on the AARP conversion delay.
Maybe you can just flesh out a little bit more why and then Chris I think in your prepared remarks, you mentioned, it's going to have a more favorable long term outcome can you unpack that like what would be that more favorable long term outcome.
Well, we're in the parallel run so we're able to really evaluate how the models. We've developed work how it sort of matches up to our our business and what we're seeing is we've got some real enhancements that will help us both in our business processes the feed.
Feedback it gives us on credit migration credit quality. So we see some real opportunities to improve the structure of our program and with that improvement we need for business development and of course, then we have to test them and run them to make sure that they are delivering the outcomes. We anticipate so it's really just extending but.
This is a.
An event debt.
As an operating model for the bank for the future that we just see really.
Important to invest the time at the outset, so that we have it really in very good shape as we take it forward for that.
The final submission to Asti. So we're happy with the progress there is work to be done and we're just looking at extending what we think.
Submission date will be on this.
And so would this free up more capital than it was before is that that would be our.
That's obviously our goal is as we think about what couple of floors might come into play at the outset I mean, our focus is.
Ultimately to get at the same level as the day.
Our focus is we have a very high quality portfolio that performed very well, we like our market.
Segment that we have really specialized in and this is <unk> is a fantastic tool to really support our growth and we're going to make sure that the process under which it operates is as efficient as possible and provides us with the best capital management opportunities accounts.
And then just lastly was this driven by yourselves or was this something that was mandated by RSP.
So this is our parallel run.
And we are we have.
Our strong team over looking at and of course as you know Carolyn Graham is now the leader of that that team and we just have lots of good insight and we're just seeing.
Good opportunities for us.
So this wasn't something that Osophy said they wanted you to do.
The delay.
No. It does not specifically anything that they've said to do no. Okay. Thank you.
Thank you.
Your next question will come from monarch Rodman from Scotia Bank. Your line is open.
Hi, good morning.
On rate sensitivity just trying to think.
Through sort of the <unk>.
Upside here.
In your published sensitivity looks relatively low compared to well just what 1 would assume based on the fact that you are so heavily skewed towards NII and then.
In the MD&A talks about <unk>.
Based on the current interest rate GAAP position of 1 percentage point increase.
In rates would have an insignificant impact on net interest income I'm, just wondering how do I understand that again, given given you're a skew towards NII and just is there upside to rising rates, that's not being captured in your published sensitivity and how do you think about that.
Yes, great question, many very very topical.
Definitely has been a structural change in our liability profile. I mean this is the strongest liability profile that I can see looking backwards in terms of diversity in terms of levers at our disposal, but it is a structural change.
Isn't changed is that about 45% of our loans are at floating rates.
What has changed is that about half of our deposits float that.
That used to be about 35% ourselves. So I mean, thats a structural change and that's resulted from us winning more more full service clients and then obviously a factor of people just naturally favoring liquidity rather than term given the interest rate environment.
Our NIM will still benefit from prime increases I mean, that's a component of floating rates not all of our floating products float with prime.
A larger proportion of our floating rate loans are linked to prime about 80% of them or so.
Compared to deposits less than half of those floating rate deposits are linked to prime but even that's much closer than it used to be so I would say today, we are less rate sensitive and I'd say, we are spread sensitive at this point and things that will cause our NIM to move.
Would be competition for funding.
How we're able to deliver yields on our lending and any comp competitive factors there.
How we're able to match, our new funding sources to those higher levels of loan growth.
Over time people will eventually start trading back liquidity for term funding.
These are factors that that will influence our NIM, certainly and how it plays out.
Ultimately and how much NIM, we put to the bottom line in a rising interest rate environment.
In my view will depend on our ability to continue to win new full service client relationships.
That's where we can really win by putting a lot of lower cost funding in to offset some of the shifting dynamics in our fixed rate products overall, though I mean, we're looking at a win to NIM as a result of rising interest rates prime still accretive to NIM, we're thinking what the.
<unk> structure, we have right now we do not need the 150 basis points of bank of Canada reductions returned to us back in the form of increases to get our NIM back.
Back to where it was pre COVID-19.
It is a proportion of that we don't need 100% of it.
And so that does speak to a lot of upside. We think we can continue to drive as a result of our continued focus on winning full service clients. I mean, that's the key for US and you will not see that fall out of our interest rate sensitivity disclosures.
That's a static balance sheet view of the world and our strategic direction will have us be anything but static in terms of higher levels of loan growth and continued focus on more cost branch raised deposits.
Thanks, Matt that was pretty comprehensive and then if I can just.
Another question just in terms of gross impaired loans the increases.
In 2 specific categories of general commercial loans and then also on the on the real estate side I'm. Just wondering if you could give us a little bit more detail into what's going on there.
Is it the increase very concentrated is there anything that you can.
Sort of.
Dig out of that in terms of themes that you see developing in terms of the build in gross impaired loans.
Well I don't think we see in.
In particular themes, we anticipated as we would come through this pandemic as we that we would see an increase and we've been I think what we where we sit at the end of Q2 is pretty much. What we said we expected in Q1 and our outlook as we are in and around where we anticipated we said about 30 basis.
Points on PCL.
In this particular portfolios we've seen.
A little bit of movement, both in the general commercial and in the.
In commercial mortgages.
And we see a couple of exposures, there, where we've been very conservative in our allowances.
Our goal is just to be to run it very very tightly we've got a very strong team that oversees our.
Our Watson impaired loans.
And we just take very specific action, we've always been very.
Proactive in management of of.
Of unsatisfactory loans and that's not changing.
Thanks.
Thanks Mindy.
The next question will come from Gabriel Deschaine from National Bank. Your line is open.
Good morning, and my first of all just a quick 1 on the ATM and just kind of how to conceptually view. This thing is.
Sort of a bridge to a IRB transition.
Because.
The point of IRB transition of book.
You could accelerate your growth in.
And it wouldn't be alert.
Intensive under that model.
So we're waiting for that conversion was up more or less debt.
Well, yes, Gabe we are a standardized bank until we are not and continue to manage our bank in that fashion.
I mean this the ATM is about near term growth opportunities that we're seeing build and this is really the program to be able to take advantage of those I mean, its really sending a strong signal, we think to our teams internally as well as the market that.
Despite.
I mean, that's a separate conversation. This is a case, where we're not going to sit on the sidelines. If we see opportunities to participate in loans that are on strategy within our risk appetite.
Good full service borrowers we've been chasing for a while and now finally have the opportunity to land them. I mean, this is a case of giving the green light to them.
Your point on <unk>, I mean, not as the whole reason for doing it or 1 of the primary reasons. It is a tool that will allow us to accommodate higher levels of loan growth.
Without consuming capital so that that is still true.
Not a tool we have today and it would be the most accretive path, but the path for carbon is a standardized bank is still accretive still exciting still delivers to the bottom line still drives Roe. So.
It's a big win for us and our teams if we can deliver that loan growth.
Okay.
<unk>.
Okay.
You talked about the parallel run and costs associated with that have you ever.
Those.
So could you if not could you.
And also.
For those drop off lets say, you convert and get approval in 2023 or something like that.
Ill just fall off.
Yes, Gabe we have quantified what I would call our normal run rate of costs related to the running <unk> and Thats really depreciating what was on our balance sheet that we had previously capitalized in developing the tools.
It also accounts for the ongoing team that runs develops tweaks.
Those are costs that we expect to continue add out at around the current run rate, it's about $2 million per quarter.
What we don't know yet with certainty, but I am hopeful of is that once we get air B.
And we get used to running the tools. The models are relatively stable those I mean, the depreciation won't run down but the team supporting the models might.
So there may be opportunities to bring those costs down over time, I think for temporarily that $2 million per quarter run rate.
I do think it kicks up higher as a result of some of the enhancement work, we need to do over the near term here. So we could see a bit of a tick up but we'll continue to report those costs separately as we have been the past couple of quarters sites.
Clearly clear that beyond yourself, others in the market are interested and we're.
Absolutely open to being transparent in terms of what we're spending.
Great and then my last 1 on the.
For the deposit story, which has been great for well over a year now.
<unk> really been a demand and notice.
<unk> story.
Placing higher growth coming in you know, we're seeing 30% plus growth mode.
Both deposits now.
Walk me through that.
The future here.
We have a scenario, where maybe we've hit a peak and we start to see those.
For those deposits that pause growth decelerate.
Makes sense.
Because if you.
You hit a certain age.
Opex maybe.
And you have.
Borrower for clients drawing down their liquidity to invest.
And you also have as youre alluding to accelerating loan growth.
What are the what is your margin doing that type of scenario because it seems like that's a feasible 1 of those points.
Either direction I guess, yes.
Yes, I think it's a reasonable expectation that the branch raised deposits, we've accumulated well run off.
It's tough to say, how much and when and the timing, but I think it's a fair assumption and it's an assumption that we've embedded.
Within our outlook and guidance, we do believe that that's the most likely path.
Look for strong loan growth, we will clearly have some decisions to make on funding.
I think the natural path of what happens to our branch rates growth.
As we will likely see the the cheapest sources of funding runoff first I think that stands to reason.
What we replace it with though.
We'll have we'll have some leavers to Paul and we even have some levers to pull to think about driving incremental branch rates growth I'd say that over the last couple.
A couple of quarters for sure we've really taken our foot off the gas from a pricing perspective, I mean, we've actually taken opportunities to continue to reduce pricing on certain products because of strength of funding coming in and new wins and other sources.
A lever we could pull in terms of making some investments to potentially drive.
Higher level of branch raised deposits to offset more of the runoff.
We think without enacting those leavers, we still end up as you see in our outlook, we still end up at a positive spot in terms of branch raised deposit growth.
But this could be a tool we could use to deliver an even higher level of growth if the economics make sense.
We've also had some strong outings and the capital markets.
We've opened some new securitization channels as weiland.
Have the ability to drive funding through there. So you gave I guess the point is.
Throw a lot of the structural work, we've done to expand and deepen our funding sources, we've left ourselves with a whole lot of options a whole lot of tools in the tool kit a whole lot of leavers to Paul that if we do start seeing the runoff that we're expecting we will have plenty of ways that we can draw on to fund debt and we'll pick the path that we think is the most.
Accretive to NAV, most accretive to the bottom line, it's good to have options and.
We will manage this very dynamically to ensure we're choosing the best 1 depending on the pace and volume of the run off we see.
For the final point on that.
Scenario I described is that.
Assistant with your outlook for.
Margin.
Out of those 2 and a half point level.
Right, we think our growth will be positive.
We don't think it'll be as high as the growth we put up this quarter, so youre kind of somewhere within that range.
And our expectation is that absent any run off we would be delivering.
A pretty consistent growth rate in branch raised deposits as we put up in Q2, I mean Q2 reflected continued growth of new full service clients, we really didn't see a lot of run off.
There were products, where we made some pricing decisions and we didn't drive growth in those products, but we also didn't see any run off either so I think that 2.5%.
Quarterly sequential growth rate.
It's 1 that we could generate without being aggressive on pricing and just through the new client wins.
And then getting to somewhere between.
Flat in that 2.5% level.
Probably somewhere in the midpoint.
Based on the expected level of runoff that we see although that's.
A highly uncertain prediction of course.
Thank you and have a great weekend.
Thanks, Keith for Thanksgiving.
And our next question will come from Darko.
From RBC capital markets. Your line is open.
Hi, Thank you and good morning.
Just a couple of questions on the ATM and then a few on the margin first on the ATM I've never seen 1 before so can you just give me an idea of how mechanically it works Dwight if I'm a shareholder of CW viewed just wake up 1 morning with another.
<unk> share of CWT or whatever or do you have to you alert the market or how does that work.
Yes.
Think of it as the inverse of <unk> and CIB I mean, this is I suggest issuing new shares into the market.
From our from our Treasury shares.
We're in complete control in terms of how much we issue when we issue if we issue at all that's a call. We can make day to day week to week, we can be very responsive dynamic opportunistic based on how the trading volume.
And that day, but not 1 where you would automatically as a shareholder.
Get incremental share is landing landing in your book, It's 1 where if you are looking to put into order to buy CW be we would look to fill it if we're in the market to want to fill it with incremental shares issued from our ATM product.
Okay understood and when you say $150 million is that per year or is that for sure.
That would be the full.
<unk> of the entire program.
The way, we would use that I mean, this is not a case, where we want to go out and raise $150 million and put the capital in our genes today.
This is something over the duration of a program that.
That will use if and when needed as we need it.
Be very thoughtful about using it but that is the global limit of the program in terms of how much you potentially move each day I mean that is completely within your discretion as the issuer under that program.
There are guardrails around how much you do and really it's simple guidance and I think this is guidance that should get give comfort to shareholders. I mean, 1 of the conditions of using this program as you literally can't use it to significantly impact your share price so by nature and by design you use it in such a way that it's.
Im very obscured and you wouldn't necessarily even see us using it and you shouldn't see any impact on the share price.
Because of our ability to be really thoughtful and.
Really really not have to put the foot down on the gas from a timing perspective, I mean, we have enough of a capital buffer that we can we can be really strategic about when and how we use this.
Okay. That's a good explanation I appreciate that and so for the hypothetical of some bank came to you and said Hey, we've got a portfolio of $2 billion of commercial loans, you wouldn't just suddenly boom hit the button issue that much equity and buy the portfolio right.
Not what this is aimed at no no. This is an appropriate tool, we think for situations, where youre going to see.
Variable ongoing capital consumption of relatively minor proportions.
You were looking to raise equity in a hurry for an acquisition or for any other use that you needed. The the equity in your genes in a hurry you'd be looking at a different program to raise debt equity the ATM would not be appropriate in that circumstance.
Great. So that's pretty pretty pretty I understand it the 1 issue or difficulty I have understanding.
Yes.
It's in my recollection, I've never seen a Canadian bank to use this kind of program before not even U.
And so it begs the question are you running way too lean on capital every other.
The Canadian Bank right now has a ton of excess capital lying around.
And the other question is if we do use the program enough that you hit the $150 million at current spreads is it actually accretive or dilutive I'm doing some math, but I'm. Just wondering if you guys have done some math to help me out.
Before I go spouting off my back.
Yeah, No I appreciate it Darko so on the first question you are correct.
For my to my knowledge based on my research I have not seen in other Canadian Bank do this before neither have we.
Prevalent tool in the U S. I think the use of an ATM product in Canada.
Historically has not been prevalent it's certainly increased over the last year. If you go back and look and.
Maybe after the call I'll flip you know with with some examples I mean, it's really ramped up in the last year and that's because.
Canadian Securities administrators have.
Adjusted the rules on the setup and maintenance of an ATM program to align it with U S regulations in the U S. These are pretty common actually.
You see them in everywhere from small cap to large cap issuers use banks.
Including very large U S. Mega banks have used this product so it's not necessarily a unique product to banking or bank. It's a unique product to Canadian banking, but I think that.
It probably has something to do with how tight the rules used to be.
We will see if it picks up but to your point. It's a question of capital level I think what's different for us I mean, we've been in or around this capital level through Covid, we've been very comfortable there I think the new new change for us that we're looking at here is.
Loan growth that appears to be a reasonable enough probability.
That we like having this in our back pocket to use if we see that higher level of loan growth materializing. It's.
1 of those unique situations, just and what might be out there from a loan growth perspective that we thought warranted.
Admittedly unique solution to the problem.
Okay and on dilution.
Yes.
Uh huh.
Accretive I mean, it's.
If we're using this ATM product to issue shares and that's to fund new loan growth.
Even at current spreads that would be accretive.
Obviously, not as accretive that if we just did the loan growth without issuing the shares but.
As you run through the math Youll see.
It's <unk>.
It's a proportion of that accretion, but it's still accretive but it still puts dollars down to EPS still accretive to our ROE.
Even at current spreads.
Okay.
Touch base after the call I mean, I just want to know my math.
Absolutely.
On margins.
You mentioned that you don't quite need the bank of Canada.
To give back.
Or to a range of ratings can you can you walk through what is special now that your NIM is more sensitive to rising rates than in the past.
I'd say, our NIM is is less sensitive.
To rising rates and I think you can see evidence of that through what happened on the way down as interest rates declined.
I mean, the usual math, we had given in the past is a 25 basis point change in bank of Canada rates might drive, 3% to 5 basis points change in NIM.
If you apply that math to the last year, you would expect our NIM to be much lower than it has been.
Really the shift is us being a bit more in the driver's seat from a pricing perspective, having a greater proportion of our deposits in noticed and demand a greater proportion of our deposits and what we would call administered rates.
These are deposit products, where we are in control of the rate. We can make the decision in terms of how much of that market rate increase we pass on to our depositors. We can be thoughtful about that we can make that call based on competition and demand for deposits at the time. So the big difference is we have a lot.
More tools in the tool kit.
To be able to manage.
And reduce the volatility in our NIM.
But I suppose the price you pay for that is it. It makes you less sensitive on the way down it likely makes us less sensitive on the way up a lot of these.
A lot of the NIM expansion, though I mean, it won't directly be driven by prime interest rate increases it'll be driven based on the spread of new lending compared to the incremental cost of deposit we need to fund that loan growth.
It's a bit of.
Wait and see but it's a different situation than us just sitting back and completely winning or losing on NIM. As a result of prime I think we just have more maturity and more flexibility in our funding mix today than we've had in the past.
I'd just add that debt is entirely be in our strategic direction is to give ourselves much more of our clients for business and we have generated many many more new full service clients debt.
Is giving us that boost in demand and noticed and the ability to have a much stronger liability profile than we did before.
Okay I appreciate that.
That's great. Thanks, very much for for the color.
Thanks Tycho.
Your next question comes from Shihan Tuncay from Chi Thankfully.
Thanks for all your line is open.
Hi, everyone. Good morning, just wanted to get a little bit more color on that.
Digital product rollout.
Uh huh.
Total book.
Brim.
Virtual CLO.
Product rollout with terminal.
Are you looking at getting more deeper into the payment space at all or are you looking at enhancing the digital product shelf with any other potential on product and for visits in the future.
Do you think about if you can give us some more color on where that the direction of Boeing for the product sell for them.
Yes, well, obviously the digital delivery is key for as we think about growth.
Geographic diversification can be tremendously enhanced with a bigger digital footprint.
The virtual CEO is a set of tools that allows us to think about our client to and expand that client profile.
Really.
If we think about our current book it is really mid market commercial we see more small business able to be accessed with the virtual <unk> COO and with that digital footprint. So there's the aspects of the market. We're able to drive is just tremendously enhanced by our improvement in our in our digital capabilities on the payment side.
We are having a switch and how we're able to facilitate etfs with.
With the with our investment in digital today, we've got some muscle signed on situations that will become single.
<unk>.
All of the ways that we think about attracting more full service clients are enhanced with our investments in digital and our big release starts in the second half of this year with diverts for <unk> and as we adopt and bring into play the different commercial banking digital capabilities again, we see lots of wins for our clients.
And again to attract more full service commercial clients.
Thanks for that question, maybe just a follow up for that.
Still undergoing the rollout as you said, but can.
Can you give us system for.
With the pickup you're seeing in demand deposits in particular can you give us a sense for how much of your.
For deposit growth is coming from digital channel.
So at this point Jan its <unk>.
I wouldn't say, it's contributing a great deal I mean, we in terms of the tools. We've launched so far it's really been Onboarding I mean thats been helpful.
And contributed but I wouldn't call it the primary reason.
I think it's all part of the package when we go and win a full service client. It's an element of why a client will will do business with us they'll see what we've done you'll see what we're doing they'll make a call based on that and other factors. So it contributes but it's hard to isolate.
In terms of the the virtual C. O I mean, we're launching a pretty limited rollout of it just to to release it to a select group of clients really have them use that contribute key insights give us insights as to how we can best leverage and market and use this tool.
So in terms of near term deposit contribution from that product. This year for instance, I would not expect it to drive a different trajectory in branch raised deposit growth certainly gets us excited about the future, but that would be beyond this year future.
Appreciate the color there and maybe just on the overall.
Inorganic growth opportunities.
With your with your increase in loan growth Guide and you bought a lot of organic opportunities you can target how do you think that the.
Other avenues of growth.
Additions from your wealth management platform.
Other.
Potential opportunities, how do you balance those premium for organic versus inorganic growth opportunities from here.
Well right now we're very consumed with.
Are integrating our current wealth acquisition into the bank and making sure that we've got.
Strong team delivering there we've had great performance for just really happy with the progress of our wealth management teams as they've come together and integrating very effectively.
As we think about other sort of inorganic we still like wealth is an opportunity for growth.
But we're really focused on our digital we're focused on our wealth integration. We're focused on organic projects be clearly if there is a tremendous opportunity that we identified we would be obviously open to that but today. We've got lots on the go we're very happy with their progress and certainly the.
The delivery of of what we anticipate is a strong economic recovery.
And seeing that in loan growth that has already come through in Q2. So we just said we have lots of opportunities arent fleet today, and we're going to be very focused on delivering on them.
Thanks for enrollment for the color I'll pass it on for Brian. Thank you.
Sure.
This brings us to the end of our Q&A session I will turn the call back over to Chris Fowler for closing remarks.
Thank you Michelle.
Our focus on our clients by investing in our capabilities and product offering is yielding strong results now and creating growth opportunities for CW b. Each day. Our teams are winning more full service clients and as the economy recovers, we're well positioned to accelerate our growth and capture increased market share I am very pleased with this.
Strong performance in the first half of the year and excited for the opportunities that exist in the back half of 2021 and beyond.
Continued vaccine delivery has provided optimism for a strong economic recovery once restrictions are relaxed and it's possible that economic conditions could improve more rapidly or robustly than we expect we plan to assess these opportunities prudently and support them with our ATM program to deliver solid shareholder returns.
In closing I want to say, thank you to our teams have continued to be impressed with your efforts to advance our strategic objectives transform our capabilities and deliver strong financial results together, we're setting the stage for CW beat to deliver profitable long term growth and attractive sustainable shareholder returns to our investors.
I appreciate your confidence in us and we're excited for opportunities before us.
We look forward to reporting third quarter financial results on August 27, and with that we wish you all a good day and thank you very much.
Thank you everyone. This will conclude today's conference call you may now disconnect.
Okay.
[music].