Q3 2021 Canadian Western Bank Earnings Call
Good morning, My name is Colin and I'll be your conference operator today at this time I would like to welcome everyone to CDW B's third quarter financial results conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time.
Simply put star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star followed by two thank you Mr. Patrick Gallagher you May begin your conference.
Good morning, and welcome to our third quarter 2021 financial results Conference call. My name is Patrick color and I'm, the Vice President leading.
Time for Jane <unk> 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.
Actual results could differ materially from expectations due to various risks and uncertainties associated with <unk> business. Please.
Our strategy or a forward looking statement advisory on slide number two.
The agenda for today's call is on the third slide presenting to you today are Chris Fowler, our President and Chief Executive Officer, and Matt Road, Our executive Vice President and Chief Financial Officer. Following their presentations, we'll open the lines for question and answer session I'll now turn.
Referred over to Chris who will begin his discussion on slide four.
Thank you Patrick and good morning.
The strong results we reported today reflect the momentum our teams have created in recent years as we continue to deliver on our winning strategy uniquely focused on meeting the full service needs of business owners in Canada.
The column clients choose GWB for a proactive personalized service and the specialized advice tools and financial solutions, we provide.
Very encouraged by the results our strategic investments are delivering we will continue to enhance our capabilities and product offerings to accelerate our growth.
And further diversify our business.
We delivered very strong results again this quarter.
Compared to the same quarter last year, our pre tax pre provision income increased 15% adjusted.
Adjusted earnings per share was up 36% and ROE increased 300 basis points I'm very pleased.
With this level of performance as it reflects the significant improvements we've made to diversify your funding sources, our portfolio composition as well as improving our revenue mix through our growing wealth management business, we provide the business owners and their families.
Driven by the strategic focus on growth enabling activities.
Please revenue has increased 16% from the strong momentum our teams have generated.
This quarter, our client centric teams produce sequential growth of full service clients relationships with 4% growth in lower cost branch raised deposits and 3% growth are specifically targeted lending.
The quarterly results are the strongest growth levels in our history.
The highest growth this quarter was recorded in the commercial mortgage and general commercial portfolios driven by both supporting existing clients and on boarding new full service clients.
Our geographic diversification is producing a strong pipeline with 10% year.
Loan growth in Ontario.
We expect our strong growth momentum to continue as we enhance our full service client experience through investments in our in person and digital channels. Our digital client offering is advancing well and we're on track to release, our enhanced digital banking platform for personal and small business.
Year to date, including a limited initial rollout of our virtual <unk> solution later this year.
The virtual <unk> COO is a differentiated solution for a small business owner clients that once fully deployed will assist in driving strong client growth in this segment once fully operational we expect our enhanced.
<unk> 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 banking center footprint, while further broadening our access to stable lower cost funding.
There's no question our people are core to our success are.
And <unk> growth is supported by a positive and inclusive culture.
We remain a career destination for top talent as our as our employee experience creates value.
Our unwavering commitment to advance our people first culture was recognized again during the quarter by great place to work is one of the best workplaces in Alberta, and we are.
Our strong very pleased to be recognized nationally as one of the best workplaces for mental wellness in 2021.
As Matt will discuss in a moment, we supported our robust loan growth this quarter with active usage of our after market equity distribution program.
This program allows us to support strong loan growth while dynamically.
Also during our capital in light of the current economic volatility and providing attractive sustainable returns to our investors.
We are also continuing to use our IRB tools to assess and manage credit risk and as we noted last quarter. We're working on components of our tools and processes that we have determined can be improved.
Work.
Managed enhancements will make our tools more efficient for our teams to use increased precision in the measurement of credit risk and incorporate the changes required to adopt aussies capital adequacy guidelines with the Basel III revisions in Canada.
We remain confident our work will obtain approval for us to transition to the <unk> approach.
We.
On this slide further updates on our progress once we finalize the timeframe to a recent vendor application, while considering all relevant stakeholders I will now turn the call over to Matt who will provide greater detail on our third quarter performance and improved outlook as we close fiscal 2021, thanks, Chris and good morning, everyone. So if we turn to slide.
We will provide a compared to last year branch raised deposits grew 17% and now represent 57% of our total funding our focus to expand full service relationships with existing and new clients supported a 31% increase in low cost demand and notice deposits compared to last year.
We also continue to build on the strength.
Slide five capital markets program with a $500 million floating rate note issuance during the quarter at an attractive spread.
Our efforts to grow and diversify our funding sources drove a reduction in the outstanding balance of broker deposits again, this quarter and they now represent only 20% of our total funding compared to 26% at this time last year.
<unk> looking at slide six our total loans were up 9% in the past year with positive momentum across our national footprint.
13% growth in our strategically targeted general commercial portfolio reflected our focus to increase full service client relationships.
We also delivered 21% growth in commercial mortgages and <unk>.
Strong new lending volumes in BC, Alberta, and Ontario, with high quality borrowers that remain within our risk appetite.
Total loans in Ontario grew 10% compared to last year and now represent 23% of our total loans.
On a sequential basis, we delivered 4% growth in commercial mortgages with the majority of that growth.
Refresh strong existing CW be clients, including providing the commercial mortgage on completed real estate project lending.
Our general commercial growth of 3% this quarter was well balanced across numerous industries with strong credit profiles.
Alone in mortgages grew 3% this quarter represents a strong improvement in the performance.
<unk> from this portfolio compared to the previous several quarters.
As slide seven shows we delivered another very strong quarter of profitability common shareholders' net income increased 39% and pretax pre provision income increased 15% compared to last year and that reflects the benefit of 9% annual loan growth.
<unk> 11 basis point increase in net interest margin. Despite the continued low interest rate environment.
Adjusted and diluted EPS each increased by 26 from the same quarter last year higher net interest income contributed 25 and reflects strong loan growth and higher net interest margin, we had a 13 contribution.
And in a lower total provision for credit losses, primarily driven by a net performing loan recovery of $7 million compared to a charge of $8 million last year.
Higher noninterest income excluding the wealth acquisition contributed three and primarily reflects higher credit related fees driven by strong annual loan growth.
<unk>.
<unk> from was contributed by the <unk> acquisition, which we owned for only two months in the same quarter last year.
Excluding the wealth acquisition higher noninterest expenses reduced EPS by <unk> 13.
Which reflected our continued investments in our people and technology infrastructure to support our strategic execution and costs associated with operating and enhancing.
<unk> <unk> tools and processes. This quarter also included a partial coupon payment on our series two limited recourse capital notes that were issued in this march which reduced EPS by <unk> <unk>.
Our sequential performance shown on slide eight reflects 7% growth in revenue and a decline in the provision for credit.
<unk> more than offset a 4% sequential increase in noninterest expenses.
Common shareholders' net income increased 20% and pretax pre provision income increased 9% compared to last quarter.
Diluted EPS increased 16, primarily due to higher net interest income by contributed 11.
And a.
Lower PCL that added <unk>.
Higher noninterest income contributed <unk>, <unk> and lower LRC on coupon payments added an additional <unk>.
Higher NII he's had a <unk> <unk> negative impact and that was due to increased performance based compensation costs annual salary increments continued investment in our technology infrastructure to support.
<unk> strategic execution and cost associated with enhancing our IRB tools and processes.
As shown on slide nine our revenue has continued to build each quarter over the last year. Despite no change in the prime interest rates over that same period revenue has been driven with very strong NIM performance due to very careful management.
<unk> of our funding cost supported by very strong growth of branch raised deposits and continued progress in enhancing the diversity of our funding channels on a sequential basis. Our net interest income increased as the benefit of three additional interest, earning days and 3% sequential loan growth more than offset the impact of a two basis point decline.
Management interest margin, our net interest margin in the prior quarter did include a one time two basis point benefit associated with adjusting certain balance sheet management activities in response to a shift in our funding mix. So if we excluded this one time item, our NIM was essentially flat compared to the previous quarter.
On slide 10.
Joining that aid our delivery of another quarter of strong credit performance with low write offs and provisions for credit losses, and a decline in impaired loans reflective of our conservative credit risk management.
Our third quarter provision for credit losses on total loans of 11 basis points was down nine basis points from last quarter, our performing loan provision for credit.
We highlight was a recovery of nine basis points compared to a seven basis point recovery last quarter.
Compared to the same quarter last year. The total provision for credit losses was 22 basis points lower largely driven by a 20 basis point decrease in the performing loan provision for credit losses and that reflected continued improvements in the near term economic.
Losses forecast lower loan default rates and a continued migration of loans from stage, one back to state or from stage two back to stage one.
We continue to maintain an appropriate level of performing loan allowance for credit losses based on the current volatile economic conditions, our allowance for credit losses on performing loans totaled 113.
Economic <unk> that was a decrease of $7 million compared to the previous quarter.
Our forecast to use it in our estimation of the performing loan allowance. This quarter was more optimistic than last quarter and loan default rates continue to trend lower.
Ongoing shifts in macroeconomic factors changes in the level of portfolio defaults or changes in the risk ratings.
<unk> will continue to impact the performing loan allowance in future quarters.
At 20 basis points, our provision for credit losses on impaired loans was seven basis points lower than last quarter and two basis points lower than the same quarter last year.
Gross impaired loans were 86 basis points as a percentage of total loans down from 95 basis.
As of our last quarter and last year, new formations of gross impaired loans were down around 30% compared to last year and last quarter with resolutions of previously impaired loans up 40% compared to last year and up 34% compared to last year.
Our realized write offs remained low which has been consistent with our historical.
Points experienced even through periods of elevated levels of gross impaired loan formations are solid 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 as described further.
Oracle of MD&A, we expect our fourth quarter provision for credit losses to increase to within a mid 20 basis point range as a percentage of average loans.
Calculated using the standardized approach both our tier one and total capital ratios increased from the prior year due to our two limited recourse capital note issuances.
Whether in <unk>, partially offset by the redemption of our series <unk> preferred shares on July 31.
Our common equity tier one ratio was consistent with last year at eight 8% and 10 basis points higher than last quarter as the combined benefit of retained earnings growth and approximately $30 million of common shares issued under our ATM program more than.
The impact of strong risk weighted asset growth.
Our ATM program is an effective tool to dynamically manage our capital ratios. We expect to continue to use common shares issued under our ATM to support strong loan growth, we will balance our use of the ATM to support ongoing returns for our investors while ensuring that.
Than offset little levels appropriately reflect the potential for near term volatility and the economic reopening currently underway and the spread of more infectious variance of COVID-19, yes.
Yesterday, our board declared a common share dividend of <unk> 29 per share consistent with the dividends declared last year and last quarter.
Looking.
Our cost slide 12, we've delivered very strong earnings growth on a year to date basis that sets us up really well for strong full year performance.
We continue to expect annual percentage loan growth in the high single digits in fiscal 2021 were prudent while we expect that the origination of new branch raised deposits will remain strong we believe that this growth.
Ahead on E offset by declines due to increased business in consumer spending through the economic recovery currently underway.
Assuming continued stability in our funding cost we expect our fourth quarter net interest margin to be roughly consistent with the current quarter.
On an annual basis, we expect an efficiency ratio of approximately 49% noninterest.
<unk> <unk> are expected to increase in the fourth quarter due to the continued planned investments in our strategic priorities, which includes ongoing development of our digital client offering incremental expenditures associated with our AARP parallel run and typical seasonal increases in certain expenses.
Our outlook on profitability Hasnt.
<unk> proved from the expectations, we provided last quarter based on our strong third quarter performance. We now expect to deliver full year 2021 growth of adjusted earnings per share that exceeds 20%.
Without calling let's go ahead and open the lines for Q&A.
Thanks.
Ladies and gentlemen, we will now.
I will begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three talent profit acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if you're using a speaker phone. Please.
Lift the handset before pressing any keys, one moment for your first question.
Okay. Your first question comes from Doug Young from data or Dan Doug. Please go ahead.
Hi, good morning.
Several questions here first.
Matt on the 31% increase in.
Branch raised demand and notice deposits can you quantify how much of that came from new clients versus existing clients.
As well you mentioned in the release that you did some proactive deposit pricing changed just hoping you can just elaborate a little bit on that.
Yeah sure Doug So on the first one it's been a pretty.
The new system team pretty much all through Covid that.
The majority of our deposit increases have come from either new client relationships to CW b or the conversion of a lending only relationship to full service and with that comes deposits.
That's been a long term strategic focus in building.
Pretty capabilities to drive that outcome and we're seeing really good momentum.
What that's allowed us to do with that robust volume coming in and we think.
A large chunk of that is very sticky.
We've been able to critically analyze the pricing of certain deposit products and really taken our.
<unk> keep the gas from a competitive perspective on them and Thats allowed us to put a bit of NIM in our back pocket actually.
The other big benefit it has given us that strong branch raised deposit growth.
Reliance on wholesale funding channels has been significantly reduced.
We have tapped into saved.
Foot after market on occasion or and looking at capital market issuances.
Been very selective.
When we've tapped into those sources, we do it when we see pricing that looks compelling.
But we're not in a position where we feel like it.
It's a requirement it's just given us a lot.
The brokers to Paul.
To really reduce our funding cost as low as we possibly can and that's been a big driver year over year. If you look at our NIM Q.
Q3 last year to Q3 this year, we've improved it by 11 basis points.
That's a very different trend than what we've seen in the market from others and.
Lot of our focus on that branch raised deposit growth is paying dividends and that's what put the tools in our tool kit that's allowed us to generate that growth and NIM. Despite really no help from market interest rates. So very pleased with the progress there.
So if I wanted to quantify how much is coming from new clients, whether it'd be fair to say $130.0
And then now and then.
NIM expansion is the other place I did want to go too so thanks for that lead in.
Again, as you mentioned very different message and quantitatively very different from what we're seeing from the big six.
Is this all as a result of deposit growth in the branch raised deposit growth or is.
Other items that factored into that.
Yes, so on the first question.
We've been kind of bouncing between as low as 50% as high as 70% depending on the quarter in terms of contribution from.
New new to bank clients or conversion from lending only to to full service.
<unk>.
I mean on the second one yes. It has been entirely funding cost we have not had really any help on asset yields asset mix year over year has actually been a bit of a headwind you'd know that our overall levels of liquidity you have actually increased year over year. So.
Yeah.
On a more normalized basis, there's likely some incremental NIM that might have come.
If we lowered our levels of liquidity.
We're carrying a prudent amount right now and appropriate for the conditions, but it just highlights just how much torque we've had with really focusing on funding.
It's a test.
To say, it's been an organizational focus would probably be an understatement. We study our deposit pricing. We study our access to funding channels very carefully on a very frequent basis and in a very strategic way. So good to see that that focus has been paying off.
And then just.
Cost second on noninterest expense ratio of 49% for fiscal 'twenty one.
Take note that there are strategic spend coming in Q4, and I get all of that.
But my math suggests I mean in Q4, we'd be looking at a nix ratio in the 53% range, which is much higher than what we've seen in the past.
How that messaging.
A number about right yes.
Your math is pretty good.
Pretty close.
If you look at last Q4. It was a similar result, as while I mean fourth quarter, just based on seasonality of certain expenses typically is a bit of a tick up.
And the Nix ratio.
What we're seeing this quarter and you did your backwards math you'd likely see.
Sequential NII growth kind of in that.
Just hitting in the double digits.
If I were to break that down into three pieces about a third of that is just the normal seasonal increases we typically see.
<unk> like marketing and things like training.
About a third of that.
Comes from the costs, we're incurring to enhance our IRB tools and processes as we've discussed and then a third of that is just strategic execution predominantly our big push on digital you would have seen in the release we're pushing.
And hard to get to tools launched later this year, that's our V C.
And our small and mid size commercial digital offerings. So it's just a big push on those.
<unk> the next up a bit higher in Q4.
But a couple of those big things are heavily strategic.
<unk> really pissed items that we think will drive us pretty strong growth in the future. So.
Worth, making the big push to continue moving those along.
And then just lastly for me and thank you for that and lastly on the PCL, you're signaling mid 20 basis point range for Q4 versus 11 basis points this quarter.
<unk> essentially is the message that we shouldnt expect any release in performing loan PCL impaired PCL is probably stay roughly where they were this quarter, maybe a little bit higher is that really what the messaging is yes that would be our base case and that has been our base case, when we look at the macroeconomic forecast.
That underpins our performing loan allowance.
When we're thinking about no releases.
From this quarter to next its stability in that forecast and and stability and default rates.
We've been continually.
Surprised by I suppose each quarter is that the macro economy continues to improve.
Asked that and default rates continue to tick down. So if we saw that continue to occur in the fourth quarter.
Then there is some allowance that could be released on the performing loan side, although not our base case.
I suppose we've been continued to be surprised to the upside all year. So we will see how that plays out.
Move it makes sense. Thank you very much.
Thanks, Doug.
Your next question comes from Paul Holden from CIBC, Paul. Please go ahead.
Thank you good morning.
<unk>.
Right.
Okay.
Wanted to start with.
With this.
And.
I imagine when you take on these types of projects you run some kind of.
Financial analysis, and how certain hurdle rates in mind, I think would be helpful for us kind of understand maybe what those types of hurdle rates or how we should think about future return.
On the investments.
Seeing flow through into the P&L today.
Yes, Youre absolutely right I mean, when we're taking on these projects and some of these are capital intensive some of these hit us directly and noninterest expenses right away, which is what we're seeing on a couple of the projects but.
But we consider it as.
Turns of capital right up against using that capital for loan growth.
Acquisitions et cetera.
So yes, I mean, it has to make sense on a return on capital basis compared to the other ways, we could deploy and use that capital.
So you would not see us incurring these investments if we did not believe that the return.
A user in the long term.
In terms of when we see them I mean.
Digital is a big one there is a few different components working together there that we believe are essential to continue the strong momentum we've had on branch raised deposit growth you've seen what the investments we've made.
Turns were they asked have done for us in terms of just the momentum it's driven for branch raised deposit growth and then how that shakes out into how we can manage the NIM and drive some really profitable and accretive outcomes.
Any help really from from the market. So that's a trend we expect to continue and keep producing.
And as a result of these investments we're making just as one example.
And roughly what would your return on capital hurdle.
Hum.
<unk>.
We don't publish it but I would suggest.
Would not be too far off I think I understand how youre getting there.
It wouldn't be completely out of line.
Thank you and then just continuing with investments in digital.
The federal government put something out roughly a month ago on open banking.
I'm wondering how your digital offering.
And.
Alright.
Design or at least partly designed.
To be able to take advantage of that data portability.
Absolutely.
Paul It's Chris absolutely are.
Investment in our technology platform is really geared.
Unless the ability to take advantages of what the opportunity is open banking provides and our focus to ensure that we have a digital access to our banking programs and the ability for us to really manage data in a very secure way. So as we think about the opportunities that open banking will provide giving our footprints in.
To give a really expanding geographically we see the opportunity of open banking is very positive.
<unk> for us and.
To make sure that we can turn it into that opportunity we have invested very.
Very specifically in our technology platform to allow us to.
In our view.
To take those steps.
Okay.
And then one final question and it relates to.
So I appreciate the guidance specific for next quarter.
We think.
And the trends Youre seeing.
<unk>.
To run road.
Trends Youre seeing in branch raised deposit growth.
Why shouldnt, we expect NIM expansion over there.
Thanks.
Quarter then.
Is there anything particular to Q4 thats kind of holding back.
Expansion in the near term yes.
Yes.
Cover.
E <unk>.
Potential headwinds and <unk>.
I think that'll help explain Q4, and then maybe some some upside that might be there.
Yes, I mean, you hit on an predominant tailwind.
Growth in commercial lending and our growth in particular.
That's something that is accretive to our NIM.
The second factor that could be accretive to our NIM as we see how things settle here as we get through a couple of maybe further choppy economic periods as our overall level of liquidity I mean part of that is just structural balance sheet composition part of that is just being prudent.
And so working that down as something.
Could give us a bit of a tailwind from a NIM perspective heads.
Headwind on NIM, we think of it as a temporary factor. It's this idea that there is some element of the deposit growth. We've had that being honest. We think is just simply excess liquidity being held by our clients that will eventually be put back to work.
That <unk> continues to recover reopened.
And Thats, one were foreseen likely our lowest cost of funding our notice in demand deposits are the ones, we think roll off first.
Need to replace them in the near term.
With a more expensive deposit source broker deposits or are there.
As a sale opportunities.
That's something that could put a little bit of temporary pressure on NIM.
But once you get through that temporary impact and temporary churn and funding mix. The ongoing momentum we will have in branch raised deposit growth, which we think accelerates and continues on the <unk>.
<unk> holds from all this is something that has NIM look to normalize.
The other thing we thought about too is if you see conditions that have excess deposits being consumed in the economy. That's probably a factor that also results in incremental loan growth, maybe theres a timing factor there were deposits run first.
Clear and then the growth comes later on the loan side of things. So maybe that's ultimately a positive in the long run as well so.
From a long run perspective, I agree with your thesis that to me when I look at the factors. There is a lot more tailwind than headwind if you get through just maybe a temporary.
<unk> here.
A little bit of volatility and that's what we're thinking about in Q4, it's it's one where.
Drawn new growth of deposits from the <unk> side of things, we expect to be there.
How much of that gets soaked up with run off or if our existing deposits could be a factor.
Gary chairs, our NIM looking flattish.
If we don't see that runoff com.
Then and you could see some bit of upside there for.
Over delivering against our current base case.
Thank you that answers very helpful. That's all for me.
Your next.
<unk> comes from Marcel Mcclain from TD Securities or sell please go ahead.
Okay. Thanks for taking my question.
So I kind of want to go back to the PCL here.
Thinking about it maybe beyond just the guidance you provided for next.
Next quarter.
Typically on the impaired side.
How do you guys see things sort of playing out.
Thinking about things like Delta variance and the tapering off of government assistance.
So you will see the impaired.
Trending towards a normalized level or should we expect.
Maybe.
And to run above historical averages for some period of time, how do you see things playing out maybe over the course of the next 12 months I know, it's hard with the amount of uncertainty, but what are your thoughts on that.
Yes, Thanks, Mike.
I think the amount of uncertainty as the key part of what you just said I think as we think about.
We've come through quite an interesting to say, the least 18 months and our expectation on.
How the loan portfolio would perform as all banks took increased.
Provisions and here, we sit here today, and we've really come through with all the stimulus that has been I.
Where are we.
Stabilizing in the economy, we expect to see it just cool off and then as we think about our clients what impact does that have so I think we've had a long period of time for clients to adjust.
Really determined what the revenue profile looks like how they met certain expenses to the revenue.
And.
I think think about that typically when we come out of downturns, we do see.
Kind of the ones that have hung on that just don't make it. So we wanted to be conservative as we think about that gross impaired potential and as we kind of work through our portfolio and see the different areas that might be impacted.
As we.
We're conservatively thinking of May.
Maintaining that PCL and then.
Mid 20 basis point.
Level.
Okay. Thanks for that.
And then I just had one sort of quick.
Quick one going back to the branch raised deposit growth.
Think I.
I'm, saying last quarter that there was virtually no runoff in that number.
We could expect branch raised deposit growth the pace of it to flow over time, but it definitely got that have really.
Appeared yet this quarter I'm just wondering.
If there was any runoff included in this quarter's number and sort of.
I recall, you the timing I guess likely will coincide with loan growth but.
Just your thoughts.
On.
How penetrated.
Evolve from here.
Yes, we did start to see a little bit of runoff in certain certain products, but certainly not as high as what we might have expected.
But we did start to see it.
<unk> on a limited basis towards the end of the quarter.
But not not what I would call a material impact at this point I'm not something that for instance would have changed our deposit growth in the quarter by say a percent. It was a factor much smaller than that but obviously something we're.
<unk> been an ion and <unk> and you can see in our fourth quarter outlook, we are expecting that trend to accelerate a bit but also don't think this is something that will materially impact us from a NIM perspective.
Okay. Thank you that's it for me.
Thank you.
We're keeping.
Your next question comes from many crewmen from Scotiabank. Please go ahead.
Hi, good morning curious to follow up.
More broadly on how the business has changed pre pandemic to post pandemic I mean can you talk about the funding structure.
Yeah.
The margin is definitely a sort of on a different track.
Before the pandemic and now in terms of.
Credit and other key drivers are there any key areas, where you would say, yes. The business is definitely.
Post pandemic, we're not going back to pre pandemic.
You've changed that through through the full period here are there any other notable items you would highlight there.
I'll start.
And Matt can step in.
Where we sit today is yes dependent make absolutely changed client behavior, we are seeing obviously.
Run rate there is a higher deposit.
Levels across the economy, and all banks have seen that but our access of the deposits has fundamentally changed the execution of our strategic direction really to focus on that full service opportunity with the clients and supported that with.
An increase in product delivery and increase in the different capabilities, we are able to provide our client base and our next move to digital.
Improves that whole process, even further so for us yes.
A meaningful change in how we engage with our clients and we see that as again, a real tailwind for growth and.
And so we think of diversification.
Patients that opportunity for us to really push that geographic diversification, but also revenue as well so yes, we see post pandemic.
Realizing on the opportunities that we've invested in our strategic direction.
No I totally agree.
And we're exiting the pandemic with a lot more tools in the toolkit to drive growth and exiting the pandemic with the sort of funding profile and funding strength that will allow us to fund that growth on a very efficient and accretive basis.
So very happy about how we're positioned and.
I mean worse, we have while.
While we believe will be a more constructive macroeconomic backdrop for growth as well. So we're quite excited looking forward many.
And in terms of just the PCL ratio specifically, so obviously there is still uncertainty, but if we just think wherever that time is post pandemic behind us.
Then of course ratios kind of go back to where they were or because the business mix is changing is there a sense that maybe you'd have a <unk>.
Higher PCL ratio.
And in a normal times going forward.
So we don't anticipate our PCL ratio changing we've had this 18 to 23 basis points.
We.
<unk> changed our underwriting we're focused on the same core client.
We're very disciplined in our underwriting loan management.
We think we are just continuing.
Continuing to improve our client experience and with the improved tools that we are building through the.
Process.
We have enhances your your sort of credit insight on your book. So we don't see any change at all in that in that outlook. That's been the key theme of our growth. Many as we've achieved the growth not by by stretching risk appetite if anything through the pandemic, we might have tightened in a few areas and.
So that would mean.
The composition of the book exiting the pandemic is one that just kind of pound for pound like for like.
Overall, probably a higher credit quality and one that might.
Not cause us to deviate from the historical range and hopefully put us somewhere to the <unk>.
Slightly lower and when the smoke clears.
Uh huh.
Hopefully just a question on the ATM in terms of how quickly.
That can be deployed and how far ahead are you looking meaning.
Should we be surprised if you.
Raising money under the ATM.
This quarter, the next quarter like what kind of.
Based on your forecast, but what kind of time range are you looking for here on this current rates.
Yes, many of the ATM.
It's a great tool, it's dynamic capital management.
It allows us to have the right capital.
For the moment.
Realistically, we're looking at.
Obviously quarter to quarter.
How much capital, we believe we need to support the growth how much capital. We just want to have in our back pocket based on other factors out there that.
Might present potential downside risk as well strength.
Strength of pipelines, but it is something we can adjust and calibrate.
Very quickly.
It's not quite the sort of dynamic capital management, you would expect to have as an air B bank, but it's one that.
It's a bit of an audition here to demonstrate that we do have the the focus capabilities forecasting strength.
To.
Well to appropriately dynamically manage our capital.
Through cycles so.
Pretty pleased with the results so far and how we're using it.
And just one follow up so.
Can I just think of it as you're kind of steering the CET.
One <unk> expect it to be kind of going to eight 8%.
Be able inch for the foreseeable future until until we get to <unk>.
I guess like.
You are kind of actively manning managing toward.
Kind of numbers that we're seeing.
This past quarter would that be the right way to think about it.
Well it will depend on the quarter and.
Rainy in front of US I think a lot will depend on how delta Varian plays out.
Our base case is that we don't expect any significant losses or any big disruption coming from that but it's an area of uncertainty so.
One where we will look at where we sit next quarter.
What's the what's in front of us and potential downside and make a call on capital. So you could see us flex it up you could see us feather it down if we get to a point, where we think we're through that uncertainty.
The amount of growth, we're generating right now that even if we thought we had a little bit extra in our genes as it turns out.
<unk> went up pretty quickly with growth. So this really is.
The dynamic in the quarter management of capital and one we can reposition pretty quickly based on the circumstances in front of us.
Thanks, a lot.
Thanks Penni.
Okay.
So.
Your next question comes from <unk> <unk>.
From Stifel. Please go ahead.
Good morning, Chris Let me just kind of elaborate a little bit more on the digital product rollout.
Plan for.
The end of this year.
Next year, if you could give us a little bit more detail on what that product shelf could look like on the.
Personal and commercial bank.
Banking opportunities.
How should we think about the incremental benefit I mean is it just the potential incremental reduction in funding cost.
So we got from digitally sourced deposits or is there anything other projects youre working on that could enhance noninterest income on a revenue opportunities attached to that as well.
Sure I'll start on this.
So the initial rollout that we will have in Q4.
So you could deliver the small business and personal online banking and convert those to digital so that gives us access to just a better way for clients to navigate within our online banking program. So that that's a big win the commercial banking platform will come in Q.
Q1 Q2 of <unk>.
Fiscal 'twenty two.
And that will then provide that commercial banking digital platform that allow again are our clients there to navigate with more.
Ease and single single sign on in terms of managing their.
Daily Affairs, and then also adds into how we can manage payments and so there.
<unk> opportunities from that perspective, the other deliverable in this quarter coming up and a full go live as we get into 'twenty. Two is the virtual <unk> COO. This targeted small business client and the goal there is to provide essentially as a cash management program as well with artificial intelligence to assist in them.
Lots about how they manage their cash so looking at receivables payables payroll and giving them that sort of choose on how they can look at their <unk>.
<unk> and provide that extra insight into their into their.
Into the cash flows of the company so the opportunity we see.
I'm looking at one for clarity for <unk>.
Increasing our low cost deposits as we look to really support that small business client.
Which would typically net depositors.
It also looks to increase our footprint as we with the digital delivery we are less dollars.
Isn't on physical branch interactions with clients, we can do much more online and then ultimately that more client base again, we're focused on that full service. It does translate into more noninterest income as we look at service fees and transaction fees and our ability to just generate more business with our clients.
Dependent so digital is a meaningful.
Packed on how we think about our ability to to grow support our clients and really focus on that geographic diversification as well.
Thanks for that Chris and then maybe just a follow up.
From your answer.
How do you think about.
So going forward I mean, you've always had.
New branch openings.
The performed quite well for deposit growth.
Full service banking opportunities, but how do you look forward in terms of how do you balance digital growth versus.
Opening new branches or has that changed at all.
<unk>.
Maybe an update on the branch rollout as well please.
Yes, well branches still remain very important for us we actually are we're scheduling our branch opening in Markham and.
In.
Mid 2022, so looking forward to that so we see that GTA opportunity for.
<unk> two <unk>.
Or more sort of feet on the ground.
Also as in the marketing side, the sort of transactional side of branches I think we will see less of that but really the focus on the advice and those client meetings that allow us to really provide that special.
For us that we historically delivered to clients with strong expertise in loan structuring and providing that.
Appropriate financial solutions to clients. So yes, we would expect to also add branches along with digital so we can really capture that.
Sort of a broader geographic footprint.
<unk> survey very targeted where we think we've got from a physical presence we have good opportunities and again thats the GTA opportunity in front of us.
Thanks for that.
Another update.
My follow up I apologize if I missed this.
For your Q4.
Ben.
What do you factor in in terms of.
Houston.
Yeah, so on that one.
It would not be surprising to see us continue to issue a bit.
On the ATM in the fourth quarter as well.
Our guidance, if youre looking at hitting our EPS.
Growth of in excess of 20%, we have factored some incremental usage of our ATM to drive to that outcome.
Not a material amount not something that would cause our EPS to change.
By more than a center.
But we are expecting a bit of continued usage.
Thanks, Matt.
And just one last question for me guys.
As we look forward to the removal of capital distribution shareholder capital distribution restrictions for morphine.
Two how do you balance or is the has there been any change in your thinking of how you look at the dividend.
You balance the use of the ATM your growth opportunities.
How should we think of the dividend going forward if in one.
Those restrictions are lifted.
Yes, so I mean dividend.
We've always managed within.
Target for payout ratio prior to the pandemic and you can see by our results. We were typically in the mid <unk> in terms of a payout ratio percentage.
Consequently, if you took our earnings projection this year and maybe a few normalized PCL.
<unk> just something that was more representative of a mid point of our historical range.
See that our payout ratio is probably landing pretty similar right now to where we were.
Pre pandemic. So if we were following that same trajectory. It would suggest that we don't need to see a big boost to the dividend to.
<unk> to deliver that same level of payout ratio.
He is a bit of a balance of what we thought was an appropriate direct return to shareholders. While also acknowledging that internal retention of capital. We can do some pretty accretive things with that in fact did.
To shareholder returns and.
To continue Brian retaining capital and deploying it with loan growth and some of the strategic initiatives. We're working on actually drive some more favorable outcomes. So it's one where you'll continue to see us have that balance is a standardized bank and certainly as an <unk> bank in the future. It is how do we think about capital allocation as well pressure.
The lungs is to growth organically.
And acquisitions that helped drive our strategic progress and are accretive and then when we get through those to anything we have left over for a return to shareholders our preference would be.
Buybacks and then maybe dip.
Referenced thereafter, and because those last two when we model them out our less accretive to shareholder returns.
Thanks, very much that's it for me.
Thank you.
Your next question comes from Sohrab <unk> from BMO capital markets. Please.
It ends.
Okay. Thank you just a couple of just clarifying I think hopefully quick ones here for you Matt.
I mean, if I think back over the last three or four quarters in our conversations.
There's going to be a bit of a transitional year I guess with the addition of the wealth management acquisition.
Investor.
Go ahead.
Particularly around digital.
So the expenses were going to be a little bit I suppose.
Uneven from quarter to quarter, you've kind of talked a little bit about what next quarter may look like.
Is it fair to assume that.
The guidance around expenses for next quarter.
Investment and if it from maybe some pulling forward of some of the rollout expenses associated with the future versions.
Chris was talking about in Q1 Q2, or do you think some of what may be implied.
In next quarter's earnings or expense line, sorry may continue to trickle into next year.
Yes, I mean, we.
We haven't finalized our budget for next year, but just in terms of broad themes on things that.
I would drive or benefit NII growth this year compared to next year.
Investments will continue to make in enhancing our ARV tools I mean not something.
That is impacting our expense growth in Q4 likely something that we see continuing into some period into next year as well, we're working on how long and.
When we provide our full year guidance that'll be a factor we will discuss.
The push on digital I mean, it's a big push this quarter to launch the limited role.
Of the V C.
How clients respond to that initial rollout and what enhancements or tweaks, we decided to make to it as a result, there could be minor there could be some incremental build we put onto it.
As we think about a full rollout of that tool.
That will be a bit of a wait and see but in terms of the development.
Progress on digital yes, I mean, it's a big push.
This coming quarter, and it's one that should moderate over time, but perhaps in the first half of next year, we might see that trend continuing.
But year over year.
And if we're thinking about 'twenty, one versus 'twenty NII growth in 'twenty, two versus 21 NII growth.
All despite not having a finalized budget all indications point to a bit of a moderating of that trend.
But with some factors that may.
And on a temporary basis don't habit moderate perhaps as much as we'd like.
Okay. That's helpful.
And then just looking at kind of the other income line that fee income line.
Security gains.
Can you step back I think over the last seven quarters have kind of been anywhere from zero to.
On a million.
<unk>.
You.
Can you tell us how much unrealized gains we still have.
Kind of sitting around.
While the using the the gains on securities, it's not something we're necessarily using to drive earnings its more of an outcome of balance.
<unk> management activities.
Our expectation going forward and when we thought about Q4 guidance certainly that was pinned to an expectation that we wouldn't have any significant realized gains.
We're thinking about movements in the balance sheet quarter to quarter, we didnt see anything there that we thought would give rise to tushar.
Finalizing any big gains in the quarter. So I wouldn't expect gains on securities to be a continued driver of earnings and certainly not an intentional driver of earnings.
More of an outcome of the activity in the quarter. So I wouldn't bank on it for next quarter.
Okay, and just one last.
That's very helpful. Thank you and then one.
Plus reaction I mean until you eventually hopefully successfully transition over to the IRB you are still under the standardized when you think about.
This quarter's loan growth and mix shift this quarter as loan growth you talked about the success in commercial real estate.
Every year, you talked about general commercial.
And last quarter.
Do you think this where you are having success.
Now and you expect to continue to generate the kind of growth.
In the coming quarters is there any reason to believe.
The capital intensity of the business.
Because of the growth.
But because of the risk weighted associated with that growth.
Is going to increase here in other words, if I think of your RTW as two assets as a proxy.
Is this are we.
We had a bit of a upward trend here.
So.
Commercial lending is a standardized bank.
That is our biggest.
Consumer of <unk> density so as long as that growth continues.
Fair to say that it would cause our <unk> density to increase we're seeing good momentum on personal lending, though and.
This quarter pretty good momentum on the insured residential lending which from.
Our <unk> consumption basis favorable zero percent so.
It's one that as long as that.
Residential mortgage growth continues.
As a proportion basis this quarter it kind of held right in there.
So that continues its one where you probably see stability.
From an <unk> density or certainly no no material movements.
And that's what we'd expect at least.
Into the fourth quarter, perhaps on a longer term trend if we saw commercial lending accelerate at a pace beyond.
Residential mortgages and yes, I mean thats the factor that would increase density.
<unk> standardized bank.
Okay that said, but I guess, that's not like when you think about some of the guidance you've shared around for example loan loss provisioning next year and so on and so forth I assume implicit in that is some assumption around.
Proportionality at that commercial versus.
Insured mortgages that you made reference to so I assume.
Youre not youre working assumption is that the proportionality is not going to necessarily change correct. Yes. It would be relatively consistent would be our view at this point.
Great. Thank you very much.
Your next question comes from Gabriel to Shane from National Bank. Please go ahead.
Yes, a quick one here.
RB transition is there any change in the timing of your submission and I don't think so but you've got some new language on this.
Our 2023 revision that you have to integrate.
While we continue to work gave we've got lots of program. We've got lots of people that are on it.
Okay, we're going to give an update as we move along we've got we're seeing lots of opportunities and we're going to incorporate the two.
The final Basel III amendments that will come into play.
Where we're focused on there be.
Tremendous long term positive for the bank, because we think about particular business model with our commercial banking focus.
It's it's.
It's a it's a long term investment that will pay off and we're going to ensure that we deliver it appropriately.
Okay, and then the other one as far as the ATM issuance, how do I do.
Is it appropriate to measure what you issued.
This quarter relative to the excess loan growth this quarter, so I'm thinking about <unk>.
But annually or whatever.
Because it seems like.
Or if you.
Through more than what was the.
What was.
Uh huh.
<unk> met with let's say that by loan growth this quarter of them.
It's not exact reminding our BPM to what you did that quarter, it's coming in the next quarter as well.
Yes, I mean, it's.
I mean, you would've seen we built our Cte.
Tier one ratio from last quarter to this one I mean, that's a factor of current growth Thats a factor of strength of pipeline and then that's a factor of making.
Necessitate a potential downside risk and external factors.
A bit of choppiness with the reopening bit of Delta Varian concern kind of rising quarter over.
Issued or so.
Those are all factors, we'll consider each quarter and deciding how much to raise so not completely.
Completely direct linkage to current loan growth, but that would be the primary factor.
Yes.
Making a few simple assumptions in.
Over.
I'm trying to calculate some accretion.
It doesn't I mean, maybe neutral or maybe slightly accretive.
Uh huh.
Issuance this quarter, but that might not that might be understating driven.
There's more to come with us.
The right way to look at it.
Well it depends on your math.
<unk> accretion.
And the assumptions you are using but if you were for instance.
Using the ATM to fund loan growth and you are maintaining your CET one ratio. So you werent looking to build it you were just looking to perfectly offset.
Loan growth.
Then you might get a level of.
And using the ATM in that manner and sort of the.
Mid to high single digits as a percentage of EPS growth.
Using the ATM in the manner of this quarter for instance of funding the capital needed for the loan growth and putting maybe 10 basis points of CET one.
Accretion pocket, it's something that would say reduce that level of accretion by perhaps a percent or two so still obviously happy with how we're using it.
In fact, we can still be accretive and put a little capital in our genes for what could be a choppy next couple of quarters, we're pretty happy with that outcome.
Yes, I guess, that's my point I don't want.
One in the.
Understate that accretion considering those other factors.
You did.
<unk> been doing this issuance so.
That's right.
Go offline for this discussion I have a good weekend.
Thanks, Craig.
Your next question.
It comes from Nigel D'souza. Please go ahead.
Thank you good morning, I had a follow up for you on your stage two loan migration in the quarter.
Order and based on my math.
I have your percentage of loans for stage, two relative to the whole portfolio going from about 12%.
Last quarter to about 7%. This quarter. So first is my math right there and on that migration is that entirely driven by changes to your forward looking indicators or were there any portfolio specific borrowers specific factors.
That drove that migration.
Yes, Thanks, Nigel your math is right.
We did see that level of decline.
A little bit of the decline.
From borrower specific behavior, our watch list loans decreased by about $100 million quarter over quarter. So that was a small proportion the larger proportion was model driven.
It's kind of the inverse of the conversation we had when our stage two loan proportion was really running up and running up at a faster rate than what you would've seen in the market and what we pointed to was the short duration of our loan book, causing some of that volatility and we talked about a top client.
Would we see the opposite happen when things start improving with the short duration of your book would be a benefit in the answer to that question is yes, and thats, what youre seeing this quarter.
This assessment of stage two is based on credit risk compared at origination to today. So it's always a relative comparison.
And if you think about how quickly our loan book Churns, we've originated a fair amount.
Covid started so if youre comparing credit conditions today.
What they would have been at origination.
Certainly been an improvement and certainly not a worsening so what's happening with stage two is exactly what we expected.
Okay.
So it really quick clarification, there on the remaining states to balances.
Do you see that that migration further migration and movement lower driven by again borrower specific factors or more Apple is just to understand what's going to drive the remaining mix up to stage two.
Yes, I mean, it could be both.
Barring no improvement.
And either underlying default rates or macroeconomic conditions than it would be borrower specifics that would drive that down.
But there is still some ability for our models to continue pushing that down if we continue to see improvements in those two key factors the macro factors and default rates.
That's.
Really helpful. Thank you.
There are no further questions at this time I'll turn it back to Chris for closing remarks.
Great. Thank you Colin.
Our year to date performance has been very strong our commitment to our teams and clients over the last 18.
Months is resonating with business owners in Canada, and we're winning many new desirable full service relationships. The proactive client centric experience delivered by our teams is accelerating our growth to capture increased market share across our western and central Canadian target markets.
<unk> forward, we see robust.
The opportunities and our continued focus to invest in our capabilities and product offerings will further accelerate our momentum.
We're firm in our commitment to advance our strategic direction to deliver long term profitable growth and provide attractive sustainable returns to investors. We're also mindful of how we achieved these goals.
We are currently undertaking a process to fit sustainability into our strategic direction and our risk management activities. We're also working to deliver an authentic approach that's best from a client people and industrial perspective.
We posted our latest corporate social responsibility report to our website this morning and our.
Excited to share our progress as we support candidates goals of transitioning to a lower carbon economy, and a more sustainable future for all our stakeholders.
In closing I'm proud of our team's commitment to achieving our goal to be the best full service bank for business owners in Canada, and I'd like to say, thank you for their efforts to.
Advanced our strategic objectives transform our capabilities and deliver another quarter of strong financial results to our investors. We appreciate your commitment to CW b as we undertake this transformational journey and deliver strong returns along the way.
We look forward to reporting fourth quarter and annual financial results on.
December 3rd with that we wish you all a great day. Thank you.
Ladies.
And gentlemen, this concludes your conference call for today.
Thank you for participating and ask that you. Please disconnect your lines.