I'm very happy to have with us, Andrew Moor, President and CEO of EQB. This is EQB's first time at our conference. I'm really happy to have you join us today, Andrew.
Well, thanks, Jeff, and thanks for having me.
Maybe as a start, given it's the first time at the conference, I know you've got a few kind of opening remarks that you wanted to run through before we get into the fireside chat. So I'll hand it over to you.
Great. Thanks, Jeff. Yeah. You know, given as Jeff mentioned, this is the first time we've appeared at this conference. I, you know, hopefully it's a chance to meet some new people. I thought it might be useful to kind of come up with a new few slides to sort of tell you the top, top of the house, house story, rather than get into some of the detail with the, you know, that Jeff and I will talk about, as for those of you more familiar with the story. Thank you very much for being here for the last session of the afternoon. Recognize we're not the main draw, but, but really pleased that you're taking some time with us. So we position ourselves as Canada's challenger bank. I think it's a distinctive position in the marketplace.
We're now the seventh largest bank in Canada, and people tend to think about the banking industry being occupied by six guys. We are the seventh, and I think we've got a distinctive position, and I'd like to kind of try and jog you up into the kind of thinking about where we might fit in your investment portfolios. So in terms of how we differentiate our position, first of all, EQ Bank is our... is, we believe, the leading digital bank in Canada today. You'll see a lot of noise from us.
For any of you watching football on the weekend, you'll see us with new advertising collateral in the marketplace with starring Eugene Levy and Dan Levy, to try and really elevate our brand and try and get a kind of sense of consciousness around the value that we're offering in the EQ Bank platform. Really growing very fast. We launched this business in 2016. Today, we have 400,000 customers, and many hundreds of customers are joining every day, and we expect, as we build our brand in the marketplace, that will continue. We have a really strong funding position. You know, not only do we have EQ Bank providing deposits, we've got the broadest reach on brokered deposits, access to covered bonds in Europe, deposit notes, a really strong position.
Most of our lending is in major urban centers, and really most of it relates to places that people live. So while half of our business is described as commercial and half personal, in the commercial side, it's mostly funding apartment buildings, condominium construction, and things that really are useful to solving the kind of major structural issues that we seem to be facing in Canada today, which is we don't have enough places for people to live for the number of people who want to live in the country. With the acquisition of Concentra that got concluded in November 2022, we're now the seventh largest bank in the country, and that acquisition has gone very well for us. Here's our value creation methodology.
We generate about a 15%-17% return on equity. We pay out about, ten percent of that or, or 1% of our capital as, as dividends every year. Dividends are growing at about 20%-25% a year, but still not a high yield compared to the other banks. That leads to book value growth, per share growth of, fourteen to sixteen percent and an EPS growth of 14%-16% as well. You know, this is a plan we put out many years ago, as kind of what we are trying to achieve, and this is what's led to the superior returns that you'll see on the next slide.
So if, in fact, you take all of the banks listed on the TSX and the S&P 500, look at the total shareholder return over the last decade, you know, this point with, with the, with the top of the stack in that regard. And you'll see that, while we've produced a 15% CAGR on total shareholder return, that really lines up very well. This is not because of multiple expansion. This is because the book value per share has actually grown by 14.9% CAGR over that period. EPS lagging there a little bit, because that could be a little bit volatile depending on earnings in any one kind of period.
But I think the kind of the book value per share tells the story that, that over that period, the earnings have been strong enough so that retained earnings has, has grown the book value. It's great to see, so you know, just beating out JP Morgan and some other kind of illustrious names in the U.S. market, and I think we can all agree have had a pretty good decade as well. When you think about Canada, again, obviously, given those same banks were included on the list, you see again that we're top of the stack here. But I think it's interesting to think about the top two banks, being National Bank of Canada and ourselves, having those total best returns over the decade. And, you know, it certainly gets you thinking why that might be the case.
I think one of the reasons why that might be the case is both of these banks are more, more focused on investing in the Canadian market, where good returns are available, there's a rational structure to the industry, and we continue to be focused, you know, on Canada as a place, place to invest and build our business. You know, having said that, you might have seen these returns and say, "Well, it's, it's all over. I missed it," if you did indeed miss it. But, I, I'm not convinced that's the story at all.
In fact, when you look at this kind of conventional way of value in banks in terms of kind of regressing ROE to price- to- book, you can see the value today could be CAD 136 as a fair value, and we're trading just shy of 90 bucks as we speak. So I think there's plenty of opportunity on the upside even to kind of correct to that, close that gap. And then, of course, hopefully, we can compound the returns at 15% as we have over the last decade and in the years ahead as well. I think one of the interesting stories, one of the differentiators between us and the other eight banks you've heard from today, is the amount of earnings that we're retaining.
When you think about retained earnings, really, it's an opportunity to invest in the bank at book value in a sense, 'cause if that, if that payment got paid out as a dividend, you'd have to pay the premium available in the market if you just wanted to reinvest back in the bank. And so I think that's a bit of a secret sauce to kind of why we've been able to generate these higher returns, is that ability to keep compounding the capital within the bank, retaining it on the balance sheet, and finding ways to deploy it that continue to drive this 15%-17% ROE kind of story. So why might be the time to look? You know, this is the first time we've been invited to the Royal Bank conference to come and speak to you.
So, it obviously shows we've passed a barrier that that maybe, you know, maybe could set off a new series of shareholder growth. But we also did just align our fiscal year to the Canadian publicly traded bank, so we had a 10-month year last year that concluded at the end of October. You know, Jeff has been a very strong analyst with us for many, many years, and we really value his insight. Many of the other banks didn't have the same history, and we're largely getting the bank analysts to track us now. With the market capitalization now, you know, comfortably over CAD 3 billion, to some extent, it moves us into the other investable opportunities with other portfolio managers.
So hopefully some of you on this may not have considered us before, but now that we're past that CAD 3 billion threshold, perhaps there's an opportunity to think about us. We are trying to generate more liquidity in the stock. One of the knocks in the past has been there isn't enough liquidity to allow me to buy stocks. So we have been trying to do some deliberate things to increase trading volume and liquidity. One of them was a stock split a couple of years ago. Anything else, if you know, if you have any other ideas about how we might be helpful in that regard, that would also be good. But it clearly actually that insight came on the stocks, but came from the Royal Bank actually talking to traders and understanding the dynamics of you actually do get more volume when you split, when you split a stock. And as I say, we believe the share price remains well discounted for versus the peer group, and so there is opportunity still to have a bit of a run there. So that's kind of my opening comments, Jeff, and maybe we can move to my, my thoughts.
Perfect. Thanks for that, Andrew. Maybe I'll start off similar to Darko with his previous fireside chat start on interest rates. It seems like in the Q4, calendar Q4 last year, interest rate expectations in terms of size and then how quickly things might move seem to have changed during the quarter. Wanted to better understand from your standpoint, you know, what your latest rate expectations are for 2024, and if we actually see things move a little bit more aggressively here, how does... how that's going to impact the business in terms of NIM yields, NII, loan growth, those sorts of things.
Yeah, we, we don't think we're smarter than the market at figuring out where interest rates are going, frankly. You know, the market's telling us it's 100 basis points of, of, Bank of Canada is gonna be decreasing rates by 100 basis points this year, probably starting in April. So that, that's our best guess, that's the, that's the way we would try to run the business based on those market proxies. I think there's a number of things there that are helpful. So we run a 1-year duration of equity. We always keep our equity, the equity position for to manage interest rate risk in the banking book at 1 year.
That implies that as rates have dropped 100 basis points as they have in, you know, broadly along the curve over the last few months, last couple of months, we've picked up about CAD 30 million of future NIM. So that's, that's the good news. I also generally find that spreads on mortgages and lending products tend to increase as rates are dropping, just generally find that the kind of competitive environment is not to raise, to cut rates. On the other hand, we'll see a little bit of a drag on the NIM from a reduced deposit beta in our EQ Bank platform. We saw some gains last year as we only increased the savings rate at EQ Bank by 1.25%, as the bank went through a much more aggressive tightening cycle. So we'll be giving up a little bit there. So it's a bit of, you know, gives and takes. Broadly speaking, we expect the NIM, the margins to be broadly similar over the next couple of years, and not terribly sensitive, frankly, to the pace which the bank kind of changes rates.
I wanted to go over next into on mortgage renewals. One of the, I think, kind of interesting disclosures that you made in the Q3s, Q4 results was that 80% of your uninsured residential mortgage borrowers had their mortgage either originated or renewed in the current, you know, higher interest rate environment or mortgage rate environment, and are not expected to have a material increase on the payment at renewal. And given your residential mortgage book largely gears towards that, you know, Alt-A type borrower, which typically take a 1-year, maybe 2-year type term, how do you kind of define what higher—like, how should we think about what exactly is higher rate when you define that when computing that 80% figure?
How do you define not expecting to have a "material increase"?
Yeah, the way, the way we got to know that number was, I think the, all the mortgages that renewed or were priced after the bank had already moved 300 basis points. So not the last 100, but those that have, would have seen the kind of the bulk of the shocks are really the ones that, either renewed or were originated after the spring of 2022. So I think a pretty good, pretty good proxy for those that probably already seen the bulk of the mortgage shock. And I think the encouraging thing, frankly, is, you know, the big picture is, as you were hearing, I think, over lunch and so on, is that most people are still managing their mortgages pretty successfully, even under these higher shocks. You know, we're pretty confident that we're not going to see material losses in the single-family mortgage book.
Why is that? Is it what has been really driving the ability so far of the people that have had renewed, why they have been able to still service the mortgage payment? Is it, you know, coming up with cash somewhere else to adjust the LTV? Is it they've got income somewhere else to be able to cope with the higher mortgage payment?
Well, you know, mortgage market's really complicated, so anybody that's sort of have been studying mortgage markets for 35 years still are learning something every year. But, so it's all of the above, I assume. But clearly employment is really important. So employment is really important in mortgage delinquency. So employment situation in Canada and North America generally is still pretty strong. The ability for people to work extra shifts, take gig work, and so on, seems to be the big driver. But I think...... Also, you know, many of the people that we lend to have probably got, you know, more complex family situations, where you have maybe the kids that can chip in a bit, parents that can chip in a bit from savings, and I think all of that is leading to a pretty good conclusion.
You know, it doesn't sound like you've had much, but, you know, how, if you were to quantify it, of those people that were renewing did wind up having some sort of difficulty being able to service the higher payments, and how did you kind of treat those situations?
Well, we certainly listen to those stories and, you know, that's a regulatory expectation, but it's also the way we want to treat our customers. And so if there is a, excuse me, some kind of remedy, maybe extending the amortization a little bit so that the payment can be slightly reduced, and people can make it with the income they're able to make. But certainly listening to those stories, what I would say is the number of loan modifications on that basis are really small. You know, kind of less than 10 type of thing out of a book of 30,000 mortgages. So, it's there, we're listening, we always have, but it's not a big feature of what's really going on.
Looking ahead to 2024, not going to hold you to it, but what does your crystal ball tell you about how the Canadian real estate market and mortgage market's gonna fare?
Well, you know, certainly the way we've built our budgets and the kind of messaging to our investors is that we expect the second half of the year to be stronger than the first half. You know, presumably triggered by Bank of Canada starting to move rates down, but also and so people getting confidence that the rate market's not going to be something that's gonna move against them. But I think there has been a bit of fear. We've got a lot of pent-up demand. You know, I think Ron Butler was quoting some notes, some comments at lunchtime, where, you know, Toronto's had the slowest real estate market in 23 years or something. So, you know, housing markets do need to move. You know, there are real-life events. Another child arrives, another bedroom is needed.
People who get married, they want to set up a household together. There are real things that pressure people into being active in the housing market. So, you know, I think the combination of that pent-up demand, a bit of confidence about where interest rates are going, will actually trigger more activity, and that, and that's obviously good for us. It gives us more opportunity to lend. And so, so we're looking forward to the second half of the year with, you know, some, some optimism. I think I'm a little concerned, actually, already we're sort of talking about rates will be coming down this year, and people starting to jump the gun a bit on that. I hope that the market doesn't get so frothy so quickly. That feels like a bigger risk than things being a bit too slow.
I want to switch over now to talking about on the expense side here, and I promise you there is a question at the end of all this. I want to try to put everything into context here. So I mean, historically, EQB's efficiency ratio has been lower than the Canadian banks, in large part because you don't have a branch network. Your efficiency ratio typically has been around 40-ish%. We saw post the Concentra acquisition, because they had a higher efficiency ratio, kind of moved into that roughly 44-ish kind of %. But there's been other things, too, right? There's been the increased spending on brand awareness, and there's also increased spending related to kind of growth of the business and more of kind of running as a more sophisticated bank. You're continuing to expand the EQ Bank product offering, and also other investments you'll need to support your scale. Just wanted to understand here is how should we be kind of thinking about expense growth or the efficiency ratio over the next couple of years? And what are really the key factors that are going to drive OpEx growth going forward?
Yeah, so we're always thinking about ROE, as you probably kind of gathered from my opening comments. And in some ways, efficiency ratio is one of the signposts that leads you to ROE. You know, you need to manage efficiency, you measure efficiency ratio to get to drive those ROEs. So as you pointed out, you know, our efficiency ratio appears to have gone backwards a little bit. It's a little bit higher than it has been historically. We have got more fee-based revenue coming in, and generally, fee-based revenue has higher efficiency ratio, well, it's i.e., less efficient. If it doesn't absorb capital, then presumably it can't demand the pricing that would gonna have really low efficiency ratio.
So some of the kind of service businesses that we're delivering now through the Concentra acquisition and so on are inherently, you know, capital- light and therefore less efficient. So, you know, we've indicated to the market, I think, that we're going to be slightly higher than the 44% last year and around the numbers. Still driving the bottom line ROEs that we're looking for. But things like investing in our brand are really important to the long-term value for shareholders. So we've just, we're starting some TV advertising, starting yesterday, with Dan and Eugene Levy from Schitt's Creek starring in them, trying to create this tension around why we should think about EQ Bank as an offering. We've got a fantastic platform. We need to push the people a little bit to actually try it and make that and create that tension.
So that's a worthwhile investment in my view, and you know it does push up the operating expense efficiency—does push up the efficiency ratio a stick. And also, as we get bigger, you know, we're aware, you see other banks getting damaged by, you know, potential issues with compliance, risk, and so on. As we become a larger, more sophisticated bank, we don't want to be doing that at the expense of creating risk, just by not having the right people in place to understand what our obligations are under the regulatory framework and regulatory regime, which is, you know, demanding and getting more complex as we go. The good news in all of that, frankly, is the barriers to entry in this industry are becoming insurmountable. If we think about sort of Warren Buffett type valuation, there's a deeper moat around banks than there ever has been, and I don't see that coming down anytime soon.
I mean, it doesn't seem like based on what some of your your peer CEOs have been talking about in terms of a more negative economic environment. But let's just say we, for argument's sake, that we do see a materially worse economic environment. Like how, what are the kind of the main levers in terms of how you can manage that OpEx growth, if we have that type of scenario play out?
Well, there are some variable costs associated with our business. So, for example, we employ underwriters to originate single-family mortgages, and, you know, they kind of underwrite a certain number per month and so on. So to the extent we don't see the volumes coming in, then we wouldn't be hiring at the same pace as we would anticipate. And, you know, we don't necessarily have to build to invest in brand if we're not seeing the traction. So if the cost of customer acquisition is not hitting the targets that we've established with this advertising campaign, we would dial that back a bit, potentially. But we do run a very lean operation. As you mentioned, we don't have any branches. We don't tend to fly. We don't fly business class. We do kind of keep things under control.
There's not many CAD millions that can be cut out of some meals and entertainment type expenses, so it's a pretty lean operation. So it's really about kind of the headcount. Could we add headcount slightly slower than we anticipate? That really gives us the cost control. The good news when you've got a growing business is, if we're growing at sort of whether it's 10% or 15%, then just simply slowing hiring actually does kind of help with efficiency ratio, rather than what people in other larger, more established banks are forced to do, which is actually lay off people, which is clearly detrimental to morale and probably necessary to kind of reskill the team. But it's a bit of a tough thing, and customers feel it, and we don't really want to be in that world.
I wanted to switch over just to talking about credit now. You know, loan losses continue to remain low. Is that just a by-product of, you know, the post-pandemic dynamic of where we've got, you know, high home prices, low unemployment is kind of driving that? Or are there other factors at play as to why loan losses have really kind of merely moved at a snail's pace so far?
I mean, I think, I think it's, it's all of those above. You know, it, it is really the employment scenario that drives mortgage default. And clearly, you know, so the, the PD, the probability of default, the way we think about it as credit professionals is, is low when unemployment is low. But also, of course, Loss Given Default so extremely low when there's so much equity in people's homes. Let's not forget that our average mortgage on a single-family home is a 62% loan-to-value. There's lots of equity that's protected, so to the extent people are having trouble coming up with the mortgage payment, there's a fairly obvious solution either to put a little bit more leverage on the house to, to kind of tide them over until cash flow returns or to sell the house and protect the equity.
So I think that doesn't tend to be a super stressful event, frankly. It feels like it could be super stressful, but in general, you know, that gets resolved by families making decisions around how they can support, how they want to think about their cash flow and their liabilities and so on. So I think that's the kind of reality of the situation. And all the while that we've got this kind of imbalance between the supply of housing and the demand, just certainly the kind of Loss Given Default should be low, and it's hard to see how they could possibly rise dramatically. Seems as soon as prices drop a little bit, there are willing buyers.
We did have a question that came in from the audience, so I'll ask it now. You said that you expect the rates to start falling earlier during the year. Is the bank effectively hedged against a rate change during the middle of the year?
Yeah, I mean, we always are. We, we don't take any view on, on these forward rates. So basically, fundamentally, our book is matched with a, with a 1-year duration so that there's a net carryover that's absorbed by the equity. Essentially, though, when we write a 2-year, 3-year mortgage, we're, we're writing a 3-year GIC against it, the locking in spread through the life of the loan, and that's, that's how we run our book. So we're very concerned about how we manage interest rate risk in the banking book. It's absolutely a critical way of thinking about how banks should be, should we run. Our treasury team does a great job of keeping that in a very narrow window.
I wanted to switch over next to EQ Bank, your digital digital platform. It seems to be growing very nicely so far. You know, how do you think about the brand position versus the larger, more established banks in the market? You know, what are the plans for EQ Bank that we can see in 2024?
Well, banking is an extraordinary category. So you know, the research that we have at our target market, more than 70% of our customers or our potential customers are still banking with the same bank as they opened a bank account when they first opened a bank account, when their parents-- often when their parents walked them into a bank branch as a teenager. So, we need to create that brand kind of. This is extraordinary in any kind of category. You think, you know, when you were a teenager, your parents would take you to Blockbuster, and now you stream on Netflix or, you know, who are you buying telecom services from? Almost every category, things have been changed. So creating this tension around what EQ Bank provides, and we provide fantastic things.
The ability to move money around the world in 30 seconds at the cheapest rates, the ability to set up subaccounts, the ability to set up an FHSA online, the ability to open up a joint account online. All of these are things we've been pioneers on, and the Savings Plus Account is really the star of all that. Where we've got this high-interest checking account construct, so you get 2.5% on your money, 3% if you deposit your payroll, and then you can make all the payments from it. So act kind of like a savings account or like a checking account, pays you the interest of a savings account, but all the money movement of a checking account. So we need to get that brand message out there. I think we are getting there.
I'm seeing quite a change over the last year as I sort of run into people that I haven't met before and talk about what I do, and people are becoming more and more aware of EQ Bank. But I think as I mentioned on the conference call, I think one of my biggest failures or bad decisions as a CEO has been not investing enough in brand, not getting the value of the platform in front of Canadians the way that we probably should have done earlier. We're going to address that this year.
Yeah, so maybe expanding just on that, I mean, are there numbers you can kind of give around how much you want to be spending in 2024 in terms of, you know, increasing that brand awareness? How does that compare to last year? And more specifically, like, how do you measure that brand awareness?... and also the effectiveness of, of your spending in terms of trying to raise, raise brand awareness?
Yeah, roughly speaking, we're looking to double our spending on, on brand awareness this year. So, it was an okay number last year and an adequate number. You know, hopefully, that takes us to where we need to get to. How we think about it is certainly as we are building brand, we also think about what that's doing to the cost of customer acquisition. So we, we have a metric in mind of what we believe the value of a new customer is, and we try to be operating at about one seventh of that as our cost to customer acquisition. So as we put advertising collateral and investing in media in the marketplace, we'll be looking to make sure those kind of ratios are in mind.
The customer marketing team is very measures the aided awareness about our brand in the category. And we really focus on NPS. In fact, we put Net Promoter Score as one of our key metrics for driving executive comp. We have a very rigorous process for measuring Net Promoter Score, but we certainly believe that as we acquire new customers, we need to ensure that they have a very positive experience with us, so they promote, you know, by word of mouth, that the EQ Bank is the place to to bank. And so in all of those things come together to think about brand.
We had a second question come in here. A challenger bank invokes a deposit growth first strategy. What offers follow after you acquire a new customer? Will you need to broaden the product lineup?
Interestingly, I mean, I kind of borrowed the term frankly. We're pretty shameless about borrowing terms, you know, from around the world, right? Challenger banks in the UK definitely were led by the deposit. Deposit first, as the question is saying. We were actually already a great asset gatherer through our broker, traditional broker channels, and needed the deposits to really fund that broker channel. So I think the metric is turned around a little bit in that regard. Nonetheless, you know, the question is highly relevant on what other services should we be offering on our digital platform. If we have these 400,000 customers, and we say, growing by several hundred a day, you know, what other products can we offer them?
So, certainly we're well aware that we're the largest bank in the country with no wealth offering at all. And so you're trying to think about what a challenger wealth offering could look like. We do offer some credit products through the digital platform, so we have a mortgage marketplace, you can get a mortgage. But we haven't really been strong on lending through the platform. That may change over the next few years. But we're still very focused on, you know, first and second horizons, which is really to make money movement easy, to really think about how EQ Bank can kind of fulfill the high- interest checking account promise that we're making. One of which will be actually, this year, the big move is to move into small business, to be a small business bank.
What we've observed around the world is that large banks aren't loved by small businesses. They don't do a great job of banking small businesses. So the deposit gathering of small businesses is something that we're excited about. We're quite inspired by the experience of Starling Bank in the UK, where they've gone from nothing to about 10% of the small business market over the last few years, and they're very much that digital challenger, kind of built in our mold.
Just being conscious of time here, maybe I can turn it over to you. Any sort of last remarks, key messages you want to leave for investors and shareholders?
Yeah, I think, you know, we've covered the ground fairly well. I would say this is an investable thesis of compounding capital. So just go back to the thinking about the kind of circle I showed up front, that we're retaining, you know, most of our capital. We're able to reinvest it. You get the impact of compounding over many years. We've, you know, we talked about that in our 2015 annual report, and we've delivered it, you know, exactly on the numbers we promised over many years. We still see that kind of runway ahead of us. We're a company with fantastic technology that can support that agenda.
And so, you know, we're very confident about our position in the marketplace going forward, and we'd really, you know, be pleased to talk to any, any investor that might be thinking about opening up a position in EQ Bank. Sandie and Mahima are here and can talk more about, about the, about the institution, but Sandie runs investor relations, is very happy to bring people to the bank so you can kind of touch it and feel and see, see what we're all about. But we're excited about our business, as I hope you gathered from this conversation.
Perfect. Well, Andrew, thank you much very much for joining us today. That does bring us to the end of this session. It also does bring us to the end of the conference. On behalf of my colleagues at RBC Capital Markets, wanted to thank all of you for taking time out of your schedules to be with us today. And, as mentioned, that does conclude our conference. Thank you very much.