Q4 2021 Canadian Western Bank Earnings Call

Ladies and gentlemen, thank you for your patience. Please do not disconnect. The conference call will begin momentarily. Once again. Please continue to standby do not disconnect. This GWB conference call will begin momentarily. Thank you for your patience.

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Good morning, My name is Sylvia and I will be your conference operator today at this time I would like to welcome everyone to CW Bp's fourth quarter 2021 financial results conference call and webcast.

Note that 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 then the number one on your telephone keypad and if you would like to withdraw your question. Please press Star then the number two thank you Mr. Patrick Gallagher you may begin.

And to your conference.

Good morning, and welcome to our fourth quarter 2021 financial results Conference call. My name is Patrick Gallagher and I'm, The Vice President, leaving our strategy <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 CW piece business. Please refer to our 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 Rose Executive Vice President and Chief Financial Officer.

Following their presentations, we'll open the lines for the question and answer session.

I'll now turn the call over to Chris who will begin his discussion on slide four.

Thank you Patrick and good morning.

With strong execution of our unique winning strategy our momentum continued to build through the year and we will grow further in 2022 and beyond we delivered enhanced products and capabilities to our teams that are using them to win more full service client relationships and drive sustainable returns for our shareholders.

This year, we delivered 10% growth in annual pretax pre provision income and a revenue surpassed $1 billion for the first time.

This level of performance reflects the multiyear improvements we've made to strengthen our balance sheet, which supported annual net interest margin improvement this year and in challenging operating environment. In addition, we're enhancing our revenue mix by growing our boutique wealth management offering that we provide to business owners and their families.

Our proactive brand personalize specialized service clearly resonates with current and prospective clients and our team's relentless client centric focus drove strong growth again. This year, we delivered a 3% increase in branch raised deposits and 2% growth in loans sequentially.

And Ontario accounted for approximately 45% of our total loan growth.

For the full year branch raised deposits grew 16% loans grew at 9% and Ontario accounted for approximately 26% of our total loan growth.

Our strong credit quality results reflect the secured nature of our lending portfolio.

Disciplined underwriting practices and proactive loan management, we finished the year with impaired loans and payment delinquencies below pre tax.

Pre COVID-19, sorry below pre COVID-19 levels.

On an annual basis, our gross impaired loans decreased 21% from last year and our write offs as a percentage of average loans in 2021 were below our five year average this strong credit performance assisted a 32% increase in our full year net income to common shareholders.

Turning to slide five.

Our strategic priorities for fiscal 2022 will build on our strong momentum and position us to deliver continued growth of full service relationships for years to come.

As the pace of digital transformation accelerates, we continue to add to our capabilities to offer a superior client experience through a complete range of in person and digital channels to grow our full service client base.

Following the completion of the limited initial Rollouts will compete full scale launches of our digital banking banking platform for personal and small business clients.

The virtual Chief operating officer solution, and our new commercial banking digital platform that enhances our cash management capabilities.

Our enhanced digital offering supports our brand and market share growth in Ontario.

Building on the success of <unk>.

Our existing full service banking center Mississauga, we're excited to open a new banking center in Markham and fiscal 2022.

As we look forward, we believe that sustainability presents an opportunity for long term value creation for those who choose GWB today, our people our clients and our investors.

We're developing an approach to sustainability with these three groups in mind and our focus over the next year will be to integrate our sustainability approach within our overarching strategic direction and drive engagement with our teams to accelerate our execution against key priorities.

Our culture is core to our future success and is key to developing and tracking top talent from across our industry.

We're excited to welcome <unk> to our executive leadership team Carolina joined CW be with extensive risk management experience and has assumed the role of executive Vice President and Chief risk Officer.

Carolyn Graham will retire in June 2022, and will continue to report directly to me and will support <unk> and its integration into the sea or overall.

Carolyn will continue to provide executive leadership and oversight of our <unk> program before transitioning responsibilities to Carolina in June.

Our performance reflects the dedication of our teams who continues to execute on our strategy as more of our people look to return to the workplace in the new year will support and engage our employees by enhancing our flexible work arrangements talent development and retention programs will continue to support and expand our employee.

Represented groups focused on inclusion and diversity and mental health.

Our momentum is creating strong full service growth opportunities for CW, b and strategically targeted segments that will drive double digit growth of loans and branch raised deposits.

We will look to support our stable capital ratios by targeted use of our aftermarket distribution program to deliver strong levels of loan growth to drive incremental shareholder returns.

Before I turn it over to Matt I'd like to say that our thoughts are with those affected by the floods in BC. Our top priority is to take care of members of our local CW V team as they focus on supporting the clients and communities, we serve with that I'll turn the call over to Matt who will provide greater detail on our fourth quarter performed.

<unk> and outlook for fiscal 2022, thanks, Chris and good morning, everyone I'll start on slide six our focus to expand full service relationships with existing and new clients supported a 16% increase in branch raised deposits compared to last year.

Deposits now represent 59% of our total funding and Thats up from 56% last year and 50% two years ago, our efforts to grow and diversify our funding sources, including a very strong year in the debt capital markets drove a reduction in the outstanding balance of broker deposits, which now represent only 19% of our total funding.

That compares to 24% last year.

Looking at slide seven on a full year basis, our total loans were up 9% to 12% growth in our general commercial portfolio included 16% growth in Ontario, and this reflected our focus to increased full service client relationships across our national footprint.

Also delivered 24% growth in commercial mortgages reflected strong new lending to high quality borrowers and with underlying assets consistent with our risk appetite.

Oil and gas production loans increased primarily due to participation in syndicated facilities with high quality borrowers our exposure to oil and gas production and service businesses. Each continue to represent about 1% of our total loans.

Total loans at Ontario grew 10% compared to last year and now represent 23% of our total loans.

On a sequential basis. In addition to the very strong growth in commercial mortgages. This quarter, our general commercial loans grew 2%, including 4% growth in Ontario sequentially, we delivered 4% sequential growth of personal loans and mortgages is strong origination volume outpaced payouts, which have moderated over the last quarters.

But included a significant moderation this past quarter.

Slide eight shows we delivered another very strong quarter of profitability pretax pre provision income increased 6% compared to the same quarter last year and reflects the benefit of 9% annual loan growth and a two basis point increase in net interest margin common.

Common shareholders' net income increased 42% and adjusted and diluted EPS each increased by 28 from the same quarter last year.

A lower total provision for credit losses contributed 26 cents to EPS and was primarily driven by a net performing loan recovery of $7 million compared to a charge of $12 million last year.

Higher net interest income contributed <unk> <unk> and reflects strong loan growth and higher net interest margin.

Higher non interest income contributed <unk>.

Higher noninterest expenses reduced EPS by <unk> 15.

Which reflected investments in our teams and technology infrastructure to support growth and strategic execution, including additional costs associated with implementing enhancements to our <unk> tools and processes. This quarter also included a <unk> <unk> reduction to EPS from the semi annual coupon payment on our series, one <unk>, which was <unk>.

Offset by lower preferred dividends due to the redemption of our series seven preferred shares last quarter.

Our sequential performance as shown on slide nine and reflects relatively stable revenue against a very strong third quarter, we incurred a 10% increase in noninterest expenses, reflecting incremental investments in our teams and strategic projects, including digital and IRB. In addition to the usual seasonal increases in certain expenditures.

As a result pre tax pre provision income decreased 11% compared to last quarter.

Common shareholders' net income increased 4% and diluted EPS increased <unk>.

Primarily due to a lower provision for credit losses, which contributed 16.

Net interest income was consistent to the prior quarter and lower noninterest income reduced EPS by <unk> <unk>.

Higher noninterest expenses reduced EPS by <unk> 11.

Turning to slide 10, as Chris mentioned, we had a very strong year against a challenging operating environment against that environment, though we delivered record revenues of over $1 billion and drove a 10% annual increase in pre tax pre provision income for.

For the full year, our common shareholders' net income was up 32%.

Diluted EPS increased 87 was 79 <unk> of the increase contributed for a higher net interest income of.

A decrease in the total provision for credit losses contributed a further 56.

A full year of results from our wealth acquisition contributed an additional <unk> <unk> to diluted EPS or <unk> to adjusted EPS.

<unk> was reduced by 44 by higher NOI, primarily reflecting continued investment in our teams and technology infrastructure to support higher growth.

And within the impact of higher Nia's, approximately 10 cents of that related to cost of operating and the continued investment in our ERP tools and processes.

The coupon payments for series, one and series two <unk> began in fiscal 2021 and net of the lower annual preferred dividend, reflecting the redemption of series seven shares drove a <unk> <unk> decrease in EPS this year.

As shown on slide 11 on a sequential basis, our total revenue decreased 1%, primarily due to a decline in noninterest income and that was driven by a $2 million decline in net gains on securities.

Net interest income was consistent with last quarter as 2% sequential loan growth was offset by the impact of a four basis point decline in net interest margin or.

Our net interest margin in the fourth quarter, primarily reflected lower yields in our fixed rate portfolios driven by very strong residential mortgage growth and lower fee income recognized in loan yields compared to the prior quarter.

Net interest income on a full year basis was up 12% due to strong 9% loan growth and a four basis point expansion in net interest margin.

Noninterest income was up 26%, primarily due to increased revenue from the <unk> acquisition, which has exceeded our expectations. This year.

This was offset by lower net gains on securities as the portfolio rebalancing activities, we undertook last year drove some onetime gains.

Overall for the year, we're very pleased with the 13% annual revenue growth, we delivered against a challenging economic backdrop.

Highlighted on slide 12, our fourth quarter provision for credit losses on total loans was negative 12 basis points, we realized an eight basis point recovery on performing loans and that reflected a continued improvement in the macroeconomic outlook and a continued decline in realized default rates we.

We recognize it and impaired loan provision recovery of four basis points this quarter, which reflected the partial reversal of pre provisions previously recognized combined with lower new impaired loan formations.

Our impaired loans of $202 million are down 27% from last quarter and now represent 61 basis points of gross loans.

Continue to generate strong resolutions, while our annual write offs of 19 basis points remain below our five year average of 20 basis points. We concluded the year in a very strong credit quality position and our total unsatisfactory loans as a percentage of total loans are now below pre pandemic levels.

On an annual basis, our total provision for credit losses of nine basis points is well below our historically normal range of 18 to 23 basis points.

Provision for credit losses. This year was driven by an eight basis point recovery in the performing loan provision for credit losses.

As we look forward to next year as government support programs conclude and the economy continues its gradual recovery with some choppiness, we expect that our provision for credit losses may increase gradually over the year and may finish in the mid teens in basis points on a full year basis, but we acknowledge there is significant uncertainty in that estimate.

Yes.

Our capital ratios are slowing as shown on slide 13 calculated using the standardized approach.

Common equity tier one ratio at eight 8% was consistent with last year and last quarter as the benefit of earnings net of dividends and common shares issued under our ATM program were offset by the combined impact of strong risk weighted asset growth and a reduction in accumulated other comprehensive income.

Our ATM program has been an effective tool to dynamically manage our capital ratios. We expect to continue to use it to issue common shares to support strong loan growth and to ensure our capital levels appropriately reflect the potential for near term volatility.

Under <unk> leadership, we have continued to advance our IRB transition program, including the continued work to implement enhancements to our ARV tools. We continue to believe approval will make us more competitive support higher growth and achieve a further diversification with an enhanced view of risk.

Yesterday, our board declared a common share dividend of <unk> 30 per share, which is up one cent or 3% from the dividend declared last quarter and one year ago with the end of regulatory moratorium on dividend increases we expect to resume our pre pandemic practice are modest and regular increases to our common share dividend.

As we look forward on slide 14, and as Chris noted, we continue to work through our strategic planning phase to determine how best we can address sustainability, which includes climate risk we expect to achieve a core building block over the next year by engaging with an external expert to measure our scope, one and scope two greenhouse gas emissions.

And we'll look to set fiscal 2022 is our baseline years.

Our next steps beyond that will include the exploration of our greenhouse gas emission reduction management strategy and establishing incredible reduction targets. We'll also look at in the development of an approach to measure our scope three emissions and explore a path to net zero emissions.

You will see from our materials. We have also initiated a phased approach to enhance our climate related disclosures in alignment with the Tcf D recommendations will look to provide clear and transparent external disclosure as we progress along our climate journey and determine how best to support the transition to a lower carbon economy for us and our clients.

Continuing to look ahead to fiscal 2022 on slide 15, we expect to deliver another year of strong growth within our risk appetite our performance expectations are underpinned with an assumption that the Canadian economy continues its gradual recovery and we don't see any significant curtailment of economic growth are large increases in the.

<unk> rate due to future waves of COVID-19, or other factors.

Against this economic backdrop, we expect our teams will continue to deliver strong full service client growth and strategically targeted segments and within our risk appetite by leveraging our continued enhancing capabilities.

Targeting double digit annual percentage loan growth, where prudent and double digit annual percentage growth of branch raised deposits with a continued focus on broadening our other funding sources, we expect that will continue to reduce broker deposits as a proportion of our total funding.

We expect annual revenue growth to reach double digits with an annual NIM around 250 basis points. This is underpinned by the assumption of either no bank of Canada policy rate increases or rate increases that occur later on in the fiscal year. If we see policy rate increases that commenced in the first half of the fiscal year, we see upside in our NIM.

To the tune of two to four basis points of higher net interest margin.

On an annual basis, we expect non interest non interest expense growth in the low teens. This includes continued planned investments in our strategic priorities, which include certain nonrecurring expenses to implement enhancements to our <unk> tools and processes. We also expect higher expenses related to the development and roll.

Out of our enhanced digital offering to clients and the opening of our new banking center in Markham.

With an expected return to a more normal operating environment. We also expect growth in expenses like business development and travel which had been suppressed in the current operating environment.

We expect to deliver annual pretax pre provision income growth within a range of mid to high single digits. Our annual growth in earnings per share will depend on our provision for credit losses, which could be volatile compared to the current year based on a base case estimate we expect an annual provision for credit losses in the mid teens compared to now.

Nine basis points in 2021. This assumption would result in annual percentage growth of adjusted earnings per share that could finish in the range of the low to mid single digits of course, there is downside to this estimate of provisions for credit losses returned to within or above our normal historical range of 18 to 23 basis points, but on the other hand, we have further.

Upside to earnings if policy interest rate increases occur earlier in 2022 than we're expecting or our provision for credit losses holds relatively consistent with the very low 2021 levels.

<unk>, we're ready for the Q&A. So let's go ahead and open the lines. Thank you, Sir ladies and gentlemen ask David if he would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three pronged acknowledging your request and if you would like to remove yourself from the Q&A you will need to press star followed by two.

And if you're using a speaker phone we do ask that you. Please lift the handset first before pressing any Keith. Please go ahead and press Star one now if you do have a question.

And your first question will be from many Goldman at Scotia Bank. Please go ahead.

Hey, good morning.

The first question I have is just on <unk>.

<unk> just wondering if there's any updated information.

Information, especially in terms of timeline there.

<unk> also be a signaling a more normal environment.

Just wondering if there is any new development.

No we are continuing to work on our.

Parallel run and really getting a lot of good information, how we think we can really deliver this very well. So carolyn will continue to work on their projects until she retires at the end of June and we look to continue to move this forward, we still see it as a great enhancement to our capabilities.

So the previous timelines, we talked about basically are still what you're working towards.

Yes, yes.

And then just in terms of the guidance.

Just wondering.

On the operating leverage specifically it sounds like the guidance is for negative operating leverage in 2022. So I just wanted to confirm that and I wanted to see if we if you think that we could get back to positive operating leverage in 2023.

Obviously, a lot of investments happening, but how do you see that evolving over.

Beyond this current fiscal year.

Yes, you are right.

On a full year basis, it would be negative operating leverage I think thats. The story, though that youll see change as the year progresses, even and the opportunity to deliver positive operating leverage I might circle Q4.

As a potentially credible kind of where you might see that in a couple of factors driving that.

Obviously, if we see bank of Canada policy rate increases than we would if we do see them expect them later in the year.

That gives us.

Some NIM expansion opportunities later in the year and especially within Q4 and then some of what's driving the increased expenses and net.

Next year, I mean, that's going to be investments in our AARP enhancements and Thats work that we expect the heavy lifting to occur predominantly in the first half of the year may be spilling into Q3, but by Q4, we might see a bit of a tapering of those costs. So it sets up the fourth quarter to maybe see a bit.

Of torque on operating leverage and sets us up quite well going into the next year.

Thanks for that and then just two more clarification regarding the outlook in terms of the PTP.

Growth outlook are you signaling that if we get rate hike, maybe sooner than expected.

That PPP growth can be.

In the low double digits essentially is there upside to that.

<unk> estimates.

The rate environment starts to increase sooner.

Yes, when we were setting the guidance we had in our mind.

<unk> bank of Canada rate increases and thinking about whether those occurred in the back half or front half of the year and I would say that that would put you at the low or high end of our guidance. If we saw more hikes than that and especially if we saw them occur earlier in the year.

We would have the potential to break into the double digits.

All else held equal.

Okay. Thanks, Matt.

Thank you next question will be from Doug Young.

Please go ahead.

Hi, Good morning, just on the guidance as well thanks for the color I guess theres two things.

Just wanted to kind of think you may have answered them, but one is just on the noninterest expense ratio.

It seems like a $50 to 51% level seems reasonable for next year, but and then on the.

The NIM and loan growth just wondering what your assumption is in terms of loan mix because it does seem like the loan mix shift this quarter didn't have implications for your NIM. So what are you thinking in terms of loan mix more on the commercial side.

Any color on that.

Yes, so I guess first to confirm your math, Doug, Yes, we would be looking at an efficiency in or around 50%, maybe just slightly above that on balance for the full year, but consistent with my comments on operating leverage that's a number that you could see finished.

Finishing.

A good chunk below 50%.

Coming out of the year.

On on the NIM outlook you are right.

<unk> growth mix was a driver this quarter, we saw a bit of a shift in mix this quarter and it's kind of been building through this year.

Two higher growth in our commercial mortgage portfolio as well as our retail mortgage portfolio. Those are our two lowest yielding books, but give us excellent credit quality. So it's a good trade there from an ROE perspective, and especially thinking about life as an Arab bank, we'd be pretty happy with that trade.

But it does put a bit of pressure on the NIM, which gives us confidence in the NIM for next year and why we think it builds from these Q4 levels.

We're making the expectation that the two portfolios that were a bit sluggish this year, which are some of our higher yielding portfolios equipment finance, we expect a strong rebound and and.

And we've said this for a couple of quarters, but we see a really strong pipeline ahead of us and the real estate construction lending portfolio with good borrowers great projects, but we just haven't seen them start yet we expect them to start moving in fiscal 2022 and with that we'll bring some yield expansion in <unk>.

NIM expansion funding.

Funding costs will continue to take those down as we continue to grow branch raised deposits.

And just to clarify youre not assuming in your guidance any bank of Canada rate increases is that right.

Alright, yes, we're assuming basically the effect of either non or late year.

Bank of Canada rate hikes, which on a full year basis is nearly the impact of almost none.

You might and Thats why were seeing relatively consistent I think about late in the year Bank of Canada rate hikes, even if you had a couple of say one in Q3, one in Q4.

It might be looking at.

Basis point to two basis points of NIM expansion opportunity self we were $2 49. This year, you're still in that range of around $2 50 next year, which would be our outlook.

Makes sense and then just on the branch raised deposits strong.

Once again I guess my question is how much of this was from new clients that are new to CW b.

And do you have any stats that you are willing to share how are you.

Successfully deepen these relationships so additional products that you're selling maybe loans are well does it become a big part of your strategy.

First I guess is like how much of this.

Deposit growth in the branch side as new clients and how much of that has been are you converting to multi product clients.

It's been a pretty consistent trend over these last couple of years, where the majority of that deposit growth is coming from either new to bank clients or existing clients that we're converting from lending only to full service.

Most of what we're seeing in terms of product mix or what they are adding cash management has been our big opportunity I mean, those are the capabilities, we have been investing in to deliver this to our clients. That's how we're winning a lot of these full service relationships as they like dealing with us, but we just haven't had the capabilities to effectively do cash <unk>.

<unk> as well as our peers, but we've started to close that gap and effectively.

Come out with a competitive offer and are starting to see the wins that's been good news for our funding cost as well because of the deposits that come with those wins on the cash management side, there are lower cost of funds compared to other sources as well. So we're just very happy with that.

Chris I don't know if you want to give an update on wealth and how that's been going yes, and just to add on the cash management side.

<unk>.

2020 to add to our capabilities will be the digital online platform, which we <unk>.

<unk> enhances our payments program as well so we see more gain to occur in this area, which were very very positive on so very happy with the growth in branch raised and really it's a reflection of the investment we've made and again wealth has been a tremendous add.

We on boarded the teams in June of 2020, we obtained retained all the advisers, which has been a fantastic win.

We see tremendous integration as we've really worked on internally we call one wealth and just the integration of our wealth teams, but also the referral our branch business into the well into the wealth advisors and that's gone very well. So we're just happy with the kind of business execution of our strategic direction.

Chris are you willing to give any stats in terms of cross sell number of clients with multiple products I mean, the branch raised deposits is fantastic for <unk>.

Lending, but obviously the long goal is to kind of deepen these relationships and thats what im curious it would seem that there has been progress yes.

Yes, there is progress there.

We're not publishing any stats on that but we definitely have we do track it internally and we're very happy with the progress we've made on that conversion to full service clients.

Okay I'll leave it there. Thank you very much thanks, Doug.

Thank you next question will be from Marcel Mcclain at TD Securities. Please go ahead.

Okay. Thank you.

Just going back to the <unk> what was the most recent guidance.

Are you guys planning to submit.

For approval in the second half of 2022 with implementation in 'twenty three or is it uncertain at this point.

So our we're looking what we said is we are <unk>.

Taking our application.

To the regulator when we're when we're fully ready with it so that was the message that we've provided and so what we've done is we worked to parallel run.

And what that's providing us good insight into how we're best to deliver this so we're working on it through 2022.

We will focus on as soon as we feel.

Absolutely confident that the processes are in place then we will move forward with our application. So theres work to go but we're positive on the progress we're making so far.

Okay.

Okay.

And then just.

Our IP as well.

When we think about this.

The transition eventually does happen how do you see that translating into your ROE.

And possibly a year one and beyond.

Once the once you guys do get that completed.

Well, we think it's positive.

We don't see reflected in our capital today is just the underlying strength of our borrowers under the standardized approach borrowers strength doesn't factor into that equation its loan type.

So there is an embedded amount of excess capital being carried under a standardized approach that when we convert over we know will be free how much.

We will depend on our post approval conditions.

And those are things that will be worked on as we get a little closer to the finish line. So it's early days to provide a calibrated answered by Directionally I will say positive.

Okay.

Okay.

Last one on capital for me.

The ATM.

Little bit more than you had sort of guided to on our last quarter conference call that might've been reflective of the loan growth we saw this quarter.

So it seems like you guys are managing to this about eight 8% capital ratio is that the right way to think about and you guys will sort of continue to issue as much as you need to maintain that level of capital or what have you guys considered adequate level of capital and when you say that.

And so why don't I have talked about since launching the ATM is using it as a flexible and dynamic tool to manage capital levels to the right level in the moment.

If we ended up making a call on just looking ahead looking at loan growth actually realized Watson the eminent pipeline and then things out there that could introduce volatility.

Our capital, it's making sure we're calibrated to that rate level and if we.

We need to pivot either we have a little bit extra or we feel like we could put a little bit more in our back pocket we.

We have an ATM, we can use to to pivot and issue a bit more and do that pretty rapidly. Conversely, we have a strong enough loan growth is a standardized banks that we can soak up capital in a hurry as well if we feel like it's prudent to do so.

So far where we sit right now and the capital ratio, we're holding it was the right level in the moment and this is something we will dynamically assess as we go forward I mean this is part of.

Our parallel run to be in an AI or be back with risk sensitive capital, we don't have overly risk sensitive capital today.

But we're establishing our credibility as an operator, who can prudently and proactively manage capital levels based on risks in the external environment and what we're seeing internally. So that's a long winded way of me, saying each quarter, we will assess this very carefully.

Related to this quarter it was strong loan growth.

That was the pipeline through the whole quarter. We also had a bit of grind on Sept, one capital from accumulated other comprehensive income.

We have.

Bond portfolio on our liquidity block it gets fair valued each quarter. There were some unrealized losses measured at October 31, which reduced our capital levels that would have otherwise been higher so a few moving parts.

The right capital in a moment.

Okay, Alright, thank you I'll re queue.

Thank you.

Thank you next question will be from Nigel D'souza at Ferro does investment research. Please go ahead.

Thank you good morning.

And for you on your.

Formula One allowance released this quarter.

Correct me, if I'm wrong, but I think this quarter amongst the person that.

The reversal for us.

Yes.

Also at the Pentagon and so I'm just trying to get a sense of what drove that release I know you cited low default rates and.

Movement in the oil price forecast, but when I look at your disclosures, where your oil price forecast went up from <unk> 61 to <unk>.

67, so is the delta to that forecast really that material or can you just shed some light on whats driving the outlook yes.

Yes, our models start with our current realized levels of defaults as the starting point and then the macroeconomic forecast projects predicts a trajectory from there. So the lower your starting point the lower your potential projection of expected losses, if youre macro forecast was consistent quarter to quarter. So this quarter, we had kind of a double.

Benefit.

Actual realized default rates being lower quarter over quarter, Youll see that and obviously, our gross impaired loan formations as well as our delinquency levels, which just continue to drop and are now well below what they would have been pre pandemic.

Pretty benign economy, so thats the beneficial starting point and then layered on top of that would be the more favorable and I call it slightly more favorable macroeconomic outlook.

Because oil price is not a material driver of our ECL.

A secondary factor and oil price going up is helpful.

But it would not explain the majority of our performing loan released this quarter. The majority of it related to just very very strong.

Levels of realized defaults as a starting point.

So do I interpret that as you add high migration from stage two.

Back into stage one.

Yes.

Not necessarily.

What we saw actually was a couple of things.

Within the personal lending side of things that being in the mortgage book, that's a very low duration portfolio and we originated.

Predominantly most of our loan growth.

Within the last year and that was in an environment with the combination of <unk>.

Very low rates of default as well as a very robust outlook for housing prices and a very low interest rate environment.

What our models would predict for that portfolio is now moving ahead a year later.

<unk> rate environment, still very low but outlook for housing prices, a little bit softer than it would've been when those loans were originated and certainly a higher outlook for interest rates. So we actually saw an increase in stage two quarter over quarter.

But that's predominantly from that personal lending book and as we talked about earlier and the pandemic. When we saw the migration into stage two of that portfolio. It didn't cause a significant increase in our ECL for two reasons, one short duration. So moving from one year of expected losses to two years and going.

Full lifetime.

Not a material impact in that loan book is very secured very reasonable ltvs. So.

Actual predicted credit losses would be very very low.

And that compares well to realized credit losses, too so quite a few moving parts.

But on balance.

Low default rates.

More beneficial outlook on macro what's driving the decline despite some movement within staging.

Great and just last question on this.

Real quickly so when I look at your allowance levels. It looks like there is a substantial amount of excess allowances on performing loans relative to the <unk> level. So is there any risk to the upside here.

The new variant and macro economic risk.

You could see a rebuild us performing loan loss provisions in the upcoming quarters, and maybe your PCL ratio running a bit higher than forecast.

Yes, where we're sitting today, our current level of performing loan allowance does predict an increase in the rate of default progressing through the next year.

That's an embedded assumption now there could be many drivers of that increase in default rates you could turn it back to government support and stimulus running off.

<unk> a concern other factors sort of late in the economy that could lead to elevated rates.

Default and delinquency, we have factored in elements of that into our models. So we're not expecting.

Current low rates of defaults you just continue as normal we think it's reasonable those pick up and thats embedded in our estimate.

There is some risk of performing loan allowances.

Building from these levels, if we saw a very severe outcome and we're expecting a tick up but we're certainly not expecting.

A significant.

Curtailment of economic growth or anything like that or a significant increase in the unemployment rate.

But we are thinking from here as a starting point, it's reasonable to expect that we do see slightly elevated levels of default and delinquency.

Okay. That's helpful. Thank you.

Thank you.

Reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on you touched on the phone.

And your next question will be from Gabriel <unk> of National Bank. Please go ahead.

<unk>.

NIM.

Look one question.

Your.

What's your underlying.

Underlying assumption for loan growth versus deposit growth I know your loan growth but.

Maybe I missed but youre perfect patient for deposit growth yes.

Yes, we have guided to double digit on Boulder.

We think there'll be similar.

The opportunity for branch raised deposits finished slightly above loan growth would be our expectation. Okay. So you wouldn't have any downward pressure on margin from.

Suddenly meeting to rely on broker deposits.

Of loan growth.

That would be our base case assumptions, we think funding continues to be a strength for us through next year.

In the.

If the bank of Canada hiked rates earlier in the year, you could see two to four basis points.

Your NIM.

Spectation I wanted to tie that back to comments made dumping from Q2 or Q3 I forget.

Sensitivity versus spread sensitivity or more of a spread sensitive bank.

Or like the competitive environment affect your NIM.

I know these aren't huge numbers, but clearly there's still some from <unk>.

The levers to what the Central Bank both can you.

And if I may a bit on why there is still upside I think that's a good thing in that normal thing logical thing but.

Just wanted to.

On a better understanding of your rate sensitivity.

Yes, we are pretty well matched when you look at floating rate assets versus floating rate liabilities, but thats, a very broad category within floating assets you have assets that do flow directly to prime which then ties directly to bank of Canada rates.

You then have assets that are linked to SEDAR, which.

It doesn't always follow prime that exactly in lockstep, theres timing differentials and I think we've seen SEDAR curve, perhaps front run things a bit at times, sometimes it lags.

So theres a bit of a mixed factor within that broad category of floating.

Same thing can be said for our for our deposit mix.

We would have a smaller proportion of those floating rate deposits linked to prime directly.

A big chunk of our deposits float, but they float on what we call administered rates and administer rates are where we have discretion at setting the pricing.

And so what are you could see some embedded torque actually in our NIM and our outlook, we have presumed that we pass on.

The majority of the bank of Canada rate increases if they occur to our depositors. If we have the sort of funding strength that would allow us to take the position to pass on something less than the.

The bank of Canada rate increases, we saw that could give us some torque.

But if we found ourselves in a competitive dog fight for deposits.

The risk becomes that you have to pass on a little bit more to try to stimulate branch raised deposit growth.

That's a risk we mitigate by having a bunch of other sources of funding available where we can just look at what's in front of us look at competitive dynamics and decide if.

If we have a need for funding our re dialing up deposit pricing are we okay to leave it can we reduce it or not depends on strength and pricing available in other channels. So you're if I understand your model.

Love to chew on there, but not the.

The full amount of your floating rate loan book will move.

We'll see you open entire when if and when the bank of Canada rate and then you're also making a.

Fairly conservative assumption that you're where you have pricing power in your deposits, you're assuming full pass through.

Next to it which maybe.

It may not be the case.

And our and our ability to over deliver on that will be directly linked to our branch raised deposit strength. If we're seeing very good strength as we saw.

Through through late last year and into this year, we were able to enact pricing actions that reflected that strength and allowed us to talk in a bit more NIM.

And then on the IRB thing.

I seem to recall you have given a number like a quarterly number of these costs.

Sure.

Implementation or whatever.

That.

Going to be a bigger cost.

Great.

Half of the year.

It's been running out lately.

And then looking let's say to 2023, because it sounds like in Q4, it could be dropping off 2023 with those costs.

Go away or.

Which it sounds like an <unk> or are you going to look at reinvesting those savings are opening more branches in Ontario hiring more people.

People as the bank grows stuff like that.

Yes, so we have been pretty transparent about exactly what we're spending on <unk> just in the normal recurring costs of operating as an Arab bank and that really was.

We had a bunch of assets capitalized on the balance sheet. When we started the parallel run we turned on the switch to start depreciating those assets and so that impact has been running through in addition to the team responsible for originally building and developing those processes.

They move from being capitalized to them hitting <unk> and then the the uptick in those expenses you would've seen from Q3 to Q4 reflect the incremental cost and effort with developing the enhancements to those tools.

And starting to implement them so that the level of expense or seen in Q4 would reflect ongoing sustainment as well as implementing the enhancements and thats a pretty good run rate.

Going in for I'd say, the first three quarters of next year, and then starting to taper off in Q4.

Maybe help give you a better sense of the magnitude on next year.

The investments, we're looking at making with an air B I mean, its driving over 2% of our year over year NII growth.

And that would be a fiscal 2022 outcome to your point and where you are leading here.

Our intention is that in fiscal 2023 of those costs dramatically reduce single back closer to ongoing sustainment what.

<unk> some.

Incremental cost.

And in terms of what we spend those savings on do we allow it to.

Reduce our efficiency is there a big digital push to be made that's a budgeting decision we haven't made yet.

But it definitely sets the table for some more earnings torque into fiscal 'twenty three when you think about full year impacts.

Bank of Canada rate increases that might get enacted this year combined with this incremental expense we are incurring in 2022.

That we may not need to incur in 2023.

Helpful.

Helpful answer thank you.

<unk>.

Thank you.

Once again, ladies and gentlemen, please press star one if you would like to ask a question.

Sure.

And at this time Mr. <unk>, we have no further questions. Please proceed.

Thank you Sylvie.

I'd like to just say, thank you to our team members for their tireless efforts this year.

Together, we built a excellent momentum going into 2022, and I believe the execution of our strategic objectives will provide even more upside for the years to come.

I'd also like to take a moment to say thank you to our investors for their continued support despite the challenging operating environment that persisted. This year, we've delivered very strong financial performance and executed on our differentiated strategy.

Continued strong growth of our franchise will be supported for the combination of our investments in digital capabilities, our focus on delivering a lower cost funding model and the transition from a standardized to a model enabled <unk> bank.

CW these capabilities will be more competitive support higher growth and achieve further diversification. We're firmly committed to the responsible creation of value for all our stakeholders and our approach to sustainability will support our continued success.

We appreciate your commitment and confidence in <unk> and look forward to reporting our first quarter financial results in February.

With that we wish you all a good morning, and happy and healthy holiday season. Thank you very much.

Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again. Thank you for attending at this time, we do ask that you. Please disconnect your lines have a good weekend.

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Okay.

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