Q2 2023 Canadian Western Bank Earnings Call
Speaker 1: Good day. My name is Michelle and I will be your conference operator today.
Speaker 1: At this time, I would like to welcome everyone to the CWB's second quarter 2023 Financial Results Conference Call and Webcast. All lines are being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the Q and A button.
Speaker 2: Good morning and welcome to our second quarter financial results conference call. We'll begin this morning's presentation with opening remarks from Chris Fowler, President and Chief Executive Officer followed by Matt Rudd, Chief Financial Officer and Karolina Parra, Chief Risk Officer.
Speaker 2: Also present today are Stephen Murphy, Group Head Commercial, Personal and Wealth, and Jeff Wright, Group Head, Client Solutions and Specialty Businesses. After our prepared remarks, they will all be available to take your questions.
Speaker 2: As noted on slide 2, statements may be made on this call that are forward-looking in nature, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements.
Speaker 2: I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance.
Speaker 2: I will now turn the call over to Chris Fowler, who will begin his discussion on slide 4.
Speaker 3: Thank you Chris and good morning everybody. Before I begin my prepared remarks, I'd like to say that our thoughts are with the thousands of people who have been displaced and affected by the wildfires in Western Canada. Our clients and communities have proven their resilience to navigate similar challenges in the past and we remain ready to provide support to this latest challenge if needed.
Speaker 3: We reported adjusted EPS of $0.74 per share, which was down 27% or $0.28 from the previous quarter. The previous quarter included a $0.13 benefit from the reversal of a previously recognized impaired loan write-off.
Speaker 3: The current quarter also reflected three fewer interest-earning days and a revision for credit losses that moved towards a more normal level from the very low provisions recognized over the previous two years.
Speaker 3: We continue to build meaningful strength and resilience in our organization with a consistent and disciplined risk appetite, which has enabled us to navigate the significant disruption that we've observed in the banking industry during this quarter.
Speaker 3: We grew total loans by 2% compared to the prior quarter with increases across our national footprint and very strong growth in our general commercial loans of 4% primarily reflecting growth in Ontario that was supported by our Mississauga and Markham banking centres.
Speaker 3: We delivered another quarter of low credit losses, supported by the secure nature of our loan portfolio, with conservative loan-to-value ratios to support the right growth opportunities through the business cycle.
Speaker 3: As Carolina will discuss in a moment, we're starting to see credit performance returning to more normal levels compared to the very benign conditions over the last two years.
Speaker 3: The normalization of credit is expected along with credit losses that remain within our normal historical range through the remainder of the year.
Speaker 3: Our regulatory capo-ratios strengthened during the quarter without the use of our at-the-market equity distribution program.
Speaker 3: Our higher capital ratios were supported by the successful adoption of the new standardized capital regulations, which provides lower risk rates for many of our lending portfolios.
Speaker 3: Matt will speak to this further in a moment.
Speaker 3: Our branch-based deposits declined by 2% this quarter, with the entire decline occurring prior to the global banking industry volatility that escalated in early March.
Speaker 3: Following these events, we delivered growth of branch-raised deposits that were partly supported by strategic pricing adjustments.
Speaker 3: These changes were made to better respond to increased competition for deposits that arose during the quarter.
Speaker 3: We exited the quarter with a positive trend of branch-raised deposit growth that we expect to continue through the balance of the year.
Speaker 3: As we look forward, we are now targeting lower annual loan growth than previously expected.
Speaker 3: With the change in our forward view, we'll be vigilant with expense growth against revenue to position ourselves to deliver positive operating leverage through the remainder of the year.
Speaker 3: With interest rates to remain elevated, we continue to expect that our net interest margin will expand in the second half of the year, but at a slower pace than previously anticipated.
Speaker 3: primarily due to higher funding costs from elevated competition.
Speaker 3: We'll continue to drive selective growth in our risk-adjusted loan yields to deliver stronger net interest margin performance in the second half of fiscal 2023.
Speaker 3: Our teams are focused on the disciplined management of our business to adjust to lower loan growth expectations and keep us positioned to finish the year with adjusted ROE within our financial scorecard range of 10 to 11%. Our forecast is to deliver stronger financial results and to improve our business.
Speaker 3: through the remainder of the year and remain well positioned to drive accelerated growth when economic conditions improve as we have through prior cycles.
Speaker 3: I'll now turn the call over to Matt, who will provide greater detail on our second quarter financial performance.
Speaker 2: Thank you. Good morning everyone. We begin on slide six. Our branch raised deposits were up 3% from last year. It reflected 25% growth in fixed term deposits partially offset by a 5% decline in Conditionally benefit,
Speaker 2: In the elevated interest rate environment, clients continue to favour fixed-term deposits.
Speaker 2: Overall, branch raised deposits represent 55% of our total funding.
Speaker 2: Our sequential performance reflected a 2% decrease in both branch raised demand and notice as well as term deposits.
Speaker 2: Demand and notice deposits were down as we intentionally exited select higher cost, non-full service client relationships early in the quarter. We grew demand and notice deposits through the second half of the quarter, partly supported by strategic pricing adjustments to respond to the elevated competitive environment.
Speaker 2: The 2% decrease in branch-raised fixed-term deposits reflected our choice to replace select maturities with broker-term deposits at a lower relative cost.
Speaker 2: Capital market deposits decreased by 6% from last quarter due to a senior deposit note maturity that we also elected to replace with broker term deposits at a lower relative cost.
Speaker 2: Broker source deposits increased 9% from last quarter. The broker deposit channel continues to be deep in liquid source to raise fixed term funding with maturities between one and five years that are predominantly insured deposits.
Speaker 2: Our conservative approach to liquidity management ensures we maintain strong levels of liquidity while in excess of the regulatory requirements, and we continue to hold a liquidity coverage ratio that's higher than the current levels of the large Canadian banks.
Speaker 2: Turning to slide 7, our total loans were up 9% in the past year.
Speaker 2: Our focus to increase full-service client relationships across our national footprint drove very strong 16% growth in the strategically targeted general commercial portfolio. Annual growth in commercial mortgages of 5% primarily reflected strong new lending volumes to high-quality borrowers secured by underlying assets within our risk appetite.
Speaker 2: The increase in personal lending of 7% was driven by solid new origination volumes with prudent loan-to-value ratios and strong average credit scores. Both the commercial mortgage and personal lending portfolios remained relatively flat compared to the previous quarter as new lending volumes that met our risk-adjusted return expectations were offset by scheduled repayment.
Speaker 2: provision income decreased 8%.
Speaker 2: Compared to the prior quarter, adjusted EPS decreased 28 cents.
Speaker 2: In the first quarter, we benefited 13 cents from the reversal of a previously recognized impaired loan write-off, which reflected the combined impacts of a reduction in the impaired loan provision for credit losses of 10 cents, and incremental net interest income, which benefited EPS by three cents. In the quarter, higher non-interest income increased EPS by...
Speaker 2: interest recovery in the previous quarter.
Speaker 2: Higher non-interest expenses reduced EPS by one cent, primarily driven by a seasonal increase in statutory employee benefits, while our discretionary expenses were well contained.
Speaker 2: Excluding the impact in Q1 from the reversal of the previously recognized impaired loan write-off, the increase in the provision for credit losses reduced EPS by 14 cents. EPS reductions also included 2 cents from the impact of a higher effective tax rate reflecting one-time true-ups.
Speaker 2: and a one cent impact from higher LRCN distributions.
Speaker 2: As shown on slide 9, total revenue decreased 3% on a sequential basis.
Speaker 2: The 11% increase in non-interest income was primarily due to an increase in foreign exchange revenue recorded within other non-interest income, which was driven by a strengthening US dollar in the quarter. Net interest income decreased by 5%, as 2% sequential loan growth was more than offset by three fewer interest earning days and a six basis point decrease in net interest margin.
Speaker 2: As shown on slide 10, our NIM decreased six basis points this quarter with half of the impact related to the non-recurring three basis point interest income recovery recorded in the prior quarter.
Speaker 2: NIM benefited one basis point this quarter from the full quarter impact of a 25 basis point Bank of Canada policy rate increase made at the end of January , impacting our floating rate loan yields, net of floating rate deposit costs.
Speaker 2: Fixed rate asset yields continued to increase but were partially offset by lower loan-related fees for a net contribution of 17 basis points to our NIMS this quarter.
Speaker 2: Higher fixed term deposit costs had a negative 16 basis point impact.
Speaker 2: As expected, the benefit from re-pricing fixed-rate loans at higher market interest rates closed the gap this quarter to the slowing impact from higher fixed-rate deposit costs.
Speaker 2: As I discussed previously, we made strategic pricing adjustments to certain administered rate deposit products during the quarter which benefited deposit growth late in the quarter but reduced NIM by 5 basis points.
Speaker 2: Changes to our asset mix and funding mix had no significant impact to NIM this quarter. Our capital ratios are calculated using the standardized approach and the drivers of our set 1 improvement are shown on slide 11.
Speaker 2: Our set 1 ratio increased 22 basis points to 9.3% this quarter.
Speaker 2: The improvement from last quarter primarily reflects a 15 basis point increase associated with the adoption of CAR 2023 guidelines in the quarter, retained earnings growth and a decrease in accumulated unrealized losses on our debt securities. This was partially offset by risk weighted asset growth.
Speaker 2: No common shares were issued under the ATM program this quarter.
Speaker 2: The impact of the lower loan growth outlook that Chris discussed earlier results in moderate growth of our set one ratio from its current level throughout the rest of the year, which we believe is appropriate based on the potential volatility in economic conditions and provides us with capacity to support future accelerated growth when prudent. Yesterday our board declared a common share dividend of 33 cents per share, up one cent from last quarter.
Speaker 4: points last quarter.
Speaker 4: The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected write-ups, given the tangible security held in support of lending exposures.
Speaker 4: Our strong credit risk management framework, including well-established underwriting standards, the secure nature of our lending portfolio with conservative loan-to-value ratios, and a proactive approach to work with clients through difficult periods, continues to be an effective approach to minimize realized losses on the resolution of impaired loans.
Speaker 4: This is demonstrated by a history of low write-offs as percentage of total loans, including through past periods of economic volatility.
Speaker 4: I would also note that we do not have any material exposure to unsecured personal lending, including no exposure to personal credit cards.
Speaker 4: As part of our prudent risk management framework, the overall loan portfolio is reviewed regularly to provide early identification of possible adverse trends.
Speaker 4: Turning to slide 14, I will discuss our Commercial Real Estate portfolio. We are an experienced and specialized lender in the Commercial Real Estate segment, and our Strong Risk Management framework has consistently delivered high credit quality with low credit losses.
Speaker 4: We take a long-term, conservative approach to underwriting commercial real estate, including stress testing, debt service capabilities, and vacancy levels.
Speaker 4: For real estate projects, we target markets where we have deep local knowledge and our risk appetite focuses on borrowers in our stronger lending tier with requirements for presales and sufficient liquidity to support projects, along with disciplined project selection to withstand credit slowdown.
Speaker 4: We focus on prudent risk underwriting, structuring using risk policies and lending standards, sensitivity analysis and ongoing monitoring of our portfolios.
Speaker 4: Our conservative approach has created a portfolio with strong credit profiles that, combined with the strategic decision to focus on selective risk-adjusted returns, has resulted in growth of roughly half the rate that our larger peers have grown their total commercial real estate portfolios.
Speaker 4: Our total commercial wheels taper portfolio represents 29% of total loans, which is down from 33% five years ago.
Speaker 4: Real estate project loans now represent 9% of our total loans, down from 16% five years ago.
Speaker 4: Our commercial real estate portfolio is diversified and residential construction exposures represent over 40% of the portfolio. We continue to see demand outpacing supply for residential development across our footprint.
Speaker 4: Approximately half of this residential commercial real estate exposure is multifamily residential and the remaining portion represents development and construction of single-family residential.
Speaker 4: 9% of our commercial real estate portfolio relates to office space, which is primarily includes exposures for low-rise buildings that are located outside large downtown centers.
Speaker 4: We are proactive in our loan management and have completed a review of our office exposure. We recognize impairments in this portfolio this quarter with prudent provisions for credit losses added as we work with our experienced Special Asset Management team in the resolution of these exposures.
Speaker 4: Turning to slide 15, despite elevated interest rates continuing to work their way through the Canadian economy, our provision for credit losses was 12 basis points this quarter and remained below our five-year average of 17 basis points. The performing loan allowance was consistent with the prior quarter and reflected relatively stable before.
Speaker 4: the economy will drive moderate increase in our provision for credit losses in the second half of the year, but remain within our normal historic range of 18 to 23 basis points, reflecting the strong credit quality and secure nature of our portfolio. We continue to recognize the current economic environment and the current economic environment in a time context that's continued to be a problem even in our 150,000 degree range. One more reminder, though, is that just like importing off or Sheriff's Office or indeed
Speaker 4: that feel confident of how we're managing the portfolio through the cycle.
Speaker 4: Before we begin with the question and answer section, I will turn the call back to Chris Fowler for his closing remarks and notebook.
Speaker 4: with the question and answer section, I will turn the call back to Chris Fowler for his closing remarks and notebooks. Thank you, Carolina.
Speaker 3: Turning to slide 16.
Speaker 3: The result of lower loan growth expectations in the current environment is delivery of pre-tax, pre-provision earnings and an efficiency ratio that will not meet our scorecard metrics for this year.
Speaker 3: As I noted previously, we're taking action to prudently maximize earnings within the lower growth environment.
Speaker 3: We continue to expect that our net interest margin will expand in the second half of the year, but at a slower pace than previously anticipated due to higher funding costs.
Speaker 3: We will continue to target growth in our risk-adjusted loan yields to help support stronger net interest margin performance in the second half of fiscal 2023.
Speaker 3: We'll also manage our discretionary expense growth to adjust to the lower growth environment to position ourselves to deliver positive operating leverage through the second half of this year.
Speaker 3: As Karolina noted previously, we continue to expect provisions for credit losses to remain within our normal historical range of 18 to 23 basis points, reflecting the strong credit quality and secured nature of our loan portfolio. Through these actions, and supported by the strength of our credit performance, we have
Speaker 3: we expect to drive annual adjusted earnings for fiscal 2023 in the range of $3.50 to $3.60 and adjusted return on equity in line with our 2023 scorecard targets.
Speaker 3: As we look forward, the combination of our robust balance sheet and capital position, our experienced and specialized teams in the markets we operate across Canada, and our prudent approach to how we grow, have us well prepared to navigate the potential economic volatility that may unfold.
Speaker 3: As we have in past periods of economic volatility, we will remain well positioned to capitalize on opportunities to accelerate growth when conditions improve. Before we open the call to Q&A, I want to say thank you for your commitment to CWB. I'd also like to thank our teams for their passion and dedication in supporting our clients. Their collective efforts have earned national recognition and support for our clients.
Speaker 3: as the Business Lender of the Year by the Canadian Lenders Association. I'm also extremely proud that for the second consecutive year, CWB placed within the top 25 on this year's best workplaces in Canada.
Speaker 1: recognition for our commitment to a people first culture. I'll now turn the call back to the operator for the Q&A portion of this call. 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.
Speaker 1: You will hear a three tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment please for your first question. The first question comes from Doug.
Speaker 5: and how long will it take to get there? Because I know there's a difference in the duration and how the funding cost is moving versus your asset yields. Maybe I'll start there and I just got to follow up on names too.
Speaker 2: Yes, so on the trend, just mechanics of the book, Doug, I'd point to, I'd say a trend we signaled last quarter that we expected to start in the second quarter and that's precisely what we've seen. If you recall last quarter, sequentially we saw an increase in fixed asset yields at 17 basis points or so. Funding costs, they had increased 29, so that was an unfavorable gap, but that gap had started now.
Speaker 2: looking at how that book was structured and the churn. If we play that forward, there's likely about another year or so of this continuing trend where asset yields continue to tick up and then just structurally fixed term funding costs. We don't expect them to go up much further just if you're looking at market GIC rates.
Speaker 2: They feel a bit at peak levels, especially at the shorter term lengths. So we'll continue to benefit and get a NIM lift from just those mechanics over the next year. Structurally, what does that mean? You know there's lots of other puts and takes in our NIM funding mix.
Speaker 2: asset mix, those are important. Competitive pricing dynamics in the market, that's important. But if all else was held equal and we just looked at how the book churned, mechanically you'd be thinking about a NIM in the mid-250s, with of course many puts and takes. And that takes about two years to fully get to that.
Speaker 2: a fair assumption? Well the differential in duration between kind of average assets and average liabilities, you know our assets sort of being in that high two year range and liabilities in that low one year range, you kind of have a year, year and a half of delta between those two lengths so that's about what it would take for the portfolio to fully churn.
Speaker 2: And we're basically, we've turned the corner this corridor and we're starting to see it.
Speaker 5: The negative on that would be is if you had to raise funding costs like administrative rate funding costs again because of competitive pressures like that would be the biggest other delta that would go against that re-pricing on the asset yield side is that correct?
Speaker 2: Yeah, I mean that would be something you'd look at as a potential headwind. I mean we did make an adjustment this quarter, the adjustment we made and we've been very careful on our administered rate deposit costs really through the first half of the year and over the last several quarters. The reason why is when you increase pricing there you effectively reprice that whole product and so the impact...
Speaker 2: to put ourselves in a very comfortable position this quarter. And, you know, so basically you're well positioned through looking through the rest of the year, especially one where if you think about market interest rates moderating, holding the line on the rates we have on these deposits feels like a pretty strong competitive position. And so I don't know, I'd circle this as a big risk to our NIM looking forward.
Speaker 2: serve us well as the year progresses. So we're feeling like we're pretty well positioned at this point, Don.
Speaker 5: And then just last on NIMS, like what is, so if it's not administrative rate funding costs, it's not like mixes obviously can fluctuate. Like what is the biggest risk to your NIMMO luck?
Speaker 5: So if it's not administrative funding costs, it's not like mixes obviously can can fluctuate. Like what is the biggest risk to your NIMO look?
Speaker 2: Well, the big drivers of NIM, if you highlighted funding mix, obviously skewing to a lower funding cost mix would be beneficial to NIM, obviously. Asset mix is important, so if we're looking forward and we're not out looking for growth to necessarily maximize spread on an absolute basis, any time we're looking at the growth
Speaker 2: key headwinds we faced on our net interest margin is over the last several years there are certain categories of lending that would have had higher yields higher spread relative to others we just didn't like the risk return trade and so we got into lending that had a lower absolute spread but higher average credit quality low credit risk
Speaker 2: And so, you know, you don't like the dynamics on your NIM, but looking forward in terms of credit loss performance, it's one of the things that gives us confidence that our credit losses will be well contained and well controlled looking forward. So, those are things, obviously, market pricing on GICs, broker GIC pricing, capital market deposit pricing, those are things that can impact your NIM, but...
Speaker 2: Those are tools and levers and options we'll look at and continue to place funding on where we think the most cost-effective place is. We just like having that optionality and we'll use it wisely as the year progresses. It takes me to my second question and Chris, maybe this is for you or Matt. With that in mind, you obviously are slowing your loan growth.
Speaker 2: start and then Chris can give Bill in the strategic part of it, but just the mechanics of it.
Speaker 2: You know, if we're looking at long growth and a lower growth environment, we are even more, we're always focused on risk adjusted returns, but in this sort of an environment, you look to set the bar higher. So when I look at the likely composition of growth through the remainder of the year, I don't think it will be a headwind on NIMH relative.
Speaker 2: But probably I'll throw to Chris to just lay out strategically how we're thinking about portfolio allocation, which portfolios we favor in this sort of an environment. But I wouldn't highlight it as a name had we not done.
Speaker 3: Yeah, agreed, and thanks, Matt.
Speaker 3: As we think about, if you see that the growth that we have posted has had higher on the general commercial side. And that general commercial opportunity, of course, is that full service opportunity for us as we look to do both the loans and funding side of, deposit side of the client's balance sheets. Those are the opportunities that we think are very positive.
Speaker 3: The higher-yielding books that have not grown at the pace we historically did grow them at being real estate project lending and equipment finance, there's specific reasons for that as we think about the environment that we're in. Equipment finance, of course, the headline there, or the headwind there, had been the challenge of supply chain and just lack of product to actually get out to the clients. So before we can use those. We go to a very rapid rate. Usually we throw in about 35 per acre in a year.
Speaker 3: So equipment finance remains a very attractive market for us and we will continue to work with that to grow it and really support it. And project lending will be very specific on where we participate, very targeted on the type of client we take on and the projects in which we finance. So we're very focused on that allocation perspective and thinking about how we really, you know, continue to very proactively build the bank in a very positive way.
Speaker 2: to see more in equipment finance as we see more positive opportunities there and continue to focus on general commercial. The other portfolio I'd highlight, which is no different than anyone else, Doug, would be residential mortgages, and that's a low-spread book as well, so that's one I'd expect limited grow.
Speaker 6: I've got a few more, but I'll move to you for now. Thank you very much. Okay. Thank you. Thank you. The next question comes from Darko Mihalik of RBC. Please go ahead. Hi. Good morning. Thank you. I wanted to just follow up on this discussion.
Speaker 6: I think Matt you just mentioned that the mortgage growth will be slower and it's low spread.
Speaker 2: Is that to say that there is less demand for this product or is it that you're actually going to probably avoid it a little bit because it is low spread? Yeah, low spread would be low relative to other opportunities we have on the commercial side. I think it's a case of one, expecting really strong rates of demand.
Speaker 6: I'm seeing, it looks like very strong growth here when I'm looking at the slide.
Speaker 6: and you're saying that you're seeing it slow in demand. I think that there's another dynamic here that I just want to make sure that I understand very well.
Speaker 6: seeing it slow in demand. I think that, you know, there's another dynamic here that I just want to make sure that I understand very well is the funding side.
Speaker 6: So when I look at what you've put together on the slide, which is helpful by the way, thank you very much for it.
Speaker 6: But you do mention that you've exited some sort of relationships or some deposits.
Speaker 6: that were not full service demand and notice.
Speaker 6: Can you just maybe describe the nature of those deposits?
Speaker 2: Sure, so why don't we get Jeff to step in and just kind of outline the strategic way we've looked at deposit profitability and you know obviously with the pressure just in dynamics of our book, assets versus liability re-pricing, we've been very mindful of this and making sure we're being as profitable as we can within.
Speaker 2: Prudent limits obviously on our liability base. So throw to Jeff. Thanks Pat. Morning, Darko. As we've talked about the bulk of our deposit book is driven by our full service relationships and that continues to have positive growth through the year. We have a small portion of our book that is non-strategic.
Speaker 7: deposit only relationship and on those we really look at the cost closely compared to other funding sources and made some trades particularly early in the quarter that we liked other funding sources better and decided to exit a few of those relationships
Speaker 6: Okay, so tying them both together, the reason why I'm asking these questions in a very odd manner is, when I look at the broker market today for GICs, which looks like you've been favoring and growing,
Speaker 6: in lieu of these other deposit relationships that seemingly are non-core. If I were to just compare where you are today versus, let's say, the beginning of March 1 before we had any disruption...
Speaker 6: In the one, two and three year tenor of GIC deposits in the broker market, you're about 35 basis points higher than a large bank.
Speaker 6: In the two year, you're 72 basis points higher.
Speaker 6: And in a three-year year 76 basis points higher than a large bank.
Speaker 6: and in March 1 you were 17 basis points 22 and 17. So there's been a fairly significant jump.
Speaker 6: And that's why I was very interested in the nature of the other deposit that you're exiting because this is fairly significant.
Speaker 6: I was very interested in the nature of the other deposit that you're exiting because this is fairly significant and the reason why I asked about mortgages...
Speaker 6: was because when I look at the brokered mortgage deposit market, the competition will come from some subprime mortgage providers, or near prime mortgage providers. They are only today about two basis points higher than you. So I suppose where I'm going with all of this...
Speaker 6: is if you've already exhausted or removed a lot of these non-full service fixed term deposits.
Speaker 6: And the option going forward really is in the GIC broker market. You're really competing against a couple of very specific firms that are pushing up their pricing versus bank. And so the question is, you know, specifically within when you think about those competitors, they have been pushing higher and I've been watching this closely over the past quarter.
Speaker 6: And is there any reason to believe that they will stop pushing that GIC term funding cost higher for you? Because that's who you are ultimately competing against.
Speaker 2: Yeah, so a few things on this. First, just thinking about the rest of the year and how we think about funding. I mean, you heard me reference optionality and I mean that's what we've set up for the back half of the year. You know, our branch raised deposit trend through the quarter, you know, overall was negative. We exited on an upswing and we're seeing that momentum continue. I mean that's the first channel you look at on a cost-effective basis to drive growth.
Speaker 2: And if you think about a lower loan growth environment in the back half of the year, it creates a pretty comfortable funding profile relative to the momentum we're seeing in branch trades deposits. But the trade you ultimately look at, and this is the trade we've been looking at through the first half of the year, and it really intensified your right coming basically since March.
Speaker 2: We've seen the large banks, and you've probably seen this in looking at pricing, not be overly aggressive in that broker GIC market, although they have actually done some volume there. And at times you see them move up the leaderboard. Where they have been especially aggressive, and we have seen pricing at times,
Speaker 2: 50 to 75 basis points higher than what we can ultimately pay in the broker GIC market would be on larger kind of non core GICs that when we look at our preference in that trade would obviously be the lower cost, but you're also obtaining, you know smaller deposits you can think about the maturity ladder of them, stack them how you need to stack them.
Speaker 2: You basically look at relative pricing of the various options, be that broker, be that securitization, be that the debt capital markets, be that tactics you can deploy in your branches, either promotions, marketing campaigns or pricing to drive that channel. You know, you do the economics and you take your best option based on what's presented to you.
Speaker 6: Okay, but to be clear, have you sort of finished that, are there still pockets of these non-full service fixed-term deposit maturities that you think you should be replacing here at these prices, or are you kind of done there, and will really the source of funding going forward really come from the term?
Speaker 6: be clear have you sort of finished that are there still pockets of these non full-service fixed-term deposit maturities that you think you should be replacing here at these prices or are you kind of done there and will we need a source of funding going forward really come from the term term GIC broker market
Speaker 2: We'll have some decisions to make. No real big ones coming through Darko, but we'll have some. When they come up for maturity, we'll take a look at the relative options and we expect to continue to use the broker GIC market, just not to the same volume and extent we did through the first half of the year. I think you'll see us.
Speaker 6: our volumes there taper off. Okay, fair enough. All right. Thank you very much for taking my questions. Thank you. The next question comes from
Speaker 6: our volumes there taper off. OK, fair enough. All right, thank you very much for taking the questions. Thank you. The next question comes from Marcel McClain of TD. Please go ahead.
Speaker 2: Okay, good morning. Thanks for taking my question. I'm going to start on expenses. Just wanted to get a little bit more information on where you intend to cut expenses.
Speaker 2: given the revised efficiency ratio outlook of approximately 51%, and we are at 54% year-to-date, so over the next two quarters doing the math that implies a fair bit of expense cut. This quarter it obviously came down a fair bit, and that's trending the right direction.
Speaker 2: To get to that 51%, I think that would still imply some still pretty meaningful cuts in the second half. So just wondering where you see those expenses coming out. Yeah, fair enough. And let's start with just maybe the Q2 expenses. As we anchor to that and just think from Q2, where do these trend through the back half of the year? What are we thinking about?
Speaker 2: I mean, you start at salaries and benefits, it's two-thirds of our NIE, so that's the one. You know, we've been managing tightly there, whether that's salary increases, I think if you do some back of the envelope math, you'll see we've been pretty well contained, although of course we've had to make.
Speaker 2: inflationary adjustments, but not to the same extent as others. It's been very well managed. The way we'll manage that looking forward, you know, obviously it's a lower growth environment. You know, we'll have attrition as the year progresses and we'll just be very mindful on how we ultimately backfill those roles. Do we go person for person, role for role? Do we take that headcount and deploy it elsewhere?
Speaker 2: you know, do we let that level of head count run down a bit? These are the sort of levers and options we'll think about as the year progresses, but we will be laser focused on, you know, every single head count we add we'll have a high degree of scrutiny and we'll need to have strategic value in making that addition. So...
Speaker 2: That's one where we will be tight and sharp on that. Within the Q2 number, you see that we had a bit of a tick up and that was due to some sales incentives based on growth delivered on a trailing basis. If you think looking forward what would be more interesting on this look at the different
Speaker 2: and over the finish line, but it'll be a pretty close run rate through the rest of the year. And then if you go down to that category of other expenses, on the discretionary expenses overall, I'd expect us to hold the line on those levels through the first kind of the...
Speaker 2: Q3 and Q4, we'll look for opportunities to nip and tuck where that makes sense and where prudent. Usually in Q4 we see an uptick in that bucket of other and those discretionary expenses particularly. Our intention this year would be to basically hold the line on the trend through Q3.
Speaker 2: And then within that bucket, if we look specifically at the Q2 number, within the, I suppose, other category of other expenses, we had a few kind of one-time, non-recurring, I wouldn't expect them to reoccur. For instance, in filing our GST returns, which is an annual activity, there was a bit of a true-up needed there. You know, our normal run rate for these other expenses should be more like $3 million, not the $5 million that was recognized this quarter, so we'll get some benefits.
Speaker 2: the bank's overall loan but compared to the larger peers, obviously just given your more commercial posture. Just wondering if you could speak to the reserve levels you're holding against those loans specifically and how that compares to maybe say a year or more ago.
Speaker 3: how that's trended in terms of conservatism. And any other metrics you wish to provide or highlight like LTVs of the office portfolio or vacancy levels or anything like that, that would be helpful. Sure, thanks Marcel. Yeah, we've participated in the CRE market for our entire history and it's
Speaker 3: a very disciplined approach that we do take both on the construction side and on the commercial mortgage side in terms of on the construction side, you know thinking about who the border is location how we structure all of that with respect to pre-sales and Boras equity and the structures that go into place there when we look at the commercial mortgage side we lend to the rent rolls thinking about mortgage ability.
Speaker 3: conservative. We always are conservatives when we think about setting up provisions because we want to make sure it's one hit. And then we work to resolve them. We've got a strong team that we've always had on that credit resolution side, our special asset management team, and really focus on resolution of these loans, working with the board and guarantors to those loans to resolve them.
Speaker 3: So, it's really a structured approach of how we deal with those areas and really have, you know, making sure that we have momentum all the time. Now, Carolina, if you want to add anything further? Absolutely. So, thank you, Chris. So, when we look at the impairment disorder and the provision, the PCL we put forward was really related..
Speaker 4: levels on our commercial real estate.
Speaker 4: only about 20% of it below 65% launch value. So it's like we have really strong launch values. Sorry, we have less than 25% above 65%. So it's a good trend. We continue to work closely and looking at our relative values of the property.
Speaker 4: And we have a diversified look on the properties we hold, with only 9% in the office space, with very selective asset classifications as well, and looking at offices outside of downtown centers, smaller, low-rise offices that have...
Speaker 4: better marketability and our ACR as well and we're following closer vacancies as well.
Speaker 2: I appreciate that contact. I have one follow-up. I'm not sure if you want to take this one. I think I heard you on the call say we expect the relative proportion of theory to continue to trend down and in the slide it has highlighted it has come down over the past five years. I was wondering the thinking over the last five years because really theories only become more complicated than they are.
Speaker 3: a potential issue in the last sort of 12 to 24 months. So just wondering what the thinking was in sort of bringing that portfolio down. And if there is a level you're targeting that you feel is appropriate for your bank, what this ultimately makes up. Yeah, so the reason that that has occurred, and you'll have seen that in our numbers, obviously, is the fact that it is the most competitive area of...
Speaker 3: on the commercial mortgage side. Sorry, the commercial mortgage side is the most competitive area. Every bank is involved in it, credit unions, there's often pension funds, life codes. So there's a lot of players in that market. And what we always try to do is really look at the risk return. And what we really found in this last couple of years in particular is very strong competition in there. And we've grown at a much slower rate than, say, the large banks have in that category. And it's really been that risk return measurement.
Speaker 3: and choose the structures, locations, and borrower profiles that we're comfortable with.
Speaker 6: Okay, thank you. I appreciate you taking my question. Thank you, Michelle.
Speaker 1: Thank you. The next question comes from Gabriel Deschenes of National Bank Financial. Please go ahead. The next question comes from
Speaker 8: Good morning, a couple of questions here. With the loan categories that you listed that are going to be slower growth and lower loan growth overall, can you give me a sense of what the ATM usage will be, if any, going forward? Because you didn't use any this quarter obviously. But generally in in largest picture is you if you you may pay
Speaker 2: And then the second question I have has to do with the, well, you know, I'll wait on that actually. Yeah, so on the ATM usage, I mean, last quarter, I laid out the conditions under which we wouldn't use it. You know, we basically looked at adopting new standardized capital guidelines.
Speaker 2: but lined up very nicely actually to how we think about lending and got some risk weighted asset density relief and basically a capital base that can support higher levels of growth based on how we target growth and the prudent approach we take to risk. It lined up nicely and gave us some support.
Speaker 2: What we saw in actually adopting it this quarter is precisely what we expected and something we'll continue to leverage and target. So that's been a positive. The second piece I lined out was the unrealized losses in the debt securities portfolio. I know that was quite topical this quarter. South of the border. I feel like I've been talking to you guys about this for the better part.
Speaker 2: So as that occurs, that puts wind in our sails.
Speaker 2: And then just thinking about mid single digit long growth, I mean that's obviously a quite comfortable level of growth if you thought about it from a capital perspective. You know, it's not the driver, but the outcome, you know, is that we see our set one just organically building from these levels, which, you know, I suppose in this sort of an environment, not a bad idea to have dry powder and ready to be opportunistic when you kind of get through the cycle and things start.
Speaker 8: credit, loan losses were lower and we saw the impaired loans balance go down about 10% from last quarter, but within the GIL balance I saw...
Speaker 8: A $70 million increase in commercial mortgage impaired loans and that's been moving higher pretty steadily for the past year. What can you tell me about the loan or the loans that became impaired this quarter? Industry, classification, whatever and what your loss expectations are.
Speaker 4: So, as we mentioned, the impairments this quarter and as you see was related to various properties, commercial mortgage properties across different asset classes, some of them on the office space, mostly suburban office space properties that went to impairments.
Speaker 4: towards what we see our average range of 13 to 18 basis points. And we will see that probably consequently growing in the next couple of months, couple of quarters. But it's quite aligned with what we've seen historically from a trend as well.
Speaker 6: So of the 70 plus million, how many properties and where were they? It was various properties across the impaired loan that we took as well, the loans, and most of them were in Western Canada. Okay, and how much of that was offered?
Speaker 4: It was mostly suburban offices. I would say, I don't know the specific of the amounts, but it was mostly suburban offices. Okay, alright that's it for me. Thanks.
Speaker 6: Thanks, Gabe. Thank you. The next question comes from Paul Holden of CIBC. Please go ahead. Thank you. Good morning. I want to ask a question regarding the branch raised deposits. Obviously, a departure from plan this quarter and for...
Speaker 9: you know, some reasons that impacted, I'd say, all banks. If I go back to your investor day presentation, you had an interesting time series just showing the magnitude of branch raised deposit growth for Canadian Western Bank versus the big six and there was just this huge increase in sort of the 2020-2021 type.
Speaker 9: And I guess my basic question is, is there continued risk that maybe you have a hard time meeting your deposit objectives at the near term because of the normalization in deposit amounts? And how would you view sort of the need for core savings versus excess savings with your existing customers?
Speaker 2: Yeah, so I'll start and then Jeff can fill in the blanks, just strategically how we thought about deposit growth just over really the last year. But yeah, I mean we thought about support and stimulus being flooded into the economy. Of course that resulted in an uptick in deposits and I wouldn't point to anything specific on our end that would have had us have a different trend or an outsized benefit relative to the large banks.
Speaker 2: I think the whole economy and the whole system benefited significantly and perhaps one thing I could point to anecdotally, and I'd have to really dig into some data to support this, but with us, you know, we have a larger commercial base, larger banks obviously having the retail base where I look at where most of the stimulus and support went.
Speaker 2: up whether that by retail customers and their spending or businesses and running the operation of their business. We've seen this really occurring over the last year or so and so we thought about deposit growth for this year yeah we were thinking about that churn and trend and and I wouldn't point to that as something being beyond what we expected or anything surprising there.
Speaker 2: You know, where are we positioned today? What's left to occur when we look at kind of average balances by customer? It's starting to look, you know, fairly close to back to normal, at least for commercial customers. On the retail side, there might be a little bit of excess still to churn through, which I think will be a different trend perhaps for the large banks going forward versus...
Speaker 2: pricing tactics the strategy because this is something that, you know, from a headline number perspective, you know, we've made some trades on that branch raised deposit headline number because we've had other options.
Speaker 7: Yeah, so I agree with what Matt said and I think the other bit I just add in on the macroeconomic environment is as high as interest rates are, we have some clients that are choosing to pay down debt instead of holding deposits and so that's also a bit of a headwind for the industry in general. But when you look at our numbers in particular, we talked last quarter about...
Speaker 7: through the first part of the year, we made a choice to prioritize NIM at the cost of some of our deposit growth. With the events down in the US, while we saw no deposit run-off following what happened there, we decided the right thing to do was to build out liquidity. And so we made a shift. We've been growing our branch raised deposit since that point.
Speaker 2: and expect to do so for the balance of the year. Yeah, and it's a bit of a math problem, Paul, when you think about the rest of the year. Like you look at the headline guidance, I guess, of single digit growth on a full year basis and that doesn't look overly robust, but you really have to break the year into two halves. Like to get to that.
Speaker 2: low single digit deposit growth on a full year basis, you look at negative growth through the first half of the year, you know, we're seeing and we're projecting it to continue through the back half of the year, you know, very solid, pretty strong grant raised deposit growth to get to that number.
Speaker 2: And so you think about dollar amount of deposit growth in the back half of the year against dollar amount of the lending we put up, you know, kind of our base case expectation is branch raised deposits fund you know the vast majority of that growth.
Speaker 2: And that's sort of the base case in how you think about a funding plan. And then you have the optionality though to continue looking at other potential sources we could tap into if we thought it was a better position on a more cost-effective basis relative to the tactics you take in the branch race channel to continue to drive growth. We like the optionality and that's a theme that will continue through the rest of the year.
Speaker 9: Okay, okay, that's a very detailed and helpful answer, thank you. And then I'll just throw in one more. So, I heard some commentary around, you know, pulling back your appetite for loan growth based on where risk adjusted margins fit and fully appreciate that and would agree with the view you're taking. But then just trying to reconcile that against the PCL expectation of going back to the normal.
Speaker 2: band. Like if risk is a little bit elevated, maybe it's more of a price dynamic and you can clarify that, but if risk is a little bit elevated, should we expect PCLs to also be maybe a little bit elevated versus the normal band? You think about risk in two buckets, I'd say. So, you know, there's risk you see out that, you know, when you look forward you see an element of risk and you compare that against the pricing you're seeing in the market and you can take a position that
Speaker 2: you know, we're trying to do because we're worried about the underlying credit quality of our portfolio. You know, from that perspective, we're feeling solid and, you know, our provisions, we've been building them up really over the last three quarters and we're feeling very comfortable with where we sit relative to, you know, a deep look at the current portfolio. This is more about forward-looking and pricing relative to risk on, you know, the lending we're seeing out there. It's just not squaring for us at the moment, maybe it is for others.
Speaker 2: But I mean, that's how we're thinking about this in two pieces. I understand. That makes sense. Thank you. I'll leave it there.
Speaker 6: Thank you. The next question comes from Joe Hokim of Credit Suisse. Please go ahead. Hi. Good morning and thanks for taking my question. I just had a couple of quick ones. Maybe first on mortgages. Sure. Just ask.
Speaker 9: And I appreciate that your mortgage book is a bit different than what we see from your bigger peers. But could you give us a sense on what you're seeing from your borrowers, whether you are seeing any changes in activities, perhaps on the payment rates, and curious what you're also seeing from your borrowers, what you're seeing upon the renewal of the mortgages.
Speaker 7: Thanks. Sure. I presume you're talking personal mortgages. Just to clarify. Yeah. Yeah. So, you know, when we look at our book, certainly we have a number of renewals coming up at much higher interest rates than they were initially booked. The B-20 stress test certainly helps because as we did these mortgages, they all qualified.
Speaker 7: recognizing they could do 2% higher than whatever their rate was at inception. And so, you know, we watch our book closely. We have a pretty good idea as renewals come, which clients may have a bit of a challenge, and we work with them directly. It's a pretty small percentage of our book, frankly, that's having those challenges. But there's tools that we can work with in the structure to help them through this.
Speaker 7: And then in the background, frankly, we have fairly low LTVs that give us comfort if we do run into a challenge.
Speaker 4: If I can just add to that, the tenure of our book is shorter compared to other participants in the market. So we've had already just over 20% of our book that has been renewed at already high rates and when we look at the delinquency and performance of the portfolio, it's still quite strong. So even at the higher rates we're seeing our clients...
Speaker 5: Thank you. Just a follow up, is there any way you can size the...
Speaker 7: the borrowers that may be having trouble maybe meeting the payment requirements are up on renewal? Just to tell them. I think the best thing you would probably look at is our delinquency rate, which although it has ticked up from abnormally low rates through the pandemic,
Speaker 9: continues to be below pre-pandemic levels. Okay, sounds good. Thank you doctor for me.
Speaker 9: below pre-pandemic levels.
Speaker 6: The next question comes from Nigel De Souza of Veritas Investment Research. Please go ahead. Thank you. Good morning. I wanted to circle back on deposits again. Just a couple of follow-up questions. First,
Speaker 5: Could you elaborate on the pricing differential spread between your branch rate deposits and the broker challenges trying to get a sense of
Speaker 5: You know, if mixed does shift, I'm very believe what the, the drag could be on, on men. And then, um, trying to understand, you know, try to get your comments on, on long growth, you know, expect that the, the moderate, does it also mean that, uh, you won't have to compete on pricing as aggressively, uh, you know, against competitors and in the broker challenge. And it's not what you see it, and you see that as a tailwind for next.
Speaker 2: Yeah, I mean, it's something that could be helpful to NIM. I mean, we'll obviously pick our spots. And I think what you've heard us say is that, you know, our spots, we're defining as something that have really strong risk-adjusted returns. So you know, all in all, and then a lower growth allows us to just be really what you see.
Speaker 2: pricing relative to broker pricing, I guess it depends on what sort of product. So if we thought
Speaker 2: you know, pound for pound retail GIC raised in the branch channel relative to a GIC raised in the broker channel, you know, you're immediately saving a commission, about 25 bps if you raise it through your branches. We're also, you know, some deposits are raising through that channel would be at equivalent rates to broker, others you could get away with a lower rate, so...
Speaker 2: You might have some overall savings there, but that's how you think about it on a term basis. We thought about it on the basis of, call it that, demand and notice as an overall bucket. It would be considerably cheaper for most deposits in that channel than broker.
Speaker 2: And so we're pretty conservative when we think about demand deposits in particular, of how much liquidity we put up against holding those deposits. So that can impact your economics as well. So it's hard to do just a pure rate comparison because there's a few other factors involved when you're thinking about demand versus term funding.
Speaker 5: Okay, that's helpful. And then on the dividend increase, trying to understand the rationale there. Why not maintain the dividend filled with more dry powder given where we are in the cycle, and then either deploy that to the balance sheet or to buy back fares to offset the ATM issue.
Speaker 2: I'm trying to understand the rationale because we are at a point in time where maybe excess capital could be useful coming out of it. Yeah, you thought about the dividend increase of a penny, I mean that's about one basis point of set one, so I wouldn't look at that as a material driver of capital. And when we look at the dividend increase...
Speaker 2: obviously we're looking to provide a good return, but also trying to manage to what we think is a very reasonable payout ratio. With the increase, I mean, we're basically in the mid 30s, which for us is obviously very comfortable. And it's about looking at the forward trend of earnings is if we don't.
Speaker 2: keep pace on the dividend, that pay-all ratio just starts dipping and dipping and it's already a little bit lower relative to some of the large bank peers. So I think when we look at a dividend increase and why we're comfortable with it, I mean we see despite lower growth a lot of levers that are available for us to pull to really increase the earnings power and earnings efficiency of this bank relative to that lower growth.
Speaker 2: So I take that as a vote of confidence in that earnings outlook as well.
Speaker 2: that as a vote of confidence in that earnings outlook as well.
Speaker 1: Thank you. There are no further questions at this time. 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.