Q4 2022 Canadian Western Bank Earnings Call
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Our strategic execution in fiscal 2022 enhanced our digital capabilities, increased our physical presence in key markets, and further improved our client offering to provide a foundation to accelerate full-service client growth. Our new financial scorecard lays out the key performance metrics we expect our teams to deliver over the next two years at the standardized bank to increase value for shareholders. I will now turn the call over to Matt, who will provide greater detail on our fourth quarter performance and outlier. Thanks, Chris. Good morning, everyone. We start on slide 7. Our branch-raised deposits were up 8% from last year. That reflects 34% growth in fixed-term deposits. That's partially driven by a shift from existing demand and notice deposits, which were roughly flat on a net basis this year. Branch-raised deposits represent 57% of our total funding. That's relatively consistent with last year. On a sequential basis, our branch-raised deposits increased 2%. That was a 12% increase in fixed-term deposits, partially offset by a 2% decline in demand and notice deposits. The change in branch-raised demand and notice primarily reflected a shift to term deposits. We also saw a reduction in our existing deposit balances as clients put excess funds to use, and that more than offset the solid growth we saw from net new full-service client additions in the quarter. Sequentially, our capital market deposits increased 10%, reflected an opportunistic capital market deposit issuance in the quarter at favorable pricing, and our broker deposit balance decreased by 3% in the quarter. We flip to slide 8. Our total loans were up 9% in the past year.
Total loans were up 2%. The general commercial represented nearly two-thirds of the net loan growth in the quarter. We're also pleased to see equipment financing loan growth strengthened as the year progressed and we delivered 2% growth in the fourth quarter. Ontario loans grew 2% within the quarter and now represent 24% of our total loans. We delivered very strong 4% growth in Alberta this quarter.
and BC loans remained relatively consistent. Our performance compared to Q3 is on slide 9. Common shareholders net income decreased 16% sequentially and diluted EPS decreased 16 cents. That was primarily due to the impact of accelerated amortization of our previously capitalized ARB assets as Chris mentioned in his opening.
Adjusted EPS decreased two cents and pre-tax pre-provision income remained relatively unchanged.
The provision for credit losses increased EPS by one cent as due to a lower impaired loan provision, partially offset by higher performing loan provision due to further deterioration in the forward-looking macroeconomic outlook. Non-interest income contributed seven cents, primarily driven by foreign exchange revenue.
Higher adjusted non-interest expenses reduced EPS by seven cents, primarily due to the continued investments in our strategic priorities. That included the redevelopment of our ARB tools and processes, the harmonization of our wealth management brands with the launch of CWB Wealth in the Quarter, and the customary seasonal increases we typically see in advertising, community investment and training costs, along with higher people costs in the quarter.
Additional costs related to the accelerated ARB amortization reduced EPS by 13 cents, which is reflected in adjusting items.
The other items that reduced DPS in the corridor included a 1 cent impact from a higher effective tax rate, higher LRCN distributions that decreased DPS by about a penny, and a 1 cent isolated impact of the incremental shares issued under our ATM program. Common equity raised under the ATM supported incremental loan growth in the corridor, and with an income contribution that exceeded the dilutive impact of the incremental shares.
Our performance compared to the same quarter last year is on slide 10. Our common shareholders net income decreased 25%, our EPs was down 29 cents, primarily due to an increase in the provision for credit losses on performing loans and the impact of the accelerated amortization of our previously capitalized ARB assets.
Adjusted EPS decreased $0.15 while pre-tax pre-provision income increased 8%.
Increased net interest income contributed 9 cents, and higher non-interest income increased EPS by 7 cents compared to last year. Higher non-interest expenses reduced EPS by 8 cents, and reflected targeted investments in our strategic priorities, including our ARB tools and processes, digital capabilities, investments in our client offering, and our new banking centres in Markham and downtown Vancouver.
As we optimize our business, deliver an unrivaled experience to our clients, and position ourselves for an acceleration of full-service client growth.
The accelerated ARB amortization reduced DPS by 14 cents. Provision for credit losses reduced DPS by 19 cents due to the increase in the performing loan provision that I previously referenced.
Other items reduced EPS by four cents and primarily reflected the isolated impact of the incremental shares issued under our ATM.
As shown on slide 11, the 3% sequential increase in total revenue reflects consistent net interest income and a 27% increase in non-interest income, and that was driven by higher foreign exchange revenue and higher credit-related fees partially offset by lower wealth management fees.
Net interest income was 4% higher than the same quarter last year, as 9% loan growth was partially offset by a 14 basis point decline in NIM.
Non-interest income increased 29%, primarily due to higher FX revenue and higher credit-related fees, partially offset by lower wealth management fees, and that was due to the market value declines that reduced average assets under management.
Our 10 basis point decline in net interest margin is shown on slide 12 and reflects that the growth in asset yields has not caught up yet to the growth in funding costs in the rising interest rate environment.
Through Bank of Canada policy, rate increases totaling 125 basis points occurred during the quarter and that contributed 9 basis points to our net interest margin, isolated to the impact of the increase on our floating rate loans, net of the impact on our floating rate grant rates deposits. For more information visit www.fema.gov.au
Higher asset yield contributed 20 basis points, and that includes the impact of higher interest rates turning through our fixed-rate loan and securities portfolios, and was partially offset by lower loan-related fees.
Higher funding costs had a negative impact of 37 basis points.
This primarily reflected increases in market GIC rates on new fixed-term deposits and pricing adjustments that were made to certain administered rate deposit products to main competitiveness on pricing.
Our asset mix reduced NIM by two basis points, primarily driven by a reduced proportion of higher yielding equipment finance and real estate project loans from the prior quarter.
On slide 13, we highlight our continued very strong credit performance. That's supported by the secured nature of our lending portfolio, our targeted borrower selection, discipline underwriting practices, and proactive loan management.
A fourth quarter provision for credit losses on total loans was 14 basis points compared to 16 basis points last quarter.
A performing loan provision for credit losses was 14 basis points compared to 4 basis points last quarter that reflected a softening in forward-looking macroeconomic assumptions, primarily due to the forecast impact of the rising interest rate environment generating lower GDP growth, a decline in housing prices and higher unemployment rates.
which also moved a larger proportion of performing loans into Stage 2 this quarter.
Gross impaired loans of $167 million pairs to $187 million in the prior quarter and now represent 46 basis points of gross loans.
On a quarterly basis, write-offs as a percentage of average loans of 12 basis points remained well below our historical average and we recognized a nil impaired loan provision for credit losses.
The sequential change in our set one ratio is shown on slide 14.
Calculated using the standardized approach, our set 1 ratio was 8.8% compared to 8.9% last quarter.
While organic capital generation and common shares issued under our ATM program more than offset growth of risk-weighted assets, our capital ratios were negatively impacted by an unrealized loss on our debt securities portfolio, helped for liquidity management purposes, with that impact recognized and accumulated other comprehensive income and due to the rising rate environment.
To support strong loan growth as we navigate current and future economic volatility while prudently managing our capital, we issued common shares for net proceeds of $29 million under our ATM program.
Despite the recent downward pressure on our share price, the net earnings contributed by the incremental loan growth supported by the ATM issuances this quarter more than offsets the dilutive impact of the incremental common shares issued, which drives an ongoing increase in EPS and ROE.
Yesterday, our board declared a common share dividend of 32 cents per share, which is up 1 cent or 3 percent from the dividend declared last quarter and up 2 cents or 7 percent from one year ago.
Looking forward on slide 15, current economic forecasts anticipate lower GDP growth through 2023, including a moderate to sharp decline in housing prices and a steady increase in unemployment rates.
In this environment, our growth will continue to be focused on portfolios that support further full-service client opportunities and remain within our strict underwriting and pricing criteria.
We expect to deliver high single-digit annual percentage loan growth, with stronger loan growth in the strategically targeted General Commercial Portfolio and in Ontario.
Additionally, we expect to deliver double-digit annual percentage growth of Crantrays deposits, supported by our enhanced digital capabilities and continued focus of our teams to drive full-service client growth.
Based on the assumption that policy interest rate increases taper off in fiscal 2023, our dendritious margin is expected to increase over the next year to reflect the combined benefit of normalized lending spreads and the impact of fixed-term loans continuing to reprice at the current market interest rates.
We'll manage to an annual efficiency ratio below 50% and deliver positive operating leverage next year. We expect lower growth of non-interest expenses next year and our approach to expense management will focus on execution of our most important strategic priorities with prudent management of our discretionary expenses.
Supported by our disciplined approach and leveraging our enhanced credit risk management tools and processes, we expect that our provision for credit losses will remain within our strong historical range of 18 to 23 basis points next year, likely on the higher end of that range given the potential economic volatility.
With our other assumptions constant, a provision for credit losses in the high end of our normal historical range drives annual adjusted EPS percentage growth in the low single digits and adjusted ROE somewhere in the midpoint of a 10-11% range.
On the same basis, a provision for credit losses in the low end of our historical range drives annual adjusted EPS growth in the mid-single digits and adjusted ROE that approaches 11%.
On slide 16, you'll see we've introduced a multi-year financial scorecard. Our financial objectives are reflected by three key performance metrics that we expect to drive over the next two years. Pre-tax pre-provision income growth greater than 10%, an efficiency ratio below 50%, and total savings reduction.
and achieving adjusted ROE of 12% by 2024.
These targets have been developed on the assumption of a relatively stable economic environment and under the standardized approach for capital management.
We look forward to spending time bringing you through the value of our strategy and what it will deliver against these financial performance scorecard metrics in detail at our investor day in Toronto on December 7.
With that, Michelle, we're ready to open the lines for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received.
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One moment please for your first question.
Your first question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
question. Hi. Good morning. Maybe I'll start with the A I R B conversion. Chris today. Did I hear you correctly that you're not looking to reapply to. The Aussie until fiscal 25. So two additional fiscal years coin.
You did. Yes, we have done the redevelopment of the models. We are doing the implementation. We will run them in an internal use test and then we'll move forward with the application.
So is the intention then for the next two years to continue to run an ATM equity issue? Is that to support the loan growth? Because it sounds like the loan growth you're anticipating you will continue to need to have an ATM in place. Or are you considering other solutions?
Well Doug, we'll get help from a couple of factors. So I'd say under the current standardized car guidelines, we do have a bit of a speed limit in the high single digits in terms of our loan growth and just what it consumes under that approach.
We adopt new standardized car guidelines on February the 1st and that does introduce a bit more sensitivity and the ability for us to target our lending to lower RWA densities particularly for commercial growth. So that's quite important for us. There are pockets within there where today our commercial loan growth is at 100% RWA density.
Under car guidelines next year, going forward, we'll be able to target growth in areas that will be below 100%. For instance, SME lending in general commercial, that attracts 85% instead of 100%. Lower loan-to-value on commercial mortgages, which is the sandbox we play in, that attracts lower risk weights under the new car guidelines. So not quite...
our core liquidity portfolio. This isn't a trading book, these are not losses that we would realize, but this is a book we're required to measure at fair value each quarter. Those, in this case, unrealized losses are recognized in AOCI and reduce our set one. That's something that, as interest rates stabilize, we'll see reverse basically as that bond portfolio.
Have you modeled out that you will have to continue to use the ATM through next year, or is that something that you think you can turn off based upon your projections?
It's a case where we'll likely continue to use it in the first part of the year until we adopt the new CAR framework. Once we've adopted that and we can be very targeted and see that new lending come on at the lower risk density, our intention would be to structure our growth and target our growth in such a way that would allow us to turn off the ATM. That would be our priority.
Of course, there are other things that can consume capital and we'll continue to prudently manage it, but that would be our focus.
And then just that the third and I promise I'll stop at the on the NIMS obviously it's a huge focus this quarter for all the banks and given what we saw with big six I guess I'm not too surprised by what we saw with yourself but can you I guess my question is can you describe a scenario where you know NIMS start to expand like can you kind of give an example and like is it should we be looking at prime versus CEDOR prime versus BA to kind of gauge where
NIMS are going to go and I guess ultimately what I'm asking is like on slide 12 I guess this is a follow-on second part to this But if I look at slide 12 you have you know an asset yield benefit this quarter of 20 basis points as the lag impact starts to come through and I guess my question is like
If interest rates don't move from here, like how much more of a lag of that something similar to that 20 basis points It's left to flow through the books again assuming that no more no more rate increases I don't know if you can get some perspective on that
Yeah, well there's a couple ways you can tackle it. I mean, looking backwards, if you just look at our NIM performance this year, you'll see Q2 and Q4 where we had pretty significant increases in the bond yields. I think Q2 we would have been up more than 100 basis points within that one quarter on yields and then if you look in Q4 we would have been very close to...
curve through the quarter, and that's the quarter where you saw us expand our name a little bit.
So on the basis of stability in market interest rates, which is really what we need, it allows our assets to catch up and continue to reprice where deposits have been pretty quick to react already.
So just to give you a sense of a bit of the torque here, if we look at just the change in Bank of Canada rates through the year, our deposit costs, I mean they reflect about, call it half of the Bank of Canada rate increases, or on our asset side, it's about a third. If we just saw...
no further shifts upwards or no significant shifts upwards, that delta nearly closes over the next year in terms of assets catching up and passing through about the same amount of that Bank of Canada increase.
So that's why we're feeling pretty constructive on NIM next year and seeing just a mechanical path to NIM expansion just from our asset book catching up to our liability book, frankly.
Appreciate the call, thank you.
Thanks, Doug.
Thank you.
The next question comes from Gabriel Deschenes of National Bank Financial. Please go ahead.
Good morning.
Chris, in your opening remarks you said don't expect ARB transition over the next two years. I want to make sure I understand those comments. I didn't expect anything fiscal 2023, but you're also saying you don't expect the transition to 2024. Sorry...
Yes, so what we're doing is we redevelop the models and processes so we now in fiscal 23 will put them into implementation and then we will run a use test and then take it forward for approval. Gabe, this is a long-term win for the bank, you know, as we think about what the future has of us being able to manage capital much more.
proactively and really target our lending and really focus on portfolio management. It just provides all sorts of opportunities. So we're just going to make sure that all of the internal processes are such that we have a clear path and we're absolutely convinced we have no issues. So that's the, we just want to give that sort of timeframe that just sets the stage for what we're doing. We're confident in the work we've done.
and I think fixes or refinements to some of your existing models. I wonder if you could tell us a little bit about some of the items that you learned over the course of this year.
that prior to that? Yes, that was the outcome of our parallel run. We found that the ability to replicate was not as strong as it could be, so we are putting in more automated processes that allow us then to have a structure that just eliminates the challenge of replication so that we have a really strong process in place.
I'm going to ask Doug's question differently. I was not fully paying attention there, but can you really dumb it down as far as in the last few quarters you talked about margin expansion and it's gone the other direction. You're saying margin expansion in the coming year. What?
What are the critical factors? Is it just that the rate hikes flatten out at some point and that has less of an inflationary impact on your funding costs and then that's just repriced gradually and catch up? Is that the gist of it? That's pretty much it, Gabe. We need a quarter where yields don't go up 100 basis points.
in a single quarter. I mean that's highly unusual in a historical context and it happened in two quarters this year.
The interesting thing, our deposit costs, they've actually behaved quite well and we're pretty pleased. We've made a lot of investments over the years to start building a funding profile that's a bit more consistent with what you'd see at the larger banks.
You know, when you look backwards at the last year and I look at the change in our deposit costs relative to the large banks and including some that are being celebrated for their, you know, their strength on that regard, our deposit cost increase is kind of in the top quartile. There's I think maybe only one other bank that had a lower increase in their deposit costs over the last year. We're about the same as one other one.
and the four others actually had more of an increase in deposit costs. So I wanted to highlight that because some might find that surprising. Really the difference we've seen has been on the asset yield side. For us, this has been a mechanical repricing of our book at the higher interest rates.
I can't speak for others, but there are other ways to find yield in this environment, but for us, we have not adjusted our credit risk appetite, as remain very consistent, and we don't take on market risk or trading risk outside the management of the interest rate risk in our banking book. So for us, it's just a timing factor, and we expect that to resolve next year, and really all we need is...
have a quarter where even if you see increases, they're just not at the pace and speed that we saw through the last fiscal year.
OK, and just to confirm your statement there, well, we took a statement, but on the car update.
Is it those are perspective changes so it only affects your origination because the way I'm reading it in your Your annual reports in the car guidelines is it sounds more perspective. It wouldn't affect your
on your existing balancing.
Yeah, it does.
Okay. Yeah, you're absolutely right, Gabe. You do a re-measurement on adoption of the existing book. Now the existing book is based on what we've originated over the last couple of years and you know, while there are areas within the new CAR guidelines that allow you to target lower risk weight densities, there are other areas that go the other way where you can end up holding a higher risk weight than what we would have had under the current standardized approach.
So on day one you're adopting the portfolio you have, but on a go-forward basis you can absolutely be targeted and reduce the risk-weight density if you are prudent and smart lenders, which that's how we categorize ourselves.
Historically, you weren't optimizing for rules that didn't exist yet.
So historically you weren't optimizing for rules that didn't exist yet, now that they're in their proposed form.
but in the future you will not physically... precisely.
Yeah, and then last one, expenses. So I know I've been harping on this for a while now, but I don't want to begrudge you for 7% expense growth. That's a great outcome compared to what we've seen in the last little while, and you're looking at a sub 50% mix ratio next year. Just want to, you know, the quarter, the salaries and expenses were pretty flat year over year. That's a... you're missing out on.
anything unusual in there, unless your biggest expense component, was there anything unusual there? Or is that a sustainable kind of figure? We're all living in the world of wage inflation, not me anyway, but others.
Yeah, I mean we've taken a pretty measured approach in dealing with wage inflation. We did make some targeted adjustments through the year where we felt we needed to, but it was just that, it was targeted. I think what we've seen in the last quarter is it's proven to be the right approach because a lot of the heat has come out of the labour market, at least from our perspective.
and what we've seen kind of emerging here over the last quarter. You know, when we look to bring in new talent, you know, our proposition isn't come here for a financial windfall, people are coming here because they believe in the strategy, they like the upside, they like the culture, but they're not coming here to make a higher wage necessarily. We're competitive, but we don't need to be...
top of the table and that's consistent with loan pricing, deposit pricing, our proposition is service, value and culture and not necessarily price and it's similar on wages so I think that's allowed us to weather this storm pretty effectively actually.
Okay, well, enjoy the weekend.
Thanks, Dave. Thank you. Thank you. The next question comes from Manny Gruman of Scotia Bank. Please go ahead.
Hi, good morning. Just a question on the delay of ARB. I'm wondering if there's any expense implications that we need to think about specifically for next year? No, Manny. Even though we have some implementation work to do and we're building some automated portions of that implementation, it gives us a much better sustainable operation.
will cause any pressure on NIEs next year. You know, it's a case where as we progress with the ARB, now that we're through this big chunk of development work, that was the big push in terms of effort from our teams and our third parties to get that up and running. It was a very expensive piece of that process and from here things start to get less expensive.
Understood.
When we look at the credit picture for CWB specifically and broader, it definitely doesn't look like there's any big credit issue out there, just more of a normalization. But I'm wondering more on, from your perspective, speaking to customers, are there certain...
areas or geographies where you are hearing about more stress. I'm thinking in particular maybe the franchise finance business in particular. Are there any areas that you would highlight that are dealing with more challenges across your customer base?
We've not seen any particular portfolio have kind of systemic increase in risk, which is great. The franchise finance, of course, came through the COVID structures with actually very good outcomes. We've talked before about very defined lending process within franchise finance, but we're focused on suburban hotels that have lots of flexibility with operating leverage. They can cut their costs quite dramatically.
We're coming out of it now. So we're not seeing that as one that is providing extra risk. But again, we are following all of the segments of the portfolio as we monitor the future and see what will occur as the impact of higher interest come on the economy.
Thanks Frank and see you next week.
Thank you. The next question comes from Sarab Mopahavi, BMO Capital Markets. Please go ahead.
Hey, thanks. I just wanted to get a perspective.
Do you anticipate any benefit to your franchise from the HSBC Canada acquisition here?
Well, we are, our largest portfolio is in British Columbia. So that's our, we have a big footprint of ranches there. That's the largest portion of HSBC from what I understand. We have lots of clients that we share. We have lots of opportunity to be very focused on how we approach that market. We are, have grown up in.
in BC and Alberta, so we've got a good familiarity there, good brand awareness, and we'll be very focused on making sure that we can look and speak to clients.
Just by pure coincidence, Sohrab, we just opened a flagship banking center and regional office right down the street from them. That wasn't obviously intentional and this was planned a while ago, but just kind of further highlights how well positioned we are relative to that opportunity.
And just I guess that's both in terms of client and talent acquisition on your part, maybe attrition on their part. Is that fair to say, Chris and Matt? I think that. I think we're.
We're focused on the same markets. You know, our general commercial focus is definitely one that HSBC has always been very active in. Um, and I says, as I say, we, we do share clients, so we've got a, you know, a very similar underwriting structure as, as they would the, uh, opportunity, I think both for clients and, and, uh, as we look at supporting our growth with, uh, excellent staff, that would be an awesome job.
kind of windfall gains whether it's business or otherwise from this HSBC disruption or did it assume status quo as far as the competition kind of landscape is concerned.
Yeah, so Rab, I think it's fair to characterize it as it was more status quo. I mean when we were developing our outlook and budget for next year frankly, we did not have this necessarily top of mind. So this is something I would look at as putting a bit of wind in our sails relative to the hand we thought we might have been dealt next year.
Obviously other things can happen, but we look at this one and it gives us a pretty high degree of confidence in the outlook, put it that way.
Okay, and then Matt, just one final one, then just on that same topic, I mean, obviously HSBC is both active on the retail and the commercial side. I think you run more into them on the, you know, as you know, you respect them as competitors, I think is the way ultimately Chris characterized it as competitors on the commercial side. Would, is there any, from what you would have seen in deals that you would have been with them, is there any indication thatgame
when we've been up, you know, we're up against the big banks and we often see them, you know, pretty significant pricing pressure and we find ourselves, you know, priced a little bit wider of the large banks.
and then people take it because they're, you know, frankly we're charging for a premium service and then delivering it. Against HSBC though, I, you know, at times we've seen them get aggressive, but overall they're fairly well behaved I think. Chris, unless you've seen something different? I think on the commercial side, I think it's not a dissimilar approach to the client base, not a dissimilar pricing structure. I think they'd be much more aggressive on the personal side.
dividend increase it was a penny, annual earnings per share down, adjusted down.
Um, what's the thought process there? Why bother for just a penny? You know, this is a bank that's using an ATM, so I just wonder if you can just talk to the decision.
to suggest to the board to raise the dividend.
Yeah, so we think about it, Darko, from a payout ratio first and I think if you look back historically and you look back to the last time we had medium-term targets and we wanted to be in that 40% range, you know, if we're going year-over-year comp, I think last year a tougher comp from an earnings perspective because we had very benign...
TCL, we had performing loan releases, etc. and a fairly low payout ratio. Even with this increase, we'd be still in the mid 30s, which we'd still characterize as fairly low. So when we think dividend, when we think payout ratio, it's about the ratio of earnings, very confident in the earnings outlook and the ability to grow and expand from here. So that was the logic behind the increase. I mean, it's something we look at as more structural, whereas...
use of an ATM a bit more reactionary, a bit more in the moment, based on immediate, more near-term capital needs relative to near-term capital demand from loan growth? Or is the dividend a bit more structural and not the tool I'd necessarily look to as a capital management tool?
Okay, and then just switching to the AARB tools that are sort of in your toolkit.
I just wanted to understand a little bit, like...
My understanding was you were already using parts of it to help you to gather insights into the lending book and the behaviors and so on of certain products.
So what is it now that requires a full year and plus?
of using this tool that you would not have already garnered from using it up until now? Or am I just missing something? Am I missing just the full extent of what you're capable of using? Or maybe you can just provide some...
some sort of insight into how much of it you were using.
this past year versus what the full use would be next year.
So the difference, Darko, is that when we do a loan underwriting, we use a scorecard. And the scorecard that we're using today, which does utilize the Airbnb categorization on risk for the different portfolios we're in, it's a pretty manual scorecard. And what we will be replacing that with, and the model that drives that is the one that we've replaced. What we'll be replacing that is a more automated process for.
the manner under which we calculate the risk rating per client. Essentially it gives you that granular look on loan by loan and that's where that implementation time is taking over the next year.
Okay, and with respect to the ARB technology stack and so on, maybe this is a better question for investor day. Okay. I'm not going to pin you guys here. I'll save this one for next week. So thanks for that and I'll see you guys next week.
OK. Thanks, Joico. Cheers.
Thank you. The next question comes from Lamar Prasad of Coremark. Please go ahead.
Thanks. Before I start the question, I'm just going to be really blunt with this one, so I'm going to apologize in advance for that, but I really want to understand it.
I think you guys read that the guidance has been a bit of a moving target throughout 2022 and in Q4 again with the sharp decline in margin. So I'm wondering if you could really talk to us about what the real surprise was from the last quarter's conference call as you kind of move through the quarter.
Not to put too fine of a point on it, but you guys offered, let's say, the NIM guidance at the end of August . So I guess what moves so sharply against your expectations in September and October to drive margins down so much sharper than expected? Maybe you could comment relative to the waterfall you provided on slide 12, which is very helpful. And I guess the reason I'm asking this is because...
I guess how confident are you more broadly in the guidance for the year ahead? Is there a margin of safety built into your 2020-2023 outlook? Or is that kind of a best case scenario where it could be walked down throughout the year? Thanks.
Yeah, no problem, Lamar. So the outlook we provided and if we looked at where, just simply pull up the two-year yield curve as an example. Our expectation when we got through the quarter and had our call was that, and this was not a CWB position, this is frankly what the curve reflected, at that point the expectation was is that yields had captured about all the upcoming Bank of Canada.
the deposit growth in the quarter was GICs, which is just natural in the sort of rising rate environment and the sort of rates you can get on a GIC these days. So that was the biggest factor of ours is interest rates we thought were done sharply increase and then they just kept going for the rest of the quarter. We felt that immediately in deposit costs and it's something where asset yields will catch on.
So when we look through the next year, if we continue seeing each quarter 100 plus basis point movements in yield curve, that would be a very challenging environment for us to expand NIMIN just because our deposit book is shorter dated than our lending book. So that would be a very challenging dynamic for us to work through. I don't think that's... I learned d-faked not a string currency statement, though.
different from the other banks, but I wonder if other tools were used to help find yield in this sort of an environment.
Okay, that's all for now. Can you talk about kind of a margin of state that you guys built in that 2023 outlook on your slide 15?
Or is that exactly what you guys are thinking in your internal models?
Yeah, so for us, obviously we would need stability in interest rates to think about robust expansion of net interest margin. If rates continue to tick up a bit next year, we'd be thinking about a less robust expansion of net interest margin. Yeah, and running through different scenarios, we're comfortable with the outlook of an increase, but a fine point on it.
Thanks for the time guys.
Thank you. Thank you. The next question comes from Mike Riznovank of KBW. Please go ahead.
Hey, good morning. Sorry if I missed this in your prepared remarks, but can you talk about that FX benefit and more importantly, is this something that, well first off, how was that manufactured and is this something that you could potentially manufacture going forward? Could we see the non-interest income line elevated because of FX and maybe even these credit related fees.
FX more specifically looks like that was a really big one Can you manufacture that going forward or just this sort of go back to that normal level? Which is looks like something around seven or eight million lower than it came in this quarter
Yeah, on the, so we saw very unusual things in the interest rate curve and beyond what we expected and I mean somewhat related on the USD CAD exchange rate, that was a pretty sharp and significant movement in the quarter and not something that we expected either. We have a small US dollar balance sheet, a little bit of a net asset.
than usual and finish the quarter stronger than usual. If you got back to neutral, if you call a 75 cent Canadian dollar neutral-ish, if you got back to there, we'd be giving back about half of the gain next year. So if you're thinking about the non-interest income line, that's one that I'd circle and say likely going downwards. The one I'd circle as going and more than offsetting that decline would be in wealth.
I mean we've just done a harmonization, a rebrand and really the full integration of the acquisition and that business is ready to rock and roll and really leverage cross-sell to and from the rest of the business. So we've circled that as something giving an offset there. So, will you see really large non-interest income growth next year? I don't think so given that FX potential headwind.
But will we continue to grow and will it be pretty solid growth? Yeah, and wealth will be the big help there.
Okay then just on that wealth, can you give us the ballpark? Is this a revenue line that could grow double-digit range?
We hope so. You need a bit of help from the market there and that's we put a headwind on the growth rate this year but from the new client generation and harvesting a lot of the cross sell that would be the growth target of this business in an environment where call it market wasn't helping or hurting. Okay so it sounds like realistically only a partial off the...
But if I normalize that other non-interest income line, the $8.5 million, it looks like it's got, like, if you're suggesting that comes down by half, $4 million, I'm guessing you're not looking at wealth hitting that $18 million level anytime soon. Just based on your commentary, is that fair?
Yeah, that'd be fair. Yeah, and then I think through next year you'll see the normal growth and credit-related and retail fees. Those typically just grow with the Valonian deposit book.
Okay. Thanks for your time.
Thank you. The next question comes from Steven Boland of Raymond James. Please go ahead.
There were two pieces of guidance given in C3. You addressed the NIMS and what the reason was for that decline. But the other piece of guidance was the 20 basis points of provisions that you expected to put up in C4. It's nice to see 14, but you also mentioned that things maybe have deteriorated, the outlook has deteriorated in the sequence.
impaired bone PCL in the corridor. You guys might've thought I hadn't had my coffee that morning. It's highly unusual, um, for us to put up no impaired bone provision. Um, and I think Chris is, is your chance to talk about the way we manage credits here. Yeah. Well, you know, see what we've talked about many times and, uh, you know, we really are very focused on that.
core client, very strict underwriting, secured loan portfolio, you know, strict follow-up monitoring, got a strong management team should we have clients that move into our watchroom paired. So, you know, credit is in our DNA. We make sure that it's something that supports our ability to grow. And growth is our focus, but prudent growth is really the number one outcome that we've been able to deliver, and that's our intention goal.
impaired loan PCL, you think about write-offs being much lower than usual, you think about our impaired loans going down 20 million-ish quarter over quarter, like these are all strong indicators but also things I'd circle and say are fairly unusual but in a good way I suppose. Our teams have done a great job so far.
Okay, thanks. And maybe just my second question. Just for the guidance for loan growth, when we look at the different buckets of the segments that you're lending, should we expect similar growth in those segments? Is that what's building your guidance for next year, like general commercial, real estate, things of those which were the highest year over here?
Yeah, we're obviously most bullish about general commercial. That's a book we've had a lot of success in, that's our target client and that's one that we expect continued very strong growth in next year. Portfolios that we circle perhaps for lower growth, which is relatively consistent with the themes you've seen this year, but our real estate portfolios and commercial mortgages, we've obviously been very targeted there.
we will continue to do so. In real estate project lending, we've been very specific about the sort of project and borrower we're targeting in that book. And that's one I'd say would grow at less than the portfolio average next year, just maintaining that same discipline and prudency. And then equipment is one, you know, it likely rebounds and grows pretty similar to the overall loan book, which would be a nice rebound.
year over year, frankly. And then the personal lending is probably one that grows at about the same level as the overall book would be. Kind of our feel right now, and obviously this can shift and change as the year goes, and Sorab and his question highlighted another interesting opportunity, but based on how we see it right now, that's kind of a high level estimate.
Okay, appreciate that. Thanks guys, see you next week. Thank you.
Thanks guys, see you next week. Thank you.
Thank you. The next question comes from Paul Holden of CIBC. Please go ahead.
Thank you, good morning. So I want to challenge you a little bit on the deposit, branch-based deposit growth outlook and I guess that comes from two perspectives. First off you put 8% growth up this year which is still a good rate but you're forecasting double-digit growth next year and I think in what's going to become a more challenging environment for economic conditions.
because of liquidity across the broader system and then also competitive intensity for deposits is ramping up as well. So, just wondering what is it in your plans that gives you confidence that you can grow at a faster rate in 23 than 22?
because of liquidity across the broader system, and then also competitive intensity for deposits is ramping up as well. So just wondering what is it in your plans that gives you confidence that you can grow at a faster rate in 23 than 22?
Well, it is our target, Paul. We've talked about this ability for us to take many of our single product and multi-product. We continue to work on improving that product suite that attracts the clients to the bank. That continues to be a way that we are winning more clients, and that is an addition to our deposit opportunities as well. We launched in this past year our personal and small business digital.
Small business is a growth area for us. It hasn't been a historic market for us that we look to gain traction in with our ability to hit that with the product that we think is going to have some good market appeal. So, you know, it is a key focus, right? As we think about the core client that we're on and having that both sides of the balance sheet for us and for the client.
as what we're really looking to drive for. And again, the 14% growth of General Commercial last year is indicative of that targeted focus and that's continuing. And that's how our teams are kind of looking at the market and that's where we're looking to really help drive that branch raise deposit growth as well. Okay. And then sort of follow on question.
How important is that branch raised deposit growth in terms of your expectation for NIM expansion next year? I mean, I don't know if you can quantify that all, but let's say deposit growth was
you know, 2% different than expected, whether high or low, or like, is that enough to actually impact your PTPB guidance or is it...
sort of a non-material impact. Just trying to get a sense, you know, if he can help with that. Yeah, Paul, I wouldn't highlight it as a material impact, especially on the PTPP. I wouldn't look at that as a big headwind. Now, a lot of the growth in branch-rate deposits has been in GICs, which are quite expensive. So for us, we're thinking that, you know, just in the high-rate environment, that continues to be a big part of the growth in branch-rate.
a big proportion of our branch raised deposit growth and we'll continue to see a migration from our cheaper notice and demand into term as a continuing impact next year already. Our opportunity would be to get more of the call it notice and demand, cash management, less expensive deposits. We've assumed we have a fairly solid batting average on that next year.
If we did not deliver that same batting average and didn't see solid growth in notice and demand, it puts a headwind on NIM, but not something I'd look at and say that would be the reason we wouldn't deliver NIM expansion. I don't think it would be a big enough factor. The biggest headwind against delivering NIM expansion next year would be similar to what we saw in the fourth year.
What I want to understand just a little bit better is...
Does it matter what part of the yield curve, and obviously I ask that question because we know Bank of Canada rates are going up in Q1 and perhaps the long end of the curve or medium end of the curve if you will might not move that much or might actually come down. What does that shift or twist in the curve mean for your funding costs?
Yeah, on the funding side, our bellwether would be the kind of more nearer term end, like that one between kind of one and two years. And then on the lending portfolio, that kind of like a two or three year type tenor would be more important.
Thank you, thanks for that. That's it from me.
Thank you. Thanks for that. That's it from me. Thank you.
Thank you. The next question comes from Joho Kim from Credit Suisse. Please go ahead. Thanks for taking my question. I just wanted to go back to non-interest expenses and I apologize if this was already asked. It just seemed higher than usual for some of the line items like professional fees.
and others. So just wondering if there's anything sort of one type in nature there and specifically for that professional fees line that's moved around quite a bit so wondering where you see that going just giving some of the projects like ARB that's going on at the bank. Thanks.
Yeah, so professional fees, kind of the big, big pieces that fell into that bucket this quarter, ARB obviously, some expenses fell into there. The other piece was in our wealth harmonization, the costs we incurred to complete that. Some of those costs ended up in that bucket. So those are the two items that would have pushed it up sequentially. Thinking through to next year, I mean, that's a bucket if we just thought on an annual basis
of strategic project work coming down, that's when I'd circle and say there's opportunity for stability in that bucket rather than, you know, you would have seen a pretty big build up of that bucket over the last couple of years. I think we've plateaued there and you'll likely see that start working down.
Thank you and just wanted to go back to margins and guidance for modest improvement for margins next year, how much of that will be tied to improvements in loan yields or loans repricing into higher rates? I'm just trying to get a sense of how quickly your book turns over and whether you see any potential competitive pressure.
potentially limiting that ability to reprice. Thank you. You're on tape.
Well, the competitive story is certainly reflective in the commercial mortgage book, which you saw a slower growth in this past year as we really kind of picked our spots in growing that. You know, we're going to be zeroed in on.
our core client, that general commercial, and we had very strong growth in 2023. We see that and really maintenance of our yields too in that category. So we want to make sure that we're deploying capital in a very effective and efficient and accretive way. So we will be targeted and ensuring that we have a...
that general commercial and we had very strong growth in 2023 we see that and and really maintenance of our yields too in that category so we want to make sure that we're deploying capital in a very effective and efficient and accretive way so we will be targeted and ensuring that we have you know we think it through
Just to give you a sense of speed of the churn, I think you heard me say that so far our asset yields and really our loan yields, if I isolated them, would be behaving the same way. They've reflected about a third of the, call it, market rate increases. If you fast forward a year and nothing else happened in terms of the curve or shape of the curve.
and you just allowed that book to reprice and you made same assumptions on today's spreads, you might move from one-third to somewhere between half to two-thirds of the market rate increases being churned through. So hopefully that gives you a better sense.
Thank you.
It does. Thank you. Thank you.
There are no further questions at this time. I'll turn the call back to Chris Fowler for the closing remarks.
further questions at this time. I'll turn the call back to Chris Fowler for the closing remarks.
Our performances here reflected solid growth and continued investment in our strategically targeted full service growth initiatives in a volatile economic environment. With a focus to grow full service relationships with business owners and their families, we delivered very strong general commercial loan growth, double digit loan growth in Ontario and supported our strong diversified funding profile. Our disciplined approach to driving growth is a
within our prudent risk appetite delivered very strong credit performance and we're in a position of strength to face the potential economic volatility on the horizon.
Our strategic execution has delivered enhancements to our digital capabilities, increased our physical presence in key markets, and further improved our client offering to provide a foundation to accelerate full-service client growth. We're focused to deliver strong core operating performance next year and achieve the financial performance targets we have set for 2024.
I look forward to talking to you next week at our investor day in Toronto. If you haven't preregistered, please see our website for further details. With that, we wish you all a good day. Thank you.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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