Q3 2023 Canadian Western Bank Earnings Call

Speaker 1: Ladies and gentlemen, thank you for your patience. Please do not disconnect. The conference call will begin momentarily. Once again, please continue to stand by. Do not disconnect. The CWB conference call will begin shortly. Thank you for your patience. – Greg Chomeau – – Greg Chomeau –

Speaker 1: Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's third quarter, 2023 financial results conference call and webcast. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, they will be a question and answer session. If you would like to ask a question during this time, simply press star the number one on your telephone keypad. And if you would like to withdraw from the question queue, please press star two.

Speaker 2: Thank you. I will now turn the call over to Chris Williams, Assistant Vice President Investor Relations. Please go ahead, Chris. Good morning and welcome to our third quarter financial results conference call. We'll begin this morning's presentation with the opening remarks from Chris Fowler, President, and Chief Executive Officer, followed by Matt Rudd, Chief Financial Officer, and Carrie Lena Parra, Chief Risk Officer. 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. As noted on slide two, 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. I will 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 a useful in assessing underlying business performance. I will now turn the call over to Chris Baller who will begin his discussion on slide four.

Thank you, Chris, and good morning, everyone. Before I begin my 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 British Columbia and Northwest Territories.

We remain committed to support our local CWB team members and clients as they navigate this challenging time.

Through the Fort Focus performance of our teams, we delivered strong financial results in line with our guidance.

Our Q3 adjusted EPS of 88 cents per share increased 19% from the previous quarter and was supported by improved revenues, continued load levels of credit losses and discipline management of our expenses.

Our ongoing efforts to expand our full service client relationships combined with the proactive deposit pressing adjustments we made in the previous quarter resulted in 3% sequential branch raise deposit growth.

We're also targeting lending opportunities that meet our expectations for risk-adjusted returns as the current uncertain economic environment demands maintaining our prudent risk appetite.

We focused on growth within the strategically important general commercial portfolio. In addition, asset repricing outpaced derives in deposit costs and as expected, we delivered a significant improvement in our net interest margin, which is a key driver of our revenue growth compared to the prior quarter.

The disruptions in the global banking industry in the prior quarter didn't impact our financial position or performance in the third quarter.

However, the impact of elevated interest rates will continue to work their way through the economy and weaken economic growth in the remainder of the year and into next year.

We're focused on the resilience of our balance sheet and maintaining our disfooted approach to risk management.

We expect that the sustained impact of higher market rates will drive increases in consumer and business defaults. And as Carolina will discuss in a moment, we expect our secured lending model, prudent underwriting practices, and proactive loan management will support provisions for credit losses that remain within our historical range.

Our earnings this quarter were further supported by management's continued actions to contain expense growth.

Non-interest expenses were held flat with the prior quarter and increased only 4% from the prior year.

This map will discuss in a moment what continue to prudently manage our expenses and be positioned to deliver positive operating leverage next quarter.

Our approach is to proactively navigate the economic and market volatility by maintaining focus on our differentiated offering with unrival client experience.

We create value for our clients and deliver strategically targeted growth on both sides of our balance sheet.

Along with discipline management of our operating and financial performance, the focus of our teams has been to support resilience in our financial position and deliver the strong financial performance that we expected this quarter.

I'll now turn the call over to Matt who provide greater detail on our third quarter financial performance. Thanks Chris. Morning everyone. I'll start on slide six. Chris noted our continued efforts to expand our full service client relationships drove a 3% increase in our branch raised deposits and that supported a 2% decline in our broker service deposits."

capital markets remained consistent with the prior quarter. Despite lower usage this quarter, the broker deposit channel is a deep and liquid source to raise fixed term funding with maturities between one and five years and their predominantly insured deposits.

Compared to the prior year, branch raise deposits were also 3%. Increase reflects 15% growth and fixed term deposits, partially offset by 2% decline in demand and notice deposits.

We've also seen a market shift in client deposits from demand-determined deposits over the past year, but this trend has started to slow as the year has progressed.

This quarter are sequential growth and demand deposits exceeded the growth in term deposits for the first time in over a year.

Turning to slide 7, as Chris mentioned, our teams have targeted lending opportunities that are aligned to drive and full service client growth, while providing strong returns within a prudent risk appetite.

This focus drove a 3% sequential increase in our general commercial portfolio with a very strong 13% annual increase.

Our equipment financing and leasing portfolio also increased 3% this quarter and 6% over the last year. Our equipment portfolio delivers a combination of strong lending yields, comparatively lower capital requirements, and the strength of the underlying security of this portfolio has supported a long history of solid credit performance through economic cycles.

Our conservative approach to commercial real estate over many years has created a portfolio with a strong credit profile and we continue to lend within a disciplined risk appetite.

Our focus on risk-adjusted returns in the current environment limited origination volumes across our commercial real estate portfolio.

Real estate project loans increased 1% both this quarter and over the last year as we selectively finance new project starts predominantly in BC with top tier borrowers.

Commercial mortgages declined 3% this quarter and declined 2% over the last year, as low new lending volumes were more than offset by scheduled repayments.

Residential mortgages also decline sequentially, but are up 4% over the last year, reflecting new origination volumes with prudent loan to value ratios and strong average beacon scores with lower payouts compared to the prior year.

Consistent with the continued execution of our geographic diversification strategy, Ontario loans grew 1% sequentially and we're up 11% over the last year.

Ontario loan growth contributed to approximately half of the current quarter loan growth.

BC and Alberta loans were directly consistent with the prior quarter, a strong growth in the general commercial portfolio was offset by declines in commercial mortgages in both provinces.

Our sequential earnings performance is shown on slide 8. Common shareholders' net income increased 19% as higher net interest income and prudent expense management more than offset higher provisions for credit losses.

Pre-tax pre-provision income increased 16%.

Compared to the prior quarter, adjusted earnings per share increased 14 cents.

Higher net interest income increased EPS by 17 cents, with the increase in net interest margin providing a large portion of that benefit, with some support provided from the impact of three additional interest earning days.

Law or non-interest income reduced DPS by 2 cents.

An increase in the performing loan allowance, primarily reflecting the uncertainty of the current economic environment, reduced EPS by $0.04.

EPS benefited one cent from lower LRCN distributions and one cent from the impact of a lower effective tax rate as we recognized one-time true-ups that increased our tax expense in the prior quarter.

Pish on on slide nine total revenue increased 7% on a sequential basis.

Net interest income increased 9% due to significantly higher net interest margin, 3 interest earnings days and 1% sequential loan growth.

The 8% decrease in non-interest income was primarily due to lower foreign exchange revenue reflective of a weaker US dollar in the quarter, partially offset by higher wealth management fees.

As shown on slide 10, our NIM benefited four basis points from the repricing of fixed rate assets at higher market interest rates, which had a larger impact than the increase in deposit cost this quarter.

Our focus on optimizing risk-adjusted returns of our lending activities was the primary driver in the favorable shift in our LoMX that also contributed for basis points to them.

One related fees added two basis points to net interest margin.

Liquidity levels were consistent with the prior quarter and did not contribute to the sequential increase in net interest margin.

The impact of the 50 basis point, Bank of Canada policy interest rate increases majoring the quarter, had a nominal impact to net interest margin.

We continue to expect that net interest margin will expand sequentially in Q4, albeit at a smaller magnitude than the current quarter, as the continued positive impact of fixed asset repricing will be partially offset by the impact of higher funding costs, also impacted by the recent interest rate increases. On slide 11, our known interest expenses reflect the inflationary pressures in the economy, but against those pressures, we've managed our annual NIE growth to just 4%.

Our expenditures were held roughly flat to the previous quarter, as we expected. Salaries and employee benefits cost was consistent with last quarter through managing the fill rate of vacant positions. Reductions in certain discretionary expenditures were offset by the continued investment in our digital capabilities and other strategic priorities.

Our capital ratios are calculated using the standardized approach, and the drivers of our CT1 improvement are shown on slide 12.

Our CET1 ratio increased around 10 basis points to 9.4% this quarter.

Our growth in retained earnings this quarter more than offset the impact of risk-weighted asset growth.

No common shares were issued under the ATM program this quarter.

the board's decision to approve the recommendation. Yesterday our board declared a common share dividend of 33 cents per share, consistent with last quarter

I'll now turn the call over to Carolina who will speak further on our credit performance.

Thank you, Matt, and good morning, everyone. Beginning on slide 14, as expected, we saw borrower defaults and imperilons increased to normalized level from sustained impact of higher market interest rates. Total growth and perilons increased 29 million, or 12% from last quarter, and represented 75 basis points of growth loans up from 68 basis points last quarter.

The increase is primarily related to new formations in general commercial portfolio, with a net increase of 23 million in the quarter.

commercial mortgages classified as impaired increased 5 million primarily due to increases in Alberta and partially offset by decreases in B.C.

In pair, in equipment financing loans increase $4 million, priority in Ontario.

The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved and does not directly reflect the lower value of expected write-offs.

given the intangible security held in support of lending exposures.

Our strong credit risk management framework, including well established underwriting standards, the secured nature of our lending portfolio with conservative loan to valuations, and a proactive approach to working with clients through difficult periods, continues to be effective in minimizing realized losses on the resolution of impaired loans.

I would also note that we have minimal exposure to unsecure personal lending or credit cards.

This is demonstrated by our historic low write-offs as a percentage of total loads, including through past periods of economic volatility.

As Chris and Matt have noted, we have taken a targeted approach to lending with a focus on acceptable risk adjusted returns in the current environment, which have supported the resealing of a strong credit profile.

Turning to slide 15, reflecting on the uncertainty of our current economic environment, we recognize a performing loan provision for credit losses of six basis points in the quarter compared to a new provision in the prior quarter.

Our provision for credit losses and impaired loans was $10 million, equivalent to 10 basis points this quarter, below our five-year average of 19 basis points.

Looking forward, we expect that sustained impact of higher market interest rates will continue to drive increases in borrower defaults and impaired loans.

Consistent with our experience in prior periods of elevated borrower defaults, our prudent lending approach supports our expectations that our provisions for credit losses will be within our historical normal range of 18 to 23 basis points next quarter.

I will turn the call back to Chris Fowler for his closing remarks and outlook. A quick will to continue to belumunterg gentlemen,

Thank you, Carolina. Turning to slide 15, we delivered the strong, third quarter financial results we expected to the focus performance of our teams. As the interest rates continue to work through a through the economy and expected economic growth weekends, you can expect that we will remain focused on growing full-service relationships, continue targeting strategic growth opportunities within our strict underwriting and risk-adjusted pricing criteria.

maintain our conservative and secured risk management approach, and continue to critically manage expenses to be positioned for positive operating leverage next quarter.

The current year has been more volatile than we predicted, and we have navigated through the multiple interest rate hikes and significant disruptions in the global banking industry.

We have a resilient financial position and the focused performance of our teams supports our expectation of delivering an annual adjusted return on equity in line with the scorecard target that was set at the start of this year. With that operator, let's open the lines for Q&A. Thank you, sir.

Ladies and gentlemen, if you would like to ask a question as stated, please press star followed by one on your telephone phone. You will then hear a three-tone prompt acknowledging your request. And to withdraw from the question queue, you will need to press star two. And if you are using your speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions.

And your first question will be from Doug Young at Desjardins Capital Markets. Please go ahead.

Good morning. Maybe I'll start, Matt, in the past I think you've talked about if you were priced your balance sheet NIMS would be in the 2.50 range and it would take you maybe afterwards of two years to kind of move in that direction. I know this is a kind of a fluid situation and that was a static comment but you know any updates to that guidepost? Any thoughts on NIMS?

Good morning. Maybe I'll start, Matt, in the past I think you've talked about if you were priced your balance sheet, NIMS would be in the 2.50 range and it would take you maybe upwards of two years to kind of move in that direction. I know this is a kind of a fluid situation and that was a static comment, but you know, any updates to that guidepost? Any thoughts on the outlook?

If you did reprice the balance sheet, how long it would take you to get there? Maybe I'll start there. Yeah, thanks Doug. Obviously a lot of moving parts to that answer, but I'll keep it very simple. I think you look at the structure of our balance sheet today. You have all the ingredients for that to continue to hold true. What we're focused on though, if you thought over the next year or two, really the same focus and discipline you've seen us exhibit in the last quarter years. When we focus our lending activities, we're thinking about strongest risk adjusted returns, best use of capital.

That's something, you know, you saw the benefit this quarter, the impact that had to NIM from a better lending mix. So there are opportunities to continue to do that to help support NIM. Conversely, on the other side of the balance sheet, you know, we're targeting full service client growth. With that comes more demand and notice deposits. That's favourable pricing compared to other funding sources.

The other benefit that these demand and notice deposits give us, a large proportion of them are at floating interest rates. The remainder are administered deposit rates that are at our discretion. But both of those, if you thought about interest rates declining over a period of time, you get a lot of support and stability in NIM from having these deposits that either directly float or will gradually move with market interest rates. credit card

Lots of things we can do to support NIM, lots within our control and you'll see us continue to be very focused on that. Can you put numbers to the percentage of your demand and notice that's floating and percentage that's admin?

It's a reasonably equal proportion. We've seen just in branch raised deposits generally, if you went back over several years, we've seen the majority.

a fairly decent increase in demand and notice, and a large proportion of that increase has been in deposits that directly float. That's why when we went through the early days of COVID and interest rates really went down, you saw a lot of stability in our net interest margin. I think we surprised a lot of people with how stable our margin was on the way down in rates.

And that larger proportion with deposits that float was definitely a key factor that supported that stability.

Okay. And then just, you know, maybe two questions on, on credit. Um, what do you see in performance wise within your CRE commercial real estate portfolio that you mentioned a little bit, but I just wanted to maybe get a little bit more information. And then the second part is, you know, can you talk specifically what drove the performing loan ECL bill this quarter? Like what variable was it and what variable really is kind of be the key factor that really swings that performing loan.

PCL and ACL? Yeah on the on the on the series side that that book is one that we have noticeably slowed our growth in that started in fiscal 22 and continued fiscal 23 so we've been very selective in the

in the categories in which we land within CRE, it's obviously a broad category, different types of product in there and geography and focus on who those particular borrowers are. So very specific in how we approach that, so really cut that back a bit and as we think about the opportunity for management of that book, maybe we can pass it over to Carolina with some comments. Thank you, Chris. Yes, that portfolio, as part of the normal monitoring, we did a deep dive of the portfolio, feel very comfortable with the position we are right now in there, very closely followed and with the very low exposure to one of the asset categories that has the higher risk, which is the office exposure. So we're feeling comfortable from that perspective.

and we will continue to manage accordingly. On the performing loan allowance, if you look at the macro forecast, this quarter versus last, you won't see a lot of big changes. You'll see obviously a shift upward in interest rate predictions, but that in itself wouldn't have been a big component directly coming out of the models, but that's the base case forecast. When we're looking at performing loan allowances, we're also thinking about upside, I suppose, but also downside risk relative to that base case forecast.

So in an environment where it looked like, you know, at the date of the balance sheet, where interest rates were looking higher for longer, in our judgement that introduced greater uncertainty and maybe a bit more weighting to downside risk relative to that forecast and we'll see how it evolves. But coming out of the corridor, we're feeling very prudently reserved on the performing allowance.

There's more waiting of the scenarios than actually a change in the metrics of the FLI.

Yes, that's the right way to look at it.

And then on the office and the Cree portfolio, can you talk about the LTV on that?

So, we have very good LTVs in the office portfolio and on the construction side we're really following up on the trends as well. So it is a very strong prudence to manage portfolio, not just the office but across and we continue to maintain that prudency throughout this cycle as well. You don't have a number you could share or I can always follow up if it's easier.

Yeah, well, we just don't – we can follow up on that specific data.

Yeah, okay, then last lastly Matt just on expenses anything big coming in Q4 expense wise

Our goal that we set out, I talked about, I think coming out of Q2, is we looked at that level of expense and said we thought that was a pretty good run rate to hold for the rest of the year. Now that's a very high level headline. Underneath the covers of that are a lot of decisions on prioritization and making sure we're allocating expenses to highest and best use, all with the goal of driving positive operating leverage.

pretty down close this quarter didn't get all the way there, but we were close, but set up quite well into the next quarter. And thinking about positive operating leverage, that is our goal and focus.

Okay, thank you. Thank you. Next question will be from Marcel McLean at TD Securities.

Okay, thank you. I just want to try to put a finer point on Doug's initial question on the net interest margin for next quarter. You're saying an increase but less than this quarter, but that's a pretty wide range of something less than 11 basis points. So I was wondering if you could size the magnitude any more precisely than that.

Yeah, sure, I can give some help there. And going back to, I believe it was in the first quarter, the world has changed quite a bit since then, but the way I look at net interest margin surprisingly hasn't changed much. We talked about coming off of Q1, exiting the year in the 240s.

When we look at where we are coming out of the third quarter, I think about a lot of different puts and takes in fourth quarter, but a net interest margin that maybe just snuck into that range. I think we have the recipe to do that based on what I see in front of us. Is there much more upside than that? What's cool, my outlook on getting deep into that range is obviously the higher interest rates and how it will turn through funding cost is generally in the market.

I think what I heard is that there still is upside, not, you know, it will slowly creep up, I guess, throughout 2024 towards that, 250 ranges, that a fair assumption or...

to let's turn it this time to tell.

There's quite a lot of moving parts there, but let's assume that interest rates didn't change at all and the shape of the curve was roughly consistent. What you'd see play out, and this is no different than what you saw as rates worked their way up last time, is that our deposits were more responsive to those interest rate increases than our assets were. So in fourth quarter, you'll see more pressure on deposit costs, less benefit on the asset yields, but then as you work your way through that asset yields will overtake that impact.

And that gives a lot of embedded strength and margin on a go forward basis that gets massed temporarily in sort of the early days following those increases. So that's one dynamic and like I was talking to Doug about, there are a lot of other things we can do to optimize and deliver that result, but that's just kind of the structural way these higher rates turn their way through our portfolio, all else being equal.

Okay, but thanks for putting that on the phone on that. Then I have a second question on, this slowdown in loan growth or loan demand generally across the industry.

It was certainly came at the same time that CAR 23 was implemented. Now, under the previous capital regime, in the past, you guys have given a bulk give roughly 8% loan growth was where you started to consume capital based on your mix at the time. Giving you all a free, for your new mix, when we do see that loan growth resume,

Are you able to put that sort of level of growth? Like would that move up to sort of a 9% or 10% level? Or are you able to help me out with anything on that for when we do see low growth come back?

Yeah, it naturally creates more capacity, and the reason why we're a commercial lender strategically targeted in the mid-market. Under the old capital rules, you know, those were risk-weighted at 100 percent. Under the new capital guidelines, they're risk-weighted at 85 percent. So for that portfolio, which is important to us strategically and where we can be differentiated, we also get the benefit of a lower capital amount. For more information, visit our website at www.fema.gov

a little bit closer to the actual credit risk. We're quite prudent there. It gets us part of the way there, but still very conservative relative to how we underwrite and lend into that portfolio. But it permits a higher rate of growth than before in that portfolio specifically. So you're right, if you thought about our lending mix today, we are targeting opportunities within that new capital framework, but they just happen to align quite nicely to our mid-market commercial focus.

Okay, and with that new, with the new capital rules, has ARB been de-prioritized at all? Just because it sort of narrowed that gap? And, you know, I'm thinking about this in the context of you sort of managing your discretionary expenses. Would that fall into that category or no, it's still sort of full steam ahead behind the scenes on ARB? Yeah.

Well, we're still focused on making sure that the risk management structure we have internally is supporting our growth story, our ability to manage risk-a-vis returns, and the elements of ARB certainly are a really big part of that. And we continue to focus on how we deliver effective risk ratings and investing in making sure we are able to do that very effectively.

Okay, thanks so much. That's all for me.

Well, I can start and I'll pass it over to Carolina. I think we're just

It's it I think it's a general slowing argument I think we just saw the numbers come up today GDP contracted 0.2%. You know, I think there is the

You know, the transmission of monetary policy does create more challenges to businesses as they have to Navigate higher interest rates and business models have to be able to respond to that So you kind of look at all the different lending categories and you've brought you know revenues our X and expenses are Y and And expenses include the cost of borrowing and if if Y goes out more than X does being the revenue side then there's a challenge So we want to be very focused on at the inception of the loan how we underroad how we structured and then as we look at loan management making sure we're really on top of those So you know predicting which portfolio has more volatility is it's difficult we have seen that you know last quarter we had more in CRE this quarter a little bit more in the general commercial residential or personal lending has been very very strong So you know we continue to just be honest you know in terms of Coffin in the manner under which we've underwritten and and looking at how we continue to manage our existing loans So maybe maybe a question well I actually can refine that question for Carolina but the new touch upon it the increase in formations we've seen

And then the past record is, would you say that's primarily the result of the right environment? Yes, it is. It is something that we were expecting, Abe. And when we see where they're formed, like we don't have specific issues, like at the press mentioned, it's across industries. And at the end, while we have the formation's increases given the secure nature of the portfolio, not just directly on the same level of losses. Right. So we're very comfortable from the position where we're starting right now.

I'm not suggesting any major concerns, I know you guys are good at lending, I just find the commentary overall interesting. Now as far as the strategy question goes, and I know the environment is playing a role here and loan demand is maybe declining, but historically and on a handful of occasions I've seen Canadian Western Bank report a quarter where loan growth is...

shy of your typical target to be close to the double digits, but then margins go up, capital ratio holds in or increases, and most importantly, stock moves quite a bit higher. I'm just wondering if, since we've seen this before, and having made that observation, it might make you think about your balance sheet management a little bit differently, such that maybe you're willing to sacrifice on loan growth a bit more.

in order to generate the other two positive outcomes there. Three, actually.

Well, thank you for that observation. As we think about our different areas of business that we zero in on, our targeted client being that business owner client, we are very focused on risk reduction trends. And as we sit here today, no question, the kind of the structural change in the balance sheet with, as Matt spoke to, fixed...

price on the asset side responding and slower, you know, faster than the increase in deposit. So we are seeing it tick up in that interest margin, improvement in revenue. And as we, you know, kind of zero in on how we be very focused on expense management, we see, you know, EPS work and we're very positive on the outcomes of where we're at today. But it really is that whole idea of how do we think about ecosystem? How do we think about what that means for our different borrowers? How are we looking at risk adjusted returns? And you know, we just kind of take it all into context and make sure that we are really allocating our capital in the areas we're most comfortable with.

Well, enjoy the long weekend.

Okay, thank you for taking my questions. I was a little bit late coming on, so I apologize if you've addressed this.

earlier in the call but not I heard you talk a bit about the trend or the expected kind of trend and the evolution of the net interest margin into next quarter and maybe even into next year with lots of puts and takes no doubt and I hear Carly in the talk a little bit about

the credit normalization, I suppose, is the best way to think about it. So what I'm trying to kind of figure out here is how much of that anticipated, benefited in the nation's margins.

may get eroded away just because of the PCL's normalizing. So if I think about a risk-adjusted margin here, kind of coincidental name.

unless you're PCLs, where do you think that may kind of stabilize relative to pre-COVID?

Two interesting pieces there. If you look at our outlook for this year and the level of PCL we're predicting, it would be well below what we would consider a normal range.

If we thought about just the dynamic of our provision for credit losses increasing to within our normal range, which I would think would be a very reasonable outcome and reasonable expectation.

You're right, that would offset and dampen some of the lift we expect, just structurally from net interest margin and things we can do to shape that result and drive that result, obviously.

Our goal though, there's a few other levers we can look at, you know, where we grow, how we grow, supporting the deposit side of the balance sheet, prudently managing our expenses.

how we allocate them. You know, a lot of the themes we're talking about going into fourth quarter and targeting and focused on driving positive operating leverage, that will not be a temporary focus. That's something we want to sustain looking into next year. And that for us is the lever we look at to, you're correct, fight against the headwind of provisions for credit losses returning to normal. That's how we look at driving earnings growth for next year, just that really focused performance, controlling what we can control and confidence that the way we've lent through the cycle keeps our credit losses within normal range.

Okay, so just to kind of touch on, I guess, an earlier point then. So within your control obviously are expenses, but also I suppose...

to some extent long growth and risk appetite and you did not

or haven't used the ATM for a couple of quarters.

How should we think about stuff within your control and whether or not the long growth is going to be done within existing resources, so to speak, as opposed to tapping the market to the extent that there was long growth that you wanted to accelerate on?

Yeah, no, it's an interesting consideration. For us, when we look reasonably within a pipeline of opportunities that meet our risk-adjusted return expectations, our sample levels are low, so we'llOutcome the

we believe our organic capital generation is sufficient. For us to think about using an ATM to augment that growth, we would need to see premium risk-adjusted returns to offset the dilutive impact of those shares. And looking at the pipeline right now, we would be moving up a risk curve to a level that to us doesn't make sense relative to the price at this point, but it's something we'd continually look at as we work our way through the cycle. But as of right now, SOAR app.

that would seem to me to be a lower probability area of the playbook. Okay, and then maybe just one last thing on that. I appreciate that. That's helpful. I suppose equally low probability that you're focused on getting your share count back to pre-ATM introduction.

eight to 10 cultures ago. Yeah, I think we're in an early part of the cycle to be thinking about those sorts of activities, but I mean, you're right, there will come a point here where perhaps there is some capital to deploy if we get through a cycle and the economy achieves the soft landing that our policymakers are attempting to engineer.

Yeah, I mean you have coming out of the cycle potentially some dry powder to deploy and for us we have a pretty established history of doing quite well emerging from cycles based on how we've looked after clients through a cycle. We generally do quite well and see pretty strong growth opportunities to increase our market share and target more of those mid-market commercial clients we're after. It seemed to be a lot of opportunities when cycles turn and so that would be on our minds as well for sure.

I appreciate the color. Thank you very much. Thanks, Ora. Next question will be from Minnie Grauman at Scotiabank. Please go ahead.

Hi, good morning. Matt, you talked about how rate hikes this quarter only had a nominal impact on margin, and I'm curious to understand why that is. It seems like it's definitely a different dynamic than what we've seen over the past few quarters. If we think about 50 basis points of rate hikes from the BOC this past quarter, it's about 50 basis points of rate hikes.

Part of that not really expected. I'm just curious the the dynamics there and how that's changed in terms of in terms of the sensitivity of your margin to radians.

Yeah, if we thought about just the very front end of the curve, so to floating rates directly, we're at the point where our floating rate assets are almost equivalent dollars to our floating rate liabilities. We're pretty closely matched. So I know historically we've had a wider gap and that's why you've seen a greater sensitivity to prime interest rate increases and decreases frankly in past years.

Right now we're much less sensitive. So what you would have seen if you look back in previous quarters where we did have those rate hikes, you'd see, you know, maybe for every 25 basis point of Bank of Canada policy change, you'd get an immediate lift of maybe a basis point of margin on a full quarter basis from the hike, and that just reflects the fairly tight spread between floating assets and liabilities.

So we will get some lift on the immediate reprice. We would have had a partial quarter impact of that this quarter and next quarter we'd get the full quarter impact. It would help but I wouldn't look at it as a material driver net interest margin.

Okay.

Just I mean you highlighted the fires in BC You just wanted to confirm that you don't really expect any impact on your business from from that. I just wanted to check on that

That's correct, Manny. We've had some indirect impact as everybody has had from just suspended operations and stuff, but not significant impacting clients that have come to us with us for relief or anything like that. So we're comfortable from that perspective as well. Okay. That's it for me. Thank you.

Next question will be from Lamar Brasad at Corn Mark. Please go ahead. Yes, thanks. I want to go back to your site, and then that water follows to the list of cases.

Obviously, solid margin expansion this quarter and your guide is for a smaller magnitude increase in our smaller rate of expansion as before.

I want to talk about in the context of what you presented in this waterfall here. So you've called out

presentations, and this waterfall here. So you've called out

You know, the continued positive impact of fixed rate asset was pricing and higher funding. So I think that means the asset versus liability in repricing.

or you present this waterfall next quarter, it's gonna go down. So not that four mesas point lift that we saw this quarter.

Is that correct, first of all, and then help me understand how these other three factors

Act that's all and getting in to just around I guess 2.4% next quarter like I think the loan makes that we saw sequentially this quarter That seems like it's gonna persist so the loan related fees makes that gonna tail off and others gonna tail off I'll be understand why we're not gonna see this level of expansion

and getting in to just around 2.4% next quarter. I think the loan mix that we saw sequentially this quarter that seems like it's going to persist. So the loan related feed makes that going to tail off and others going to tail off. Help me understand why we're not going to see this level of expansion. Thank you for.

Yeah, so on the asset versus liability repricing, you'll see that slow down next quarter and that just reflects. Coming into Q3, we had a relatively stable interest rate environment going into the quarter and through most of the quarter and then it really ticked off as the quarter closed. So we'll feel a lot of that impact in fourth quarter. So

You know, on a temporary basis, just reflecting how much rates move that quickly. I'd expect that factor to be much smaller. Potentially, eaking into a positive position, but I wouldn't expect much contribution in fourth quarter. I'd expect that contribution in later quarters is that churns through our portfolio. No different than what you saw with the previous rate height impacts.

Well, mix, you're right. We did target what turned out to be a more favorable mix that supported them this quarter. There's a bit more work we can continue doing on that. But you're right, not to this same extent.

on the fees a piece of that I'd say is some of our

yield related fees returning to more normal levels. Others like prepayment penalties continue to be below what we would have seen maybe compared to a year ago. And some one-offs that maybe would represent, you know, half of that two basis point lift that I'm not sure would persist. So I'm not sure we'll see, unless something unexpected happens, I don't know that we'll get increased contribution from fees next quarter, that dynamic keeping prepayment penalties low.

I don't see that resolving next quarter, just thinking about how clients would behave to even higher interest rates. And then that piece we've bucketed in other, I mean, part of that's the very minor lift this quarter from the Bank of Canada rate changes. Part of it's a very minor benefit from a slightly more favorable deposit mix. So a couple minor items in there. So all that I wrapped together, that's...

That's the broader explanation as to why we believe there's room to continue to expand margin but why it perhaps stays a bit depressed in Q1 or Q4, I mean, compared to if you thought about the potential that churning its way all the way through our balance sheet over time you'll see the lift come later.

Okay, that's very helpful.

Moving on, apologies to pick on the Inca statement line item here, but other income was probably a bit more negative than we've seen in the past, I think it was negative 1.9 million.

and you guys are calling out weaker FX revenue, but even then I would expect it to be closer to zero rather than a loss. So can you help me understand what's driving that loss, that negative 1.9 and other other income this quarter?

Yeah, I gave the math, I can't remember if it was last quarter or the quarter previous, just based on the size of our US dollar balance sheet, that for about every one-penny weakening of the US dollar, it drove about a million dollar of decline in that other other income line. So if you look at end of last quarter to the end of this quarter, it was about a three-cent move in FX, about a three million dollar decline then in that other other income line.

Offset by a normal course, you'd expect transactional fees maybe in or around a million dollars a quarter is kind of a reasonable level. So that's how it washes to a $2 million negative impact you see there. Obviously not something we'd expect to persist next quarter, but dependent on what happens to the US dollar.

One word of caution too, as you're modeling, if you're looking Q4 over Q4, recall that in Q4 of last year, we saw a pretty material strengthening of the US dollar in the fourth quarter. And that's why you look, when you see Q4 last year, you see a big number in that other other income line without a similar strengthening of the US dollar, that wouldn't be in the cards for this quarter again this year.

That's helpful. That's exactly what I'm asking. To be honest. Can you also, I guess, next question, can you talk about the competitive environment for deposits and your outlook moving forward?

Some of the banks are offering elevated competition, looking forward to it. I'm just trying to understand if you feel as though you can continue to grow, branch raise deposits, or even gain some momentum.

looking forward to 2024 in light of the competitive courses that are out there.

Thanks, Lamar. We are very focused on that branch-based deposit story. We've got, as you saw, the general commercial growth we have. That includes our core target client, that business owner, and 30% growth over the last year. And really the win there is to really juice up and really create that as a solid low-cost funding source. I'll pass it over to Stephen to add more comments. Yeah, and I think we've got a lot of things that we're executing right now that are enhancing our capabilities to add those full-service clients. And so we had a number of deliverables even within the quarter about enhanced products and services that we delivered to our clients. And we've got more coming in the very near term that improve our competitiveness in that space. And we're also expanding our addressable market with a couple of new openings happening in Ontario next year. And so we've got a continued momentum just in terms of our competitive positioning and our service proposition for business owners. But we are delivering around enhancements that continue to improve our competitiveness.

Can you accelerate from here despite the competitive forces, just on the back of these new products, new geographies? Or like how should we think about that? I think that we absolutely can. We feel very strongly about the improvements to our offering that we're bringing and what that does for our batting average and ability to win full-service clients. So I don't know that that's an over-the-weekend kind of thing, but we are continuing to deliver, particularly over the course of the next couple of quarters, enhancements that are going to give us the ability to increase that for sure. Yeah, and I'd say I'd just add, it's the way we think about lending too. We don't just grow for growth's sake. We're focused on profitability of deposits. So while we like what we're winning in terms of new to bank, full service.

So it does mute some of the benefit it's still a slightly higher risk weight. Then we book at four general commercial lending and the mid market that would be slightly lower risk weight data for equipment, our small ticket equipment and leasing would be at a slightly lower risk.

The risk weighted asset density yet but.

Our larger ticket.

Kind of two larger borrowers that would actually be a slightly higher risk weight compared to low loan to value commercial mortgages. So it really depends.

I Wouldnt pointed that in itself is a <unk>.

Key driver of the.

Lower RW, a density or I guess more lending for the same amount of capital really our biggest opportunity and that shift is.

Relative to before mid market commercial dropping from 100% to 85% risk weight.

Then elements of real estate project lending, particularly for commercial construction has very punitive risk weights under the new standardized approach Cigna.

Significantly higher than those other portfolio as we've been talking about so that's that's the opportunity for more bang for the back on our lending.

Got it thanks for that and maybe last one for me just wanted to ask about funding and when I look at your loan to deposit ratio.

It's at the higher end of that.

Political wins now likely leave and so if we do get into an environment in the near term where.

Loan growth remains muted, but still at a reasonable pace.

How should we think about TWD funding for that type of growth.

Or I guess, which part of the funding profile.

Do you expect can support.

That type of growth environment.

We like having a lot of levers available when you think about funding the balance sheet for us.

Our preference because it's the most favorable cost would be branch raised deposit growth, obviously, and we liked the client relationship aspect and fee generation capabilities from that deposit source. So thats. The priority. So if you had really strong growth there what would you dial down our other funding channels, we look at it would be broke.

Kurt.

GIC deposit so that would be an equal trade dollar for deposits so that wouldn't.

Shift at all of the loan to deposit ratio.

Other sources of funding.

We do securitize.

As a funding source a couple of our asset classes.

Usually that's at a reasonably favorable cost of funds relative to other sources. So.

We'd look at that source versus broker versus I suppose.

Raising a senior deposit note in the capital markets, what we ultimately decided to do would be driven by trying to manage a loan to deposit ratio, we would be thinking about liquidity characteristics of the deposits profitability.

And obviously that preference to full service client deposits.

Yes.

Alright, thank you.

Thank you and at this time, we have no further questions I would like to turn the call back over to Chris Fowler for closing.

Thank you Sylvie the entire CWC team has supported the strong results, we reported today and I. Thank them for all their continued and the continued efforts together, we've built meaningful strength and resilience in our organization with high satisfaction from our clients our strategic focus to meet the full service financial needs of.

<unk> and their owners differentiates us from the market and we will continue to create value for mid market commercial businesses and our shareholders. Thank you for your continued interest in CWC financial group and we look forward to reporting fourth quarter financial results on December the eighth. Thank you very much and have a great long weekend.

Thank you.

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask tissue. Please disconnect your lines.

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Yes.