Welcome to EQB's earnings call for the first quarter of 2024 on Thursday, February 29, 2024. At this time, you're in a listen-only mode. Later, we'll conduct a Q&A session for analysts. Instructions will be provided at that time. It is now my pleasure to turn the call over to Sandie Daoust, Vice President of Investor Relations and ESG Strategy for EQB. Please go ahead.
Thanks, Julie, and good morning, everyone. Your hosts today are Andrew Moor, President and Chief Executive Officer, Chadwick Westlake, Chief Financial Officer, and Marlene Lenarduzzi, Chief Risk Officer. For those on the phone lines only, we encourage you to also log on to our webcast to view our accompanying presentation. There, on slide two, you'll find EQB's caution regarding forward-looking statements, as well as the use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted. Due to EQB's change in fiscal year and the four-month prior period for Q4 2023, commentary today will focus on year-over-year comparisons for income measures. Year-over-year measures compare this first quarter of 2024 and then January 31, and including ACM midway through the quarter to the closest applicable period, which is Q4 2022, ending December 31.
As you review the MD&A, this period also includes the acquisition of Concentra Bank and its contribution for 2 of 3 months for that quarter. It is now my pleasure to turn the call over to Andrew.
Thanks, Sandy, and good morning, everyone. In the next few weeks, we will mark our 20th year as a publicly listed company. While we have not quite reached that milestone yet, it does appear that we will be able to celebrate the best 20-year total shareholder return of any bank on the TSX and on the S&P 500 when we opened the Toronto Stock Exchange that morning. We achieved benchmark-setting performance one quarter at a time, and you can see from our most recent results that Canada's Challenger Bank continues to work well for our customers while rewarding our investors. Our quarterly earnings per share increased 12% year-over-year. We again delivered more than 15% ROE. Our board of directors authorized a dividend payment 20% higher than the prior year.
These are good results achieved despite a slower housing market resulting from Bank of Canada tightening. This is also our first fiscal quarter to align with other publicly traded banks. We recognize that the fiscal year-end change adds complexity to interpreting the results, and I hope you agree that the team has done a nice job in trying to cut through this noise. In reaffirming our 2024 guidance today, we believe we have started the year well and we're set up to see stronger performance in the next few quarters as sales activity in residential markets increases and based on our expectations for our securitization activities. We also expect provisions for credit losses will moderate in the second half of the year.
Understanding this is a busy day of bank reporting, I will highlight just a couple of important developments, beginning with brand awareness and customer growth. In January, we launched our Second Chance campaign, featuring Eugene and Dan Levy, and followed in Québec en français with Deuxième Chance, starring Québécois mother and daughter duo, Diane Lavallée and Laurence Leboeuf. Both of these campaigns are rooted in a key insight that many Canadians still bank with the financial institution their parents led them to, despite the downsides of high fees, little to no interest, and widespread dissatisfaction with financial incentives. A curious feature of banking, compared to the choice and change in so many other aspects of life.
As Canada's Challenger Bank, we use these insights to create tension and encourage Canadians to ask whether they're being properly served by their first-ever banks, to look beyond what is familiar and to get a second chance through EQ Bank, where they can make more. Many of you will have joined the 90 million Canadians who tuned in to the Super Bowl this year and saw our campaign ads run throughout the game in English and French, and continue to see our name pop up on screens, social media, TVs, and billboards across the country. We are pleased with the approach of having recognizable Canadian celebrities in our advertising and are confident that our Second Chance campaign is dramatically enhancing brand recognition that will in turn have a positive impact on customer sign-ups and the cost of customer acquisition.
Of particular note is the exceptional positive reaction that Québécois consumers have had to Second Chance, where search, web traffic, and new account sign-ups are all up by significant margins. We launched Banque EQ in Quebec just over a year ago. We're excited about how many Québécois seem to agree with us that Banque EQ is a better way to bank. It's also time for something more. It's time for EQ Bank to enter the small business market, which we'll do later this spring. EQ Bank Small Business will provide entrepreneurs with the opportunity to earn high daily interest on their hard-earned cash, with great access to payment solutions that have traditionally been pretty clunky for these customers. As a long-time lender to small business, we intimately understand the challenges faced by entrepreneurs.
This no-fee product is all digital, meaning being available whenever and wherever a business client wants to use it. This launch is just a start as we continue to build new services for Canadian entrepreneurs. As a technology leader in the banking world, we're also making substantive gains in digital innovation with an embrace of automation and artificial intelligence.... Our technology team works in agile pods, allowing us to leverage our technology and talent to drive faster and better customer value. We're running a pilot project using generative AI agent-assist tools in our customer care center. And we have a new partnership with Trulioo to enhance the EQ Bank customer onboarding experience, using their AI tools to deliver advanced security and identity protection. Taken together, these advancements add to our Challenger Bank advantage. Another development worthy of note is the 55% year-over-year growth in our decumulation business.
We now have a CAD 1.6 billion portfolio and continue to expect strong growth going forward, led by demand for reverse mortgages on the back of market-leading product value and consumer awareness, courtesy of our Talking House campaign. For our personal bank, more broadly, we expect to see a stronger market this year for single-family housing, buoyed up by pent-up demand and Bank of Canada easing, which will support our single-family mortgage origination activities. While expanding, we've been investing in risk management and compliance to ensure our bank is well prepared for the growth we see in the years ahead. While you can see from our financial statements that there's been an increase in arrears, we are confident that we are well reserved, and we will maintain our low loss rates. The portfolio remains strong, supported by conservative LTV and good credit scores.
Our lending has always been prudent to fit the circumstances. Today, over 70% of our commercial loans under management are insured through various CMHC programs, and we continue to prioritize lending secured by buildings where people live. In order to help Canada close a significant housing supply gap, and as a matter of strategy and risk management, we focus on multi-unit residential lending in urban markets, with loans under management growing 34% year-over-year. Now, some brief comments on our credit book, which is standing up well. Our real estate lending business is using a consistent approach, and we essentially lend with the goal of not losing money. Our equipment financing business, which accounts for just 2% of the bank's total loans under management, is quite different.
In that segment, we price loans at a wider spread, expecting that some of this spread will come at the cost of credit losses. True to form, this is an area where we saw elevated losses, representing over 80% of our net PCL for Q1 or CAD 12.7 million. These losses were largely a result of the cyclical downturn in the long-haul transportation sector, which represents about 40%-4% of our leasing business assets. What we're seeing here is a trucking industry that has been negatively impacted as demand for transportation services has declined, with shifts in consumer spending patterns since the high watermark of 2022. This has put pressure on some of our customers, which has resulted in elevated default rates. The PCL is mostly due to lease originations from the 2022 vintages.
More generally across the commercial book, we're getting increasingly comfortable that our commercial portfolio's impairments will start to normalize in the second half of this year as we reach resolution on larger commercial loans. In fact, already in February, CAD 55 million has been resolved or made current, and we have a plan to exit the vast majority of these loans with full recovery on many of them. I'll wrap up my thoughts by acknowledging another important milestone. Partway through Q1, we completed our majority interest acquisition of ACM Advisors, bringing nearly CAD 5 billion in assets under management into EQB and a very talented team. We're excited about the potential of the ACM business and are working with management toward a goal of doubling this business over the next five years.
While it's early days, ACM is performing to plan, and our partnership is focused on elevating performance for ACM and their fund investors across Canada. To conclude, EQB started its fiscal year with good results, and all our businesses are set up to see even stronger performance in the next few quarters. Now over to Chadwick.
Thanks, and good morning. Before I jump into the numbers, let me repeat how we are presenting our results to the fiscal year change, as Sandy outlined at the beginning of the call. With our fiscal year change and to October 31, for a year-over-year comparison, we are presenting Q1 2024 relative to Q4 2022, which is the closest period. For quarter-over-quarter, as you would expect, we are comparing Q1 2024 to Q4 2023. However, this is a 3-month to 4-month comparison, so we focus on our quarter-over-quarter commentary on primarily balance sheet measures. While this adds some complexity, we're very pleased to now be reporting on the same cycle as the Canadian banking industry. The feedback we have received from our stakeholders on this change is unanimously positive.
As you reviewed in our results, despite a challenging macro environment, we're starting fiscal 2024 with a solid quarter, a record top line with nearly CAD 300 million in revenue and margin expansion. We are trending well on all key guidance measures. Capital continued to expand, with CET1 increasing to 14.2% and our total capital ratio up to 15.4%. With continued strong capital levels, our board of directors has approved removing the 2% discount on our common share dividend reinvestment plan, while still maintaining this excellent program for our investors. Our book value per share increased 14% year-over-year, driven by an average ROE closer to 17% over the past four quarters.
This performance also reflects growing weighted average diluted common shares outstanding, which increased further with shares we issued from Treasury as part of our investment to acquire ACM in Q1. EQB's book value per share this quarter reflects the downward adjustment to shareholders' equity to reflect the value of a future option to acquire the remaining 25% of ACM. Without the adjustment for this option, book value per share would have increased 15% year-over-year and 3% quarter-over-quarter. This morning, I'll move right into additional context on a few key performance measures before opening the call to Q&A. First, margin. NIM expanded 1 basis point from Q4 to 2.01%, mainly due to the ongoing benefits of our funding strategy and increasing yields on higher margin conventional loans in the commercial portfolio, as outlined in our Q1 MD&A.
Margin is supported by the continued lower deposit beta contribution of EQ Bank deposits and diversification of funding. NIM expanded in the quarter despite lower prepayment income, which we expect to increase and normalize at a higher level with more housing market activity, especially if policy rates move as markets expect in 2024. This margin expansion and growth in conventional lending resulted in net interest income increasing 17% year-over-year. Overall increases in asset yields were driven by the combined effects of rising rates, a higher percentage of our personal lending book consisting of uninsured loans, rising uninsured commercial yields, and a reduction in on-balance sheet insured multi-unit residential loans that are lower yield. Driving this shift in our personal lending portfolio was uninsured lending growing 7% year-over-year, with decumulation growing 55% over the year.
Decumulation lending yields are slightly higher than our typical uninsured single-family residential loans, with longer terms and conservative weighted average LTV for the portfolio of less than 40%. Our commercial portfolio, excluding CMHC-insured multi-unit residential, grew 10% year-over-year, led by our secured lending toward larger borrowers, including growth in our insured residential construction business. Now on funding. Combined with expert treasury management, our long-term efforts to diversify and strengthen sources of low-cost funding are continuing to translate. Last quarter, I referenced the launch of another new funding source, our first Bearer Deposit Note program. In just one quarter, it's grown to nearly CAD 500 million in funding, demonstrating investor conviction in our credit quality and ability to repay. You can expect to see more activity in our funding programs this year, including for covered bonds in Europe and our deposit note program in Canada.
Also, in the next couple of months, we expect to launch another exciting EQ Bank challenger deposit product. We'll share details soon, but the notice product design will enable customers that are in a higher rate and also reduce competitor attrition that we see at times. Great for our EQ customers and our deposit momentum. Now over to the important growth story of non-interest revenue, which increased to over 14% of total revenue in the first quarter, up from 12.5% last quarter. This growth is on strategy and driven by increased gain on selling and income from retained interest from our multi-unit residential lending activities. Fee-based revenue from Concentra and serving credit unions, increasing revenue from payments, and about half a quarter of benefit from ACM. ACM's asset management revenue is captured under fees and other income on a consolidated basis.
For insured multi-unit residential, we now have CAD 21.5 billion in loans under management, up 34% year-over-year. CAD 16.1 billion of this amount has been derecognized through the CMHC, CMB, and NHA MBS programs. As these units are not prepayable or have their cash flows fixed, the assets are derecognized when securitized and sold. Corresponding event and spread differential results in upfront non-interest revenue in that reporting period. Gains on sale and income from retained interest amounted to CAD 19.4 million for Q1, representing a 110% increase year-over-year. We expect to maintain this level of revenue in coming quarters. Now on to a few additional comments on credit in addition to the context Andrew provided. PCL was CAD 15.5 million in Q1, reflecting the impacts of both future expected losses driven by macroeconomic forecasts and loss modeling.
Phase three provisions and write-offs increased to CAD 17.3 million, with two-thirds associated with our equipment financing business. The net effect was a PCL ratio of 13 basis points in Q1, compared to 12 basis points last quarter, weighted to the PCL rate on equipment financing, increasing to 3.76%, compared to 2.67% in Q4. Not surprising at this point in the credit cycle with these particular vintages, as Andrew outlined, and we do expect these to start to normalize later in 2024. The consumer lending PCL benefited from a new agreement with a consumer lending partner, increasing cash reserves to secure against losses. This was part of our original guidance and plan for 2024. Based on our lending approach and business mix, our personal banking portfolios are performing well.
Higher than last quarter, now about 85% of our single-family uninsured lending has already renewed since interest rates began to rise in the spring of 2022, a positive forward-looking indicator for our book. Net allowance for credit loss ratio remained consistent sequentially at 22 basis points, and of the 25% increase in the impaired loans to CAD 475 million from Q4, 57% was related to personal residential lending and 43% to commercial. The weighted average LTVs of these impaired residential and commercial mortgages are 68% and 47%, respectively, mitigating expected future losses and considered in the allowances we hold against these loans. For the residential portfolio, based on our historic and stress scenarios for losses, we believe we are very appropriately reserved.
Recent indicators in Q2 so far are that early delinquencies are moderating, and as housing market activity picks up, we expect delinquencies and arrears will continue to trend in a positive direction, particularly in the second half of 2024. Similarly, while overall impaired commercial loans increased in the quarter, we saw the rate of increase in impaired loans drop 40% versus last quarter. As Andrew noted, we are beginning to see our resolution strategies mature and loans resolve. Shifting to expenses. Non-interest expenses increased to CAD 134 million as we continue to make important strategic investments in building EQB, importantly into EQ Bank innovation, next level brand awareness, with an impact of millions of eyes on EQ Bank over the past month, and investing in our enterprise support functions. Q1 expenses also increased with a half quarter of ACM.
From a people perspective, our FT increased 4% over the quarter, with our new colleagues at ACM accounting for over half of these positions. The balance reflects growth in product, engineering, customer service, as well as our enterprise risk management and finance teams. We are being measured about expense growth, leading with our pace of hiring, but are also excited to bring great talent to EQB in this market. On the technology side, we've been continuing to expand our cloud capabilities, invest in cyber and fraud, and accelerate innovation in data and AI solutions to support both customers and employees. We have the ability to move fast and smart in managing our expenses and investment dollars. We are investing through this cycle, making effective long-term trades that will benefit us in the years to come.
Achieving our ROE guidance will remain paramount over achieving short-term positive operating leverage over the course of a few quarters. To wrap up, this fourth quarter demonstrates that our strategy is translating. We have the ability to grow and manage credit across cycles, and our diversification and sources of revenue and funding is paying off. We offered ambitious challenger guidance again for 2024, with the priority being 15%+ ROE, the center of our value creation model. With Q1 in the record books, we continue to believe we can achieve guidance, including 15% ROE, the leading consideration being the pattern of provisions for credit losses translating as we expect in the second half of 2024.
We're investing in our franchise for the long term, stories being heard and understood by more Canadians every day, and with a lot more innovation to come this year, we will continue to build on our momentum. Now, we'd be pleased to take your questions. Julie, if you can please open the line for analysts.
Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Jeff Kwan from RBC. Please go ahead.
Hi, good morning. Just on the impaired increase that we saw, particularly on the residential side, was there any trend or what was kind of driving it? Was it seeing incremental job loss? Was it ability to cope with higher payments, geography? And then on the commercial side, the impairments that you had that were driving the increase over the past two quarters, do you have any update in terms of when you expect those to be resolved?
Yes. Yes, thanks, Jeff. I'd say sort of thematically, compared in the single-family business, larger homes in sort of out-surrounding areas of the city. So, where I think the payment shock has had the biggest impact, so larger loans, larger homes. You know, the good news from our perspective is it's quite skewed to lower LTVs, so I think the payment shock is causing people to have challenges actually paying, but we are sort of fairly confident that the recoveries will be very good. So we're not expecting much in the way of realized losses over the next couple of quarters. Although a slower housing market clearly is making it harder for people to sell their own homes if they run into financial difficulty.
To the extent we've got a few homes who are trying to sell, you know, we're not finding the same activity as we'd normally expect. Hopefully, that will sort of start to resolve as spring market comes around. So the question on commercial loans, yeah, I mean, I think we're expecting good resolution here. Of course, for the commercial loans, what happens is it takes a bit of time, even when you have got a good resolution in place, you know, often you're going through a court process to actually effect the sale. But we are making good progress. And as I mentioned, I'm not expecting much in the way of losses.
In fact, Darren and I and the risk teams have been drilling it even more deeply and have been getting increasingly confident about our ability to resolve this with sort of minimal loss. Anybody have any? Carla or Marlene?
No, I would just add... Thanks, thanks for the question. We do know that when we look through our impaired loans or commercial impaired loans, about 38%-ish are are current. So despite the impaired notation, they are, they are up to date.
Yeah, about CAD 100 million got resolved in quarter two, so it's good momentum, and these are pretty isolated amounts like we talked about in past quarters in terms of the handful of them.
Okay, and then just my other question was, on the residential mortgage side, thoughts on how the spring housing season is shaping up, but also, too, is on the Alt-A side of the market, are you seeing any divergence in terms of level activity or other trends relative to what's happening in the prime part of the market?
I mean, certainly all the data is pointing to, you know, spring, starting in the spring a little bit. So we saw good data around kind of Toronto housing sales in January and mid-February , compared to an incredibly low activity level the prior year. So, you know, that gives us reason for confidence. I would say that we're not seeing in our part of the market quite the same pickup yet, but I think often, you know, sales activity, so contracts being entered into is a little bit of a leading indicator before you actually see the mortgage applications coming in. You know, our teams are feeling pretty optimistic about it.
I did meet with our sales team thankfully yesterday, and, you know, they seem to be feeling pretty confident about our position in the market and how our brokers and distribution partners are thinking about the year ahead.
Even that's part of the comments I offered, Jeff, in terms of the recent indicators in Q2. It's part of that activity Andrew mentioned, and even in the last couple of weeks, to be honest, you know, Andrew and I were speaking with the teams recently. Just literally in the last couple of weeks, we're seeing a lot of activity pick up just for some of the resolution, too. So it's-
Just to pile on, pile on with the comments, you know, I think the thing that we still seeing a lot of enthusiasm for is, is, is our ability to renew our customers and, and, and see good sort of loan growth in the books. You know, that's generally been an area where we outperformed, you know, others we've observed in our space.
Great, thanks for the team effort on the responses.
Thanks, Jeff.
Your next question comes from Manny Grauman from Scotiabank. Please go ahead.
Hi, good morning. I just wanted to follow up, specifically, on the subject of credit and specifically the equipment finance business. Andrew, I think you talked about expecting minimal losses. I'm just hoping you could provide a little bit more perspective on what's giving you that confidence. Is it just the market for equipment, and you can realize good values, or is there something else that you're seeing going on there? So that's the first question.
So sorry, my comments about minimal losses didn't refer to the equipment financing business, which is, as I mentioned, a business that we expect credit losses, you know, through the cycle. And clearly, we're seeing that as sort of in one part of the, particularly focused in one part of the book, which is really the 2022 vintages of long-haul tractors and trailers, which, I think at quarter end, we had just under CAD 200 million of assets in that, with that sort of character. And we're seeing, you know, our customers there, as I mentioned, losing their routes, which is resulting in defaults, and then we are seeing losses crystallize in that part of our book.
So, you know, we think it's relatively sort of limited to some to that vintage, the 2022 vintage. But I am expecting that through the next couple few quarters, we'll continue to see, you know, write-offs coming from that part of the book.
And then can you give us a perspective just in terms of average ticket sizes in that portfolio, and when you talk about losses?
Yeah, they're around about... You know, as you can imagine, they're tractors, tractors and trailers, so you can imagine they're sort of in the CAD 70,000-CAD 100,000 kind of range. Not large tickets, so it's a kind of diverse, almost like a consumer lending portfolio in the way we think about it. You know, we model it with kind of FICOs, equipment values and that kind of thing, as opposed to I could talk with much more confidence about the commercial real estate because we can look at a list on a single page of paper of anything that's delinquent, and actually understand the underlying drivers of each individual loan and give you sort of confidence of that building's worth. You know, we might have a loan with a CAD 10 million delinquency, for example.
We know the asset's worth CAD 20 million, and it's a matter of time to work through and get our money back.
And then just in terms of the outlook, so I just wanna make sure that I have this correct, Andrew. I thought you were saying that you'd expect performance in the equipment finance business to normalize in the second half of the year. So is that what you were referring to, or
Yes, just precisely, Manny.
So second half of the-
So second half of the year, I expect that this current quarter, Q2, will still continue to see these elevated defaults in this 2022 cohort. But, but beyond that, we're presuming that things will normalize.
And the rationale for that is just that you see a specific cohort, you're gonna resolve it, and then you don't expect issues beyond this cohort, or is there something else that you see in the second half of the year that's gonna help improve the performance here?
Yeah, I think, I don't think it's really an expectation around, you know, changes in the macro environment, particularly. But don't, don't forget, these are relatively shorter-term leases, typically written on 60 months, so they, they do amortize down fairly quickly. As I say, we've got a CAD 200 million, you know, cohort that, that we're concerned about. So we're expecting that as we've probably seen, you know, many of the customers with a, you know, weaker business models already, already default. And the analysis which we've done gives us that confidence. Although, of course, anything predicted about the future is, there's always kind of uncertainties to it, but we're feeling good about it. And Marlene, you, you've been deeper into this than I have, but, so you can...
Yeah, thanks for the question, Manny. I think as we look at some of the newer originations, you know, there's one cohort that we're concerned about from the past. But the newer originations are skewing towards more of the prime business. And so as we look through those, we feel much more confident that the second half of the year is gonna be returning towards those more normalized delinquencies and losses.
Just as a way, the local team did a good job in sort of middle 2022, started tightening and changing credit criteria, making it more demanding to get a loan, as we were sort of concerned about potentially kind of overexuberance in that part of the market. So, you know, we've been improving the position over time.
So you've made changes there to underwriting. Okay, that's great.
Yeah, we made changes back in 2022. Unfortunately, you know, the peak defaults happened within sort of from 12 to 18 months after lease origination. So, you know, clearly, we're expecting to work through that hump, if you like, because, you know, that's the time frame we're in.
Got it. Thank you.
Your next question comes from Mike Rizvanovic from KBW Research. Please go ahead.
Hey, good morning. I wanted to go back to the impairments on resi mortgages. So the 54 basis points, it's obviously moved up quite a bit here, more than fourfold year-over-year, and, it's more than doubled in two quarters. And so in the context of the big six banks, which I like to compare you guys to, it's not substantially higher than most of your, your big six peers. And my premise has always been that it's probably because you've fully repriced your loan book, for higher rates, whereas the banks are certainly not there yet. Is that something you'd agree with?
Certainly the way we think about it. So, you know, actually, I'm to some extent as well, while obviously these are, as you point out, these are increased, you know, levels. The fact that most of our customers already had their book repriced and were facing that interest rate shock is, in a sense, you know, a demonstration how resilient this group is. I think I would be concerned if I was seeing this kind of level, you know, with pricing, repricing yet to come. But unfortunately, I think what we're actually seeing is the, you know, the arrears forming as a result of the payment shock that the people are having to deal with. And then I think that's consistent with the thesis I was talking about with...
is raised, I think, with Jeff's earlier question around, you know, where are we seeing these delinquencies? It is the larger mortgages and the larger homes. So you think about a larger home with a self-employed borrower whose business might be somewhat impacted by kind of macro conditions as well as that payment shock. You can see how that could be leading to higher arrears, but not to losses for us because, again, there's plenty of equity in these homes.
That, that's super helpful. And then just in terms of the LTV, I think Chadwick mentioned the 68%, and I know it's a weighted average. I usually don't take much with that number because we just don't know the distribution. But what can you offer on your LTVs in terms of distribution? Just based on HPI levels, I can't for the life of me imagine that you have anything that's anywhere near 100%, but what would be north of 80? Is that something you could ballpark for us?
Yeah. So certainly less, certainly greater than the... So first of all, that's a deep insight that we don't always get from us. So, the average is, you know, average confuse the data, but, certainly well, less than 10% is over 90, and I think almost you say almost nothing over 100. You know, where you do end up with the odd loss is kind of these idiosyncratic loss, what we would call idiosyncratic loss, where somebody hasn't looked after the house as well as they might have done. So you assume the house is going to be in a certain condition, but, you know, we put the loan out 3 or 4 years ago, and somebody hasn't kind of kept it in good repair. So that sometimes that can create this kind of slight leakage.
The good news about that is it's really, really very small in the overall scheme of the book. So, you know, the vast majority of the stuff is below 90% LTV, and as you say, the average 68%. So we're in pretty good shape.
I was just on those, remember, as we have in the setback, right, Mike? So 64% is the overall single-family uninsured portfolio. Our new originations remain about 70% LTV, and it's literally like you can almost count on a hand anything even above that 80% mark. Those averages are very reflective of the portfolios.
Okay, that's super helpful. And then just to sneak one more quick one in. Just in terms of demand for your base, like, have you guys actively providing forbearance? I know the big six banks don't like to talk about this. They do it in the background. How active are you on helping people manage that, you know, refi or renewal process when they're paying lower on the mortgage? Like, I'm just wondering the level of activity, the level of forbearance you've had to sort of help your clients with through the last few quarters.
Yeah, it's relatively few loans or a few, sort of very few loans where we have provided forbearance. Having said that, we're very open to doing that and obviously trying to help our customers in an empathetic way and meeting the expectations of regulators in that regard. And really, what has to be, what our customer has to be able to demonstrate is there's a route forward through the forbearance to get to a place where the loan is in good shape, for both them and us. You know, unfortunately, in this kind of environment, for some people, the best solution is actually sell the home, preserve the equity. So that's the dialogue we have. You know, we feel we handled it pretty well.
But, you know, there's a fair bit of kind of discipline on our part in how we think through that. But, you know, when a forbearance makes any sense, and we'd have to have fairly good evidence that it's gonna put the loan in a better position.
Got it. Thanks for the color.
Your next question comes from Lemar Persaud, from Cormark. Please go ahead.
Yeah, thanks. I, I wanna come back to this discussion on the equipment finance portfolio. Maybe I'm reading too much into your comments, but it sounds like there's an up-tiering of that, of that portfolio. Is that a fair comment?
That was, I think for those of you that were around in 2019, which is many of you, thank you. You know, I think that was our plan then, and has been what we were executing on. So increasingly, we're migrating into what would be regarded as prime space in the leasing equipment business. And you know, that, that's the place we wanted to be. So we felt that the time we bought Bennington, we were buying a platform and that was the direction of travel. Molly, do you want to give a bit of an update on where we are on that?
Yeah. No, the portfolio is doing well in terms of our migration to the stronger credit profile customers and looking at our average Beacon scores or looking at the underwriting changes that we've made since 2022. Certainly, we're seeing about 55% of our portfolio now in prime, so it's really playing out through our numbers.
I remember, Lemar, too, for the Concentra portfolio of nearly CAD 300 million that we acquired, that was all prime as well. So that also weighted the overall portfolio of CAD 1.3 billion higher, too.
... I guess, I guess, yeah, that's very helpful. But I guess where I'm going at is, you've now seen rising impaired losses, you know, for the last couple of quarters throughout 2023 and into 2024. Is that like, looking forward, should I expect the yield on that portfolio to move materially lower? Like, I know it's not a massive portfolio in terms of size for you guys, but it is very accretive to your margins because the yield is so high. So I do care about it. And, you know, ultimately, I care about the impacts on all bank NIMs.
So that's kind of the approach I'm thinking, like, is there gonna be a very sharp shift in the mix of that portfolio over the next couple of years that would cause the yield on it to move materially lower?
No, I don't. I wouldn't expect so. And really, there's a trade-off for kind of cost of credit, i.e., PCLs versus the rate charge. So, you know, any give on the top line effectively comes back, back in provisions, we would expect. So, no, we're pleased with the yields we're able to get on our prime book, frankly. So it appears to drive, you know, ROEs that wherever we're operating within the credit bands, the ROEs are pretty good across that book.
And you saw that trend, right? So even as we talked about all this migration to Prime from Alt-A, right? When you saw that in the MD&A, right? So you can see-
Mm-hmm.
versus the Q4 period versus last quarter to this quarter, our yields are actually still expanding.
Okay, yeah. That's kind of where I was going at, more so for-
Yeah
-the number to put into my model. And then, Chadwick, sticking with you, I'm gonna go with a big, big picture question here. Do you think it's still plausible to come within your, your EPS guidance range? Can you go through, why that's still a reasonable expectation, given the, the softer Q1 results? I, I think it really does hinge on the, the back of a, a better credit outlook for the back end of the year, but I'm assuming there's probably a little more to that. So talk to me about, you know, whether that's still, still in play and, your confidence level there. And what if loan growth doesn't come back as expected? Can we still get there?
Sure. A top-down or the, the year is playing out exactly as we had expected from a guidance perspective, with the first anchor being that ROE. So that's really important. The portfolio measures right across the board as we expected, and we had signaled, right, this first half of the year, particularly from a credit loss perspective and from an investment perspective, and the bank was gonna be a little bit more elevated. So when you think through the four quarters based on the trends we're seeing so far and based on our updated forecast, we do still have conviction that that range of EPS is absolutely still doable and achieving our guidance is still doable. And to achieve that base case guidance, we didn't expect or build in that rates had to come down in this environment to achieve that.
That was still our base case guidance, too. So if our guidance or if our expectations or the reality of PCLs, say, in the back half of the year, don't play out as expected, that's something we'll have to revisit. But right now, based on all the variables, all the forecasts, and the business momentum, which is very strong, like the margins, the portfolio growth, the customer awareness, it's very, very strong. We have an incredible team here. So we have a lot of conviction in our team and our growing customer base and the stability of the margins and the funding costs. So add all those up, I think we're still on track for the guidance that we have reaffirmed today.
Yeah, if I could just again so to add some color to what Chadwick... There's a couple of things I mentioned in my script. One being the we are expecting increased securitization activity in you know this current quarter and beyond, and that that's helpful to obviously add to margins. And the other thing, just to kind of your comment about you know housing market not coming back. Our earnings are actually not terribly sensitive intra-year to the kind of origination volumes in year. In fact, whereas we originate loans we take you know we take a provision for Stage One right away. We've got cost of originating that loan. So you wouldn't expect earnings for this year to be terribly sensitive to kind of our assumptions about housing market volumes.
They do, of course, have an impact on the longer term, I think, so the bank, but I wouldn't, I wouldn't think that we're particularly sensitive to that. And of course, you know, as you're, as you're rightly pointing out, there's some uncertainty about how the housing market will work when the Bank of Canada will ease and when, when the housing market comes back to life as a result of that.
Thanks for the time.
Your next question comes from Etienne Ricard, from BMO Capital Markets. Please go ahead.
Thank you and good morning. On, on EQ Bank, as you get ready to launch the platform for small business owners, how meaningful, how meaningful do you believe commercial deposits could become over time?
I believe they're very significant over time. I do think it's a sort of 3-5-year build for something to get excited about within your models. You know, it, you know, might be a few hundred million CAD. But we're really inspired when we look at challenger banks around the world about how well they've been able to service the small business market. If you look at the UK market, for example, you know, their individual challenger banks have captured 10% of the market from what was a standing start in a few years. And so we do think that that same thing applies in Canada. There is a general dissatisfaction with small businesses to the kind of existing, their existing options, if you like. And so we think we should be able to, to deal with that quite well.
And don't forget, many of our customers in EQ Bank are self-employed already, so the ability for them to... or small business customers, so the ability to open up a small business account that goes alongside their existing EQ account is gonna be something that's really compelling to them as well.... Thinking of our vision is, you see it, have a single pane of glass where you'll see both the balance in your small business account as well as your personal bank, personal account. And for people operating in that kind of entrepreneurial world, you know, they're often thinking about the money in the business as being kind of their money, as much as the money in their own personal accounts. So we're really excited about that opportunity.
And then, of course, you know, the broader impact on brand awareness, cost of customer acquisition, generally. You know, we believe as we pick up small business accounts, some of those people may not have a personal account with us. We'll be able to accelerate the growth of our small business accounts. So we think it's a very meaningful—it's gonna be very meaningful over this 3-5-year horizon.
As a follow-up, how do you think about the relative stability of small business deposits relative to personal deposits?
Well, we think they're actually going to be fairly-- There's obviously a number of kind of archetypes within small business. I think one of the things that's, and it's been a bit of a journey to get here. There are some small businesses where you've got high, very high volumes of small value transactions. You've got other small businesses are actually fairly stable cash amounts, relatively small amounts of cash flow. The small businesses, they're often with a kind of tax advantage structure to, you know, that's why people leave money in their small business. And that's actually got... That's more simple use case.
Yes, it will be easy to move the money, but, but the money isn't moving that much in and out of these accounts, and those should provide a fairly stable platform, where we think actually the kind of a you know, good rate GIC offering, which we offer, will, will be pretty interesting to those kinds of consumers that, you know. They know they're going to pay a tax, tax bill six months from now, so buy a six-month GIC. It's a pretty stable, kind of, asset for them and liability for us. So yeah, that, that's very much the, the approach we're taking.
And we're not trying to kind of boil the ocean in small business, but we are looking at segments and trying to be really good for individual segments as we feel we've kind of honed our view on individual segments, so we'll extend it to you know the next segment of more you know larger number of shareholders, more transaction volume, that type of thing. But our starting offering is gonna deal with the you know many millions of small businesses that actually have a much simpler need.
Thank you very much.
Your next question comes from Nigel D'Souza from Veritas. Please go ahead.
Thank you. Good morning. I wanted to follow up on equipment financing, and I'm trying to get a handle on the potential tail risk for losses in that segment in a more stressed environment. So, we're already close to 4% loss rate, but if we were in, let's say, a recessionary environment or something, where the macroeconomic conditions deteriorate, do you have a sense of what the range of potential losses could be for that portfolio?
Well, do you want to try and handle that one? I mean-
Sure. I mean, it really depends on a lot of factors, Nigel. When we look at our forecasting, we think about, you know, the one cohort we've talked about and how that's flowing through the system. You know, there could be some increased losses beyond what we're expecting, but I think we're anticipating that, you know, at least next quarter, at worst case, two quarters, we'll see the losses around where they are right now and starting to come back down further. But all indicators are that with a more challenging environment, that will encourage the Bank of Canada to cut rates sooner and perhaps more deeply, and that will bode well for those customers as well.
Okay.
So it really is-
Go ahead.
No, that's all.
Yeah. So if I could maybe talk about this more strategically. When I think about your business segments or your, your categories in terms of the risk-adjusted margin. And the risk-adjusted margin for equipment financing, if you take the 10% yield, subtract, you know, 4% cost of funding and the close to 4% loss rate, you get a risk-adjusted margin a bit below 2%. And your uninsured single-family book would be generating currently a risk-adjusted margin above 2%. So that signals to me, I mean, I would interpret it as the pricing of that existing book isn't sufficient for the risk profile you're currently experiencing.
And maybe you could expand on, you know, what do you think is a minimum acceptable risk-adjusted margin for that business, and how does it tie into how you're going to underwrite new business going forward?
Yeah, I think so. So obviously what you're dealing with there is a peak cycle loss. So we would expect losses of something like 150-200 basis points through the cycle. In fact, you know, a year or two ago, we were below that 150 basis point target. So that is... It's true that if you're quite right, if we're expecting these level of losses, then our pricing doesn't over the longer term, our pricing doesn't, you know, make sense for this business. So that's something we'll obviously have to, you know, continue to tweak and play with. And, you know, I think the jury is still out on our longer-term position for this in, for this part of this segment of that part of the business.
And I wonder if you could just expand on... Sorry to kind of harp on this, but the pricing of that existing business, why shouldn't it maybe just reset higher for the entire industry? Was it just mispriced risk, where competitive market, where the yields were about 10%, maybe they should have been closer to mid-teens? Or was it just an outlier on credit risk, unique environment specific to that segment in the transport sector, and the pricing was appropriate? Just trying to understand how you think about this business.
... Yeah, I think you might see the industry reprice, frankly, because what we're hearing is that our competitors are seeing, observing the same as us. It's not kind of idiosyncratic, Equitable only thing. So, I think we'll have to kind of ask those questions, and it may be that the whole industry prices or kind of the criteria in these parts of the business reset.
Okay, thanks for the insights. Appreciate it. That's it for me.
Your next question comes from Graham Ryding from TD Securities. Please go ahead.
Oh, hi. I just wanted to drill down on the commercial arrears a little bit more, just make sure I'm getting your message correct. So it does look like those arrears are about three times your recent average, but your allowance for credit losses are sort of in line with that historical range. So is it, does it really come down to, are there some large sort of specific mortgages here that you've dug into and you don't see much credit risk? Is there sort of are there some outsized mortgages in there that are sort of large in size, but you view as maybe low in potential loss potential?
Yeah, absolutely. And I think actually, you know, again, for those of you who follow the story for a while, I remember we had arrears a few years, two or three years ago, where we were, you know, confidently expressing there'd be no credit risk. It took three or four quarters to roll it off, and there wasn't any credit loss. I think that's what we're seeing here. You know, one of the larger ones we have, for example, is a condo project that was under construction. The developer chose to start putting more structures on the same site, and that caused some challenges with the project. But we've received bids, a number of bids from potential people potentially interested in buying this project, and it's well in excess of our loan amount.
So, you know, that's a lot. One—I think the largest loan actually in the impaired bucket. So, as I mentioned, despite the fact we've got those bids, it might still take... We probably won't actually get the money this quarter. It takes a while to go through the court, you know, the receivership and the process, but the bids are in hand, and they're solid bids from credible players. So, so feel very confident about that. And I think that's what gives us confidence on the whole commercial book.
We can actually sit around the room as we have and talk through each one and understand kind of what losses might come out of these and when they will resolve, and feeling really good about that as a result of spending some time on it.
Okay, great. And just for sort of context, is this like, you know, half a dozen type mortgages that you're digging through, or 20-30? Like, what sort of size of mortgages here are you digging into?
So it's, I've just got them right in front of me, actually. So it's about 25 in total. Some of them are quite small, so, you know, not really meaningful. There's 10 or 11 or something over CAD 10 million.
Okay. That's helpful, color. Thank you.
Just so I can have them, I put on one spreadsheet, you know, tells you, you kind of know, oh, that loan. I remember that one, you know, kind of thing.
Right. Okay. So you do have some specific visibility here. Did you say that this portfolio had an average loan-to-value of 47%? Did I hear that correctly?
Yeah. Right.
Okay. And my last question, if I could, just non-interest expense. How should we think about how that's gonna progress? I know there's some further ACM to flow in. This is a partial quarter, but beyond that, throughout the rest of the year, how should we expect that to progress? Because I think you made a comment about maybe the second half expenses either being lower or the growth rate being lower. Maybe you could clear that up for me.
Yeah, I'd expect the sequential growth to slow down, Jeff, after yes, you account for ACM. We're gonna continue to invest, but there is a little bit more loaded up into Q1 as well for some of the larger marketing investments. But I wouldn't expect that continued level of growth sequentially.
Okay, understood. That's it, great. Thank you.
Your next question comes from Stephen Boland, from Raymond James. Please go ahead.
Just, just one question, obviously on impairments. You mentioned the second half of the year on PCLs and impairments, should kind of start to normalize. What about the shorter term? Can we assume that the impairment levels on an absolute basis have peaked, or is it gonna be similar in Q2?
I think you can expect the impairments are going to come certainly back. I'm pretty confident the commercial impairments, for example, will be down quarter-over-quarter when we report Q2. Obviously, PCLs and impairments are some slightly different concepts. You know, I'm still expecting, you know, reasonable PCLs flowing through from the Equipment Leasing business that we previously mentioned. So you know, and obviously we believe we're well reserved and, you know, there's obviously some complexity about provisions as it relates to kind of modeling and, and how the economic scenarios look going forward in terms of your Stage One and Stage Two provisioning. So that's, that's by very, by its very nature, hard to, hard to predict.
Okay. And then when... Basically, just to follow up then on, on the, the residential, like, have you seen the bulk of you think impairments, you know, even in your, your past due or re- like past due, but not impaired? Are you seeing that kind of moderating heading into Q2 results as well?
I think that's what we're expecting. And again, the story that, you know, as I mentioned to one of the previous analysts, you know, it's easier with the commercial ones because you can look at each loan by loan, but I think in general, that's the broad expectation with our single family modeling too.
Okay. Thanks very much, guys.
Thanks.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Gabrielle Deschênes from National Bank. Please go ahead.
Hey, good morning. I just want to clarify some of the comments you were making earlier, just to make sure I understand them. Sounds like the pace of formations in the commercial portfolio will moderate in the second half. So we could see another uptick in Q2 or maybe not? I'm not quite sure I understand that.
Yeah, to be clear, Gabrielle, that we do expect the impairments in commercial to be lower at the end of Q2 than they were at the end of Q1.
Okay. So you do expect a decline in Q2. And just related to the, excuse me, the prior question there from Steve, the delinquencies in the mortgage portfolio, we saw an uptick quarter-over-quarter, mostly in the early stage. Is that you know... Would you expect that increase to moderate or actually decline in Q2?
I think-- Sorry, let me just to be sort of consistent with what I said to Steve. You know, I think we're expecting it to moderate, but it is harder to figure out because it is a sort of loan by... It's a large, you know, it's a large number of small loans.
Okay, perfect. That's it. Thanks.
Thanks.
There are no further questions at this time. Mr. Moor, back to you for closing remarks.
Thank you, Julie. Before we leave you today, we'll be celebrating our 20th anniversary by ringing the bell at TSX on Monday, March 18th. There are shareholders who have been with us for these 20 years, and I thank them for their loyal support of EQB. I also congratulate them for buying into an IPO and turning their original investment into a 20-year return of about 1,000%, including reinvested dividends. For those who are new to our story and really want to learn about EQB as an investment opportunity, open an EQ Bank account. 4% interest every day, if you deposit your payroll, awaits, as does a convenient no-fee banking experience. That potent combination will lead to thousands of extra CAD in your pocket over time.
We'll speak to you as soon as our annual and special meeting of shareholders is on April 10 at 10 A.M. This will be a virtual event, and we hope you all participate. Thank you, and have a great day.
That concludes today's call. You may disconnect your lines. Thank you.