Welcome to EQB's earnings call for the second quarter of 2024 on Thursday, May 30th, 2024. At this time, you are in a listen-only mode. Later, we will conduct a question and answer session for analysts. Instructions will be provided at that time. It is now my pleasure to turn the call over to David Lee, Associate Director of Investor Relations for EQB.
Thanks, Sylvie, and good morning, everyone. Your hosts today are Andrew Moore, 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 2, 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 to end on October 31st for 2023 onward, quarterly comparison periods throughout fiscal 2024 will compare to the closest historical period. The second quarter ending April 30th will be compared to the prior quarter Q1 2024, ending January 31st, and prior year Q1 2023, ending March 31st.
The year-to-date figures are presented as at or for the six months ended April 30th, 2024, compared to March 31st, 2023. It is now my pleasure to turn the call over to Andrew.
Thank you, David, and good morning, everyone. Since the beginning of our new fiscal year, our team has done some really good work in serving our purpose of driving change in Canadian banking to enrich people's lives. The reward for that work has been strong customer account growth, active customer engagement, market share gains, and results for shareholders that compare favorably with EQB's high-performance standards set over the past 20 years. When I think about our purpose of enriching people's lives, we do that by deliberately choosing to only operate and allocate capital within Canada rather than expanding out to new geographies. We believe there is much to do for people living in this country, and we can deliver the best returns for shareholders with this strategy.
We're hitting our stride here, and I'm particularly excited about our two latest innovations in Canadian banking that will expand our ability to deliver on this purpose. I'll speak to those advancements on today's call, but first, my thoughts on quarterly financials and our outlook for the second half of 2024. With record revenue, record pre-provision, pre-tax earnings, 7% year-over-year EPS growth, ROE once again well above 15%, and a 22% year-over-year increase in dividends, there is a lot to like about our results in this most recent quarter, including the fact that performance was achieved in a higher-for-longer interest rate environment. If we annualize our results since November, we'd report over CAD 1 billion in revenue and CAD 433 million in earnings, both new records, all while achieving return on equity at 15%.
However, our outlook for the second half is supportive of something better as we continue to realize on the growing value of our franchise, see increasing earnings from our multi-unit insured lending business through associated securitization activity, and benefit from what we believe will be lower provisions for credit losses. Credit risk is understandably getting more airtime as Canadians cope with higher borrowing costs brought on by current monetary policy. After cresting in Q1, gross impaired loans in our commercial loan book reduced by CAD 58 million in Q2, reflecting positive resolution on a number of loans. We've made further progress since quarter end. Directionally, this is what we had anticipated and communicated in our call with you last quarter. We continue to see positive trends in our commercial book.
Based on our assessments, we are confident in our ability to resolve the majority of the remaining commercial real estate loans within the reserves already taken. These loans are secured, and the weighted average LTV on newly formed commercial impaired was 51% in Q2. As a reminder, 77% of our total commercial loans under management are insured through various CMHC programs, and we have long prioritized loans secured by buildings where people live, are proven to be an attractive asset type. In the personal loan book, the rate at which we added impaired declined quarter-over-quarter. So far in May, we have seen good resolution activity among those loans that were impaired in quarter end. We have a high degree of confidence that losses will be minimal in the single-family book and that we are well reserved.
Arrears stats in the personal book have also declined in the 30- and 60+ day periods. I think it's important to recognize that nearly 90% of our customers have already renewed into today's higher interest rate environment, as the average term in an Equitable mortgage is about two years. While other banks may face a so-called mortgage renewal cliff, as reportedly about half of their outstanding mortgages are held by borrowers who have yet to face higher rates, our borrowers have already adjusted. Chadwick will speak to PCLs in more detail. On PCL, 75% or about CAD 18 million related to run-off portfolios inherited from the purchase of Concentra and our equipment leasing business. As I discussed last quarter, leasing has experienced the aftermath of a cyclical downturn in the long-haul transportation market. Long-haul transportation accounts for less than 1% of the bank's total assets.
We're seeing encouraging signs of improvements in this industry. It certainly feels like we reached the trough of the credit cycle this quarter with what could be viewed as peak PCLs. Our expectation is that we will see lower provisions going forward. While this has been a challenging period, we largely anticipate areas of pressure. We're making good headway in resolving problem loans using our well-developed collection capabilities, and we have clearly demonstrated the importance of our prudent lending approach, combined with the resilience of the Equitable borrower. A move by the Bank of Canada next month or in July to reduce interest rates would be helpful to Canadian users of credit, and for lenders would re-energize mortgage demand in the back half of 2024 and beyond.
We're certainly of the view that a stronger market for new originations in our mortgage businesses is around the corner, given pent-up demand in the housing market. In the meantime, higher annual rates, lower on-schedule payments, and growth in high-quality portfolios led to a 13% or CAD 7.3 billion increase in loans under management over the past year, keeping us on pace with growth guidance. To single out a couple of related developments, we are gaining substantial momentum in our wealth accumulation business. Accommodation, insurance, lending, and reverse mortgage loans are up 57% year-over-year and 20% since November to over CAD 1.7 billion. EQB was one of two banks in the reverse mortgage business. With a compelling offering and effective marketing, we believe we've substantially increased our share of both the broker channel and the consumer direct channel market.
The graying of Canadian society and the need to access equity to fund retirement provides a solid backdrop for this business. The same optimistic outlook is true for the bank's multi-unit business. Substantial demand for new rental housing to meet the needs of Canada's growing population, combined with the bank's long-standing market leadership position, supported 35% year-over-year growth in our insured multi-unit portfolio. Here we are seeing demand for both CMHC insured construction loans that offer developers a variety of incentives to build, and insured long-term loans that often flow from this initial mortgage. With this demand, we expect to realize higher earnings from associated securitization activities. That expectation is embedded in our outlook for the second half of the fiscal year.
Foundational to the long-term franchise value of EQB, EQ Bank experienced a 36% year-over-year increase in number of customers with the support of our highly successful Second Chance, Deuxième Chance campaign, featuring respectively Dan and Eugene Levy and Diane Lavallée and Laurence Leboeuf, and growing use of payroll deposits, a sign that customers increasingly rely on us as their primary bank. Our next frontier is the introduction of EQ Bank's innovative Notice Savings Account and EQ Bank services for small businesses. Take each in turn. EQ Bank's new EQ Bank Notice Savings Account, which just launched yesterday, provides customers with a flexible new way to earn more money on funds they're keeping aside for short-term purposes. Based on our own research, showing that 55% of Canadians contribute to their own rainy day fund, we think there's a huge need for this kind of product.
Our customers can choose between 10- and 30-day notice periods. In return, we offer more interest than what's available from traditional demand savings products. For EQ Bank, this new product provides an extra level of deposit stability in a faster payments world. We're very excited to be out of the gate with EQ, with EQ Bank for Small Business, which represents a target market of millions of underserved Canadians with hundreds of billions of deposits. Last month, we introduced the product to a subset of business customers to test our capabilities and learn from their experiences, and we'll be expanding this to a full launch later this summer. This all digital, no-fee solution provides entrepreneurs with high daily interest and great access to innovative payment solutions.
To conclude my comments, you should expect us to continue investing in building franchise value and realizing on it in the months ahead, using our proven discipline method of capital allocation to consistently earn 15%+ ROE, while steadily increasing our dividend for investors. As we enter this next phase of the economic cycle, it gives me great comfort to know that we have a proven and committed team of business leaders in place at all levels to execute our strategies. We've worked hard to build our workforce and talent development programs over many years. In that vein, I'd like to give a shout-out to our talented capital markets and treasury teams for their success in raising funding in the deposit note and covered bond market in Europe, that Chadwick will talk about in his comments.
We're proud that LinkedIn recognized our efforts by choosing Equitable Bank as one of Canada's top four employers for workplace growth and progression. We're always happy to accept bragging rights for awards like this, but what's most important is that our team is delivering for our customers and shareholders year in, year out, in keeping with our corporate purpose. I'm proud of my colleagues, and I thank them for their incredible efforts. Now over to Chadwick.
Thanks, and good morning. With our fiscal year end change to October 31st, I'll remind you that for year-over-year comparisons, we are presenting Q2 2024 relative to Q1 2023, which is the closest period. For quarter-over-quarter, as you would expect, we are comparing to Q1 2024. In a challenging macroeconomic environment, we closed another solid quarter with a record top line revenue growth of 6% quarter-over-quarter and 20% year-over-year to CAD 317 million.
Despite the elevated provision for credit losses and operating expenses compared to Q1, which I'll speak to shortly, we continued to achieve our objective of greater than 15% return on equity, landing at 15.9%, plus book value per share growth of 14% from prior year. Capital remains strong, with CET1 of 14.1% and a total capital ratio of 15.3%. The reduction of 10 basis points in capital from Q1 is due to a portion of our excess capital being deployed in the quarter to pay down EQB Holdco debt facilities that were initially set up and used to fund part of the acquisition of Concentra Bank. I'll offer some additional context now on a few key performance measures before opening the call to our analyst for Q&A. First, margin.
NIM expanded 10 basis points from Q1 to 2.11%. I'd attribute five key factors to the expansion: increasing yields in several asset classes in our principal portfolio, higher prepayment income over Q1, expanding benefits of our funding diversification strategy, including growth and lower cost EQ Bank deposits, high single-family renewal rates, as well as the effect of fewer days in the quarter that is isolated to Q2. Our conventional lending businesses have generally increased to plan, with yields higher across asset classes as you see in our financials. Total loans under management increased 13% year-over-year, led by wealth accumulation higher by 57%, as Andrew highlighted, and single-family uninsured growth of 4% year-over-year.
Excluding insured multi-unit residential mortgages, commercial loans are 9% higher year-over-year, led by strong growth in our insured construction loans, specialized finance, and loans to small businesses, with a sequential decline in equipment financing. Combined assets increased 2% over Q1, led by personal lending, with more of the commercial growth over Q1 on the insured side. All lending is being well priced to our ROE calculator on every deal, which is evident in this margin expansion and trending as expected for the first half of 2024. Moving to funding.
In the second quarter, we generated great success in the evolution of our wholesale programs with over CAD 1 billion in new funding from the completion of a CAD 300 million deposit note issuance, with the largest-ever number of investors, and the fantastic outcome of a EUR 500 million covered bond issuance in Europe, which represented Equitable Bank's largest-ever covered bond offering and the first-ever issuance of a social covered bond by a Canadian bank. Approximately 2/3 of the more than 100 covered bond investors were new to our program, and it was eight times oversubscribed. These milestones serve as a testament to investor conviction in our bank's credit quality and ability to repay, plus our focus on responsibility with this social bond issuance. On the EQ Bank front, deposit growth of 4% in Q2 reflected our best sequential growth in two years.
This expands the lower deposit beta advantage of these deposits. Transactions increased 153% year-over-year, reaching roughly 10 million in the quarter, and customer engagement is at the highest levels yet. As Andrew mentioned in his remarks, with the launch of small business banking and new notice savings accounts, we expect the deposit momentum to continue building throughout the year and to maintain our ability to grow EQ Bank with a general range of 7-10 times customer lifetime value to cost of acquisition. Combined with expert treasury management, our long-term efforts to diversify and strengthen sources of low-cost funding are a differentiator for EQB. Next point, our growth story of non-interest revenue, or NIR.
NIR increased 76% year-over-year and accounted for 16% of total revenue in the second quarter, crossing our 2022 Investor Day target of increasing to 12%-15%, more than double from a couple of years ago. We're seeing these revenue lines increasing with strategic growth and gains on sale from our multi-unit residential securitization business, consistent fee income from Concentra Trust, expanding payments revenue, and a full quarter contribution of ACM Advisors in Q2. 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 22.6 billion in loans under management, up 35% year-over-year. CAD 17.6 billion of this amount has been derecognized through the CMHC, CMB, and NHA MBS programs.
As a reminder, these mortgages are not prepayable or have their cash flows fixed, so the assets can be derecognized when securitized and sold. The 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 23.2 million for Q2, representing a 62% increase year-over-year. We expect to maintain this level of revenue in coming quarters as indications of the insured multi-unit commercial pipeline remain robust and the Bank of Canada continues its CMB primary purchase participation in all fixed-rate CMB syndications, as announced in the 2023 fall economic statement.
We intend to maintain a strategic focus on growing non-interest revenue as a percentage of total revenue, and as we lean in to 2025 guidance later this year, you will see that range expand higher than the prior goal of 15%. Now, onto some additional context on credit. Last quarter, we signaled that our expectation was for a peak level of PCL in Q2, elevated from Q1, and as signaled, PCLs increased 43% sequentially to CAD 22 million, comprised of CAD 24 million in Stage 3 PCL and a CAD 2 million reduction in Stage 1 and 2 provision. However, as a reminder, Q1 included a one-time CAD 7 million PCL benefit in the consumer lending portfolio from an agreement to increase cash reserves to secure against losses. When you take that into account, total PCL booked in Q2 was nearly consistent to slightly better quarter-over-quarter.
The Stage 1 and 2 provision reduction was based on a more positive outlook in our economic data inputs. This is not a surprise at this point in the cycle, and you can find these estimates outlined in our financial statements. The largest drivers here over Q1 was a better 12-month forecast for GDP, a higher 12-month and up to five-year HPI outlook, which moved from a negative long-term outlook to modestly, modestly positive, and the commercial price index estimates also improved. Stage 3 provisions were primarily attributed to CAD 13.2 million non-performing equipment financing, compared to CAD 11.5 million last quarter. The PCL ratio on equipment financing increased to 4.2% as expected, compared to 3.76% in Q1, which again, is not surprising given the challenges seen in the long-haul transportation sector.
Our guidance has been consistent here the past couple of quarters and remains, that we expect these will begin normalizing in the second half of 2024. The majority of our commercial losses, excluding equipment financing, were primarily attributed to non-core Concentra loans that are running off. These allowances are determined on a loan-by-loan basis and supported by up-to-date independent property appraisals. Despite a positive number of commercial loans reaching resolutions in Q2 and moving out of the impaired status, these provisions were appropriate given current recovery plans. Our net allowance for credit losses increased to CAD 113 million, up CAD 5.8 million or 5% quarter-over-quarter, primarily due to additions from our commercial lending portfolio. As a result, the bank's net ACL ratio increased 1 basis point to 23 basis points in Q2. Switching now to our investments in EQB.
Non-interest expenses increased 7% quarter-over-quarter to CAD 143 million. Approximately 1/3 of the increase was related to marketing spend, primarily associated with the very successful Second Chance campaign, which continues to translate to significant customer growth for EQ Bank. The full quarter impact from the acquisition of ACM Advisors accounted for over 10% of the expense growth, while higher technology and product costs, representing about a quarter of the increase, were encouraged to support the successful product launches and our reference for EQ Bank, as well as our investments into expanding cloud capabilities, cyber and fraud enhancements. The remainder of the expense growth is attributed to costs for the strong top-line growth in the business, including FTE, increasing 1.5% from Q1. We have the ability to move fast and smart in managing our spend levels.
We are investing through the cycle, making effective long-term trends, trades that will benefit us in the years to come. But we are prepared to reduce our pace of spending if conditions don't trend to our expectations. I'd expect to see sequential positive operating leverage in Q3, with lower single digit non-interest expense growth in the next couple of quarters. Achieving ROE guidance will remain paramount over an efficiency target. To wrap up, the second quarter demonstrates another differentiated quarter for EQB and illustrates how our strategy is paying off for customers and shareholders, with their businesses growing and performing well through the credit cycle. Our diversification and sources of revenue funding is driving strong top-line momentum.
With the first half of 2024 complete, year-to-date ROE of 15.7% and a constructive outlook for the second half of the year, anchored in our ROE guidance, we feel confident in executing our strategy and delivering strong results. Now, we'd be pleased to take your questions. Sylvie, if you can open the line for our analysts.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Meny Grauman at Scotiabank. Please go ahead.
Hi, thanks for taking the questions. First question on the margin. Obviously, we saw a big step up on a sequential basis. Chadwick, you highlighted the factors. Just wanted to disaggregate the factors that you think will persist versus ones that maybe are a little bit more temporary or a little bit more volatile, and basically get at, you know, what should we expect for margin performance going forward through the second half of the year?
Yeah. Good morning, Meny. Uh, thanks for the question. It was a great expansion and margin, and a lot of that was as planned. The one nuance I'd say for the quarter was the fewer days in the quarter. That wouldn't persist, and that might represent a couple of basis points there. But in general, if conditions continue per our strategy and plan, you could see consistency and stability in that margin. Uh, say, for example, a couple of basis points you could call it, was from higher towards normalizing prepayment income. That depends, again, on how market conditions persist, as an example. But this really fundamentally reflects, as I mentioned, the strength in our funding benefits and how we're pricing our assets and our focus on conventional lending.
So those conditions should continue, which I think adds that strength and stability to our margin.
On the funding side, did something fundamentally change? I mean, what we've seen is, you know, relative stability over the last few quarters, and now sort of a step up here, 10 basis points sequentially. It does seem like you're putting a lot of emphasis on that funding side of the equation. So just curious about that.
Well, I mean, certainly, you know, I do think, you know, that we're gonna see some good tailwinds from things like the covered bond, as Chadwick mentioned. The other thing that's kind of interesting around prepayment income, you know, when interest rates jump dramatically and you've got relatively low coupon mortgages, clearly the prepayment income drops pretty meaningfully. It's a hard one for us to predict. It depends on consumer behavior. But now that those mortgages reset to higher rates, one would expect that that income would be prevailing at a slightly higher rate. I have to say, you know, I was positively surprised by this number when, kind of, the numbers flowed through, so.
That's right. And it's the only other way to look at it, to Andrew's point, Meny, is this has been quarters and years in the making, right? You're really seeing this benefit translate now with how our funding diversification is paying off. And you see that in the asset and yield tables and the financials, and the benefit of the wholesale programs. And then really that strength, as I mentioned, of the lower deposit beta of EQ Bank and that strong growth, that's really translating here, too.
Got it. And then in terms of PCL ratio guidance, I mean, it sounds like you're reiterating what you communicated in Q1 in terms of a peak here in Q2. Just curious, the glide path down from here, you know, do we, how quickly do we go back to the PCL ratios that we saw in, you know, Q4? You know, Q1 had some unusual aspects to it that you highlighted, but, you know, is it a slow move back to kind of the low, low single digit PCL ratio? How do you think about that?
I mean, certainly I have reasonable confidence that over the next couple of quarters, we're going to start to see, you know, more meaningful shifts towards our more historical, you know, loss rate across the various assets we have. You know, as I mentioned, I'm sort of getting more and more confident about the outlook for the long-haul transportation leasing business, but I think there's still some uncertainties there that you know. But certainly as we get out six months from now, we should be in a much lower level there. And I would say, you know, I've done much more detailed work on the commercial side, feeling really comfortable about the provisions we've already taken. So those provisions, you know, going forward, we should be taking less in the way of losses there.
Not expecting the impairments to drop quite so fast, though, that, you know, some of these things will take a little bit of time to resolve. So, you know, the story might be impaired, not dropping so quickly over the next quarter, probably dropping more in Q4, but a reduced provision level in the flow through the P&L. I mean, that's how I'm thinking about it. And certainly, as you can probably gather from my comments, there's been a lot of work done in this area to kind of give us lots of confidence around, make sure we're communicating properly, but it's always a little bit tricky, obviously, to forecast the future.
Thank you, Andrew.
We can talk.
Thanks.
We can talk more, Meny. Yeah, we can talk more.
Okay.
Off the last line on that, too. But it is pretty good momentum in the Q3 and Q4 in terms of how quickly that normalizes, given so much has been isolated to equipment financing, to Andrew's point. So you take that out of the equation, and you get back to towards normalized levels.
Just recall over the years, you know, we were for many years, we ran like 1 or 2 basis points of loss annually. So it's, these are quite, you know, these are a strange world for us.
Got it. Thank you.
Thank you. Next question will be from Lemar Persaud at Cormark. Please go ahead.
Yeah, thanks. Let me start off with a big picture one here, is for Chadwick or Andrew. Is there anything that when you look across the business that should cause the earnings power of this business to drop? What I'm trying to get at is, should we now be thinking of EQ as more of a 16% ROE bank, or is there some reason that I'm not thinking of where the 15%, you could revert back to the 15% range? Because I just don't see it right now.
I mean, certainly how that's how it feels to me. You know, as mentioned, there's always, there's always little. You know, whether it's 15% or 16%, frankly, does. You know, there are little things within any quarter that can move that. I think of us as a sort of 15%-17% bank year in, year out. That's what we've done. You know, the mid part of that range is 16%. And frankly, I feel more confident than ever about this bank. You know, our technical capabilities, the strength of the executive team, the people around us, you know, the things. You know, sometimes we sort of say, now we're bigger, it's harder to execute on things. On the other hand, now we're bigger, we've got talent around the table, we've got technical expertise.
We understand markets that we didn't understand a decade ago. So you know, I'm feeling pretty confident about that. I mean, more confident than I've ever felt about this bank, despite the headwinds of higher interest rates. So yeah, no, I think that's the way to think about it. I mean, as I, you know, we continue to project the kind of core value-generating model is that we generate that 15%-17% return on equity, reinvest the first bulk of that back into the bank with a rigorous capital allocation program to make sure we generate 15%+ on the capital reallocated. And that just drives its own growth story, which has prevailed for more decade. So I see nothing changing over the next little while.
You know, obviously, macro things could, but we're never blind to that and thinking about that, but this certainly feels like a great market to be operating in Canada with a great business model.
The other way to think about it, Lemar, we, we completely agree with you and your hypothesis. The 10-year average is 16% down to every single deal. Everything we do is anchored in this ROE, in the price into 15%, 17%. So we, we agree with the hypothesis and have full conviction.
Okay, thanks. That's helpful. And then just on credit, it sounds like we're through the challenges in long-haul trucking and these equipment finance leases. But maybe could you just expand on what gives you the confidence in the commercial ex-equipment financing, which did bump up this quarter? And then, you know, I'll put this comment out there, just maybe food for thought. It would be helpful if you guys could, I know it's a tough one, but if you could guys could provide some numbers around even the impaired PCLs outlook in a future quarter, that'd be helpful. So maybe just talk about, like, the commercial ex-equipment finance.
Yeah. So I'll take that advice on the second one offline, and we'll try to sort of think about how to reframe to be helpful to all of you on the call. I mean, I think the nice thing about commercial is that you can actually look at it building by building, and even many of the buildings, you know, either I or one of the senior commercial team actually walked the building. So we know the value of these buildings, we understand the real estate, and we understand the provisions we've taken against it, and you know, who would be in the market for this building if it came up. So I think it's a fairly.
It's much easier to give you more confidence about those numbers that we've taken the provisions we need to take. Sometimes things run into impaired positions, so even though the loan-to-value is less than 50%, the borrower gets all, you know, cash strapped, so it shows up as an impaired. It will resolve, it won't result in losses. And I think that's what we're seeing in a lot of our impairs on the book is relatively comfortable loan-to-values. That will just take time to resolve through, you know, new capital being brought in, the property being sold, that kind of thing. Of course, there are, you know, one or two on, you know, on the edge of that, the higher LTVs, where we've done a particularly deep dive to really understand, you know, what the resolution process is.
Having done that work with Marlene and her team, you know, that's what allows me to have confidence that we've taken the provisions that are necessary, and we can proceed with confidence, knowing that we shouldn't surprise you going forward.
Yeah, my only comment, Lemar, would be the point I used specifically in my comments with non-core, right? So these are pretty isolated in terms of the what you saw for the commercial explanation.
Yeah, I mean, sure, maybe I should jump in on that a little bit. I did touch on my script. Over CAD 5 million of the losses came from you know, things that we never intended to continue to be in the business or when we bought Concentra. I mean, I think possibly we should have taken a bit of a sharper knife to that in terms of putting provisions up when we bought the, the bank, but, you know, they appear to be in good shape. These are not things that we traditionally lent on and won't be. And we deliberately, you know, won't be lending on in, in the future, this type of asset class. And so that, that caused a little bit of noise in the quarter. Having said that, the Concentra acquisition itself, more broadly, has really worked out to beat our expectations.
You know, if this is the only problem it arises from it, I'm pretty happy.
Thanks. And then just my final question, maybe for Chadwick. You'd mentioned stability and margins. How does that change if we see potential rate cuts in Canada through the end of 2024? Is that inclusive of your view on rate cuts in Canada?
Yes.
Thank you.
I'll give a more fulsome comment offline.
Remember, remember, we don't take a view on interest rates. We manage a one-year duration of equity. We term match our book.
Right.
It's very strategic how we manage this margin, and the expansion has been very deliberate. So it isn't a simple, honest answer of yes, this is strategic.
Okay, fair. So that includes, like, the consensus view on, on rates?
Bottom line, yeah.
Okay. Okay, perfect. That's it. That's it. Thank you.
Thank you. Next question will be from Geoff Kwan at RBC. Please go ahead.
Hi, good morning. I want to ask on the personal side, the gross impairments have almost doubled over the past couple of quarters. You know, for the portion, I guess, that would be on the residential side, how many properties are we kind of talking about? Is it a vintage year issue, geography, borrower type? And how do you kind of expect these impairments to trend over the next several quarters?
Yeah. So if I can give some color on that, Geoff. It's over 200 loans, and in terms of geography, a little more focus on Ontario than the West. A little bit as well tilted to the larger loans in our books, and decent LTVs. And I would say, you know, the kind of general lack of liquidity in the housing market is probably let alone this impaired piece. You know, the good news is almost 30% of the impairs that we're reporting at quarter end in this book have actually cleaned up since quarter end. So we are seeing good activity in resolving, you know, some of these issues.
So it does seem people with larger mortgages probably facing higher interest rate shock, you know, other people that one naturally might think are probably having the biggest stress of leading these impaired positions. You know, fundamentally, these impaired come from the loan being more than 90 days past due.
Are you expecting?
Did that give you some good color, Jeff? Is that consensus?
Yeah, and just, like, kind of going forward, given rates are kind of still high, cost of living is high, your average loan being kind of two years, are you expecting to see that the impairments stay elevated, or improve, or possibly go higher, a bit higher from here?
What it looks like with the kind of current trends is sort of more flattish over the next couple of quarters. So not expecting to have to make, you know, more in the way of provisions. We feel we're well provided, but, you know, the impaireds will come down, you know, more slowly. I think there probably is going to be more liquidity in the housing market once we start to see the Bank of Canada move to an easing trend, and that will help impaireds move, but we're not expecting that to drop dramatically very quickly. But we do expect it to, you know, gently tail down from here.
On the small business banking solution that, you know, I know it's, it's very early days here, but just curious what the early takeaways have been, also how the product compares to what the big six banks are offering in terms of features and relative pricing, because you did mention that it's a no-fee product.
Yeah. So it's, it's very similar to how you would think about our personal banking product in EQ Bank. So no fees, you know, free money movement, interest on the balance in the account. So the kind of same propositions our everyday banks, banking solution inside EQ Bank. And for many of our customers, part of the value prop is being able to see in a single pane of glass, the small business balance and their personal bank, so that you can, b ecause many of, many of our, these are going to be owner-operators, we, we believe, who will be thinking about money in the small business account as being their money, in effect, although, of course, it's a different legal entity. So it's really trying to approach that need from that, for that market.
You know, what will be coming will be integration to accounting packages, what make people's lives easier for running their businesses that way, with kind of the payment solutions you would expect. So, you know, request to pay and other, other solutions that are gonna make a small business person's life much easier. And it's, it's all digitally enabled. So I think, you know, a lot of the feedback we're getting is a lot of having to go into the branch to set up accounts and so on, with a more traditional banking infrastructure. Ours is very much digitally enabled, digital, a good digital onboarding flow, and then many of the innovations we've brought to the market with EQ Bank.
So we're excited about the progress on that, and I think we'll probably next quarter, as we actually get into market, we'll give a bit more color on the roadmap for that solution. I mean, I would say standing it up, we've got a great onboarding piece, but it is kind of a minimum viable product to get going, and you can expect much more from us over the next couple of years. We're really inspired by what we see in other markets for small business, particularly in the U.K., where one challenger bank has captured more than 10% of the market in a matter of, you know, just a few years by bringing this kind of digital-first solution to market.
Okay. Just one last question I had was: On the reverse mortgage side, do you have an estimate of what your market share on originations are right now? And is it still just a two-player market?
It is a two-player market from a bank perspective. So the funders, there's two, two funders, two banks funding it. We've still got lots of room to grow. Probably the, y ou know, our biggest competitor is probably three or four times bigger than us in terms of originations, somewhere in that area. We don't have great data, but it feels like that.
Okay, and sorry, you were saying two banks. Are there non-bank players? Like, I, I guess my question more broadly is, are there, how many?
No, there are people that you'll see in the market who are originating reverse mortgages. Fundamentally, those mortgages end up on either our balance sheet or the other competitor reverse mortgages.
Got it. Okay, thank you.
Remember, Geoff, too, we think this market has huge growth potential from where it is. Even if you look at the size of it today, it's still a 5x-6x growth market over the next many years in Canada. So it's. We're growing in the right places and providing an important service to Canadians here.
Right. Okay, excellent. Thank you.
Thank you. Next question will be from Paul Holden at CIBC. Please go ahead.
Thank you. Good morning. First question is, I do wanna ask about the equipment finance and particularly the transportation loans. Just hoping to get some data points to help us understand why the potential losses are contained from here. So I think you'd previously identified a CAD 200 million cohort of loans that were the source of the particular credit losses. Wondering if that's still the case or if it's expanded at all from that cohort. And maybe you can give us sort of a sense of to what extent you've worked through that CAD 200 million in terms of resolving the losses and what still needs to be worked through.
Yeah, I think, Paul, it'd be great if you had a chat with Chadwick offline on this one, because there's a bit more sort of data to kind of unveil, I think, to, to pretty satisfy your need rather than kind of give, give it as a soundbite. So, kind of, I think, you know, there, there has been a little bit where we, where we thought we had some greater protection underneath. It's expanded a little bit, but, as I say, Chadwick can probably give you more color, than, than, than we could usefully provide on the call.
Okay. Next question is regarding the growth at EQ Bank. You've highlighted the phenomenal customer growth, 36% year-over-year. But I look at deposits, it's kind of lagging that growth rate. So where I wanna go with this is really, how should we think about that kind of customer growth translating to deposit growth? What's kind of been, m aybe what's caused the difference from the last year, and why that difference may not be as significant going forward, assuming it won't be?
Yeah, no, I think, I think you're, you're right on there. I mean, we are adding customers, we are adding more people putting their payroll in the system, for sure. You know, I think what we're trying to tackle, and we talked about it a little bit within terms of this notice deposit, is this, this customer that's, that's really a bit more rate sensitive and probably doesn't need the money as quickly. So not somebody using his everyday bank account, but somebody more, you know, thinking about this as kind of a long-term savings vehicle.
So some of our everyday savings account customers were definitely of that character, and so we're trying to address that with this higher interest rate notice deposit, a solution that will keep, we believe, more deposits, or keep and attract more deposits into the platform. But I think you're right. You know, the average deposit, clearly, as you can see from the math, the average deposit has dropped a little bit over the last year.
But Paul, important too, our strategy over the last year or two has been not to chase temporary campaigns that exist in the market and going after hard money. We've been focusing on growing the core franchise customers that will stick with us through payroll. And to Andrew's point, more or less deposits come with that, but the franchise grows, and more of those deposits will come back over time as competitor campaigns also expire. But that's where we have higher conviction in the stability and the continued steady growth in those deposits.
Got it. And I guess the follow-up question I have with that then, sort of the new customer growth you've experienced over the last year, I mean, it implies to me it's probably relatively small balances to start and maybe potential growth with those customers you've already added. Is that, is that fair?
I think that's entirely fair. You know, I think we actually have a fairly high share or, or certainly a much higher share with First Home Savings Account market than would be our natural market share. And which is obviously great for us, because those people are presumably going to be buying a house at some point in the future. But as you know, so I think the limit on a, on a, on a First Home Savings Account is CAD 7,000, right? So that's different than the kind of average deposit in our platform around more, more like CAD 20,000. So but, but every year it rolls around, presumably it's giving another contribution of CAD 7,000, and so you see the deposit balances grow.
Okay, okay, that's helpful. Thanks. Last question for me is regarding single-family mortgage uninsured, the volumes versus margin. So volume growth has obviously slowed for reasons that I think are well understood and cited by you. But at the same time, you've seen a pretty good margin expansion, I think, on that product as existing borrowers have maybe stayed with EQB a little bit longer and renewed at higher rates. And I guess the question I want to ask is, like, is there a little bit of an inverse correlation here? Like, you've talked to rates coming down should help volumes, but maybe that, maybe that's gonna be somewhat negative on the margins you've earned on that product. Is that, is it fair to sort of think about those two being inversely correlated margins and volumes?
I think you may be onto something a little bit at the margin. I mean, one of the reasons why you see the margin expand, generally speaking, the consumer is paying the same spread over our cost of funds, over the term of the mortgage. So you're not really seeing margins expand because, for example, we expanded that margin. Our costs are a little bit lower on a renewing mortgage, so in terms of kind of commission costs, processing costs, some of the kind of out-of-pocket processing fees, which actually do, some of those do flow through the NIM line. So to the extent that our book is more and more of a renewal book than a new book, as you point out, then you're likely to see a, you know, a little bit of margin expansion. That's probably what you're observing.
So yeah, I think it's probably fair that you would see a little bit of NIM compression as we start to see a relatively higher percentage of the business being new business.
Okay, good. That's great. That's it from me. Thank you for your time.
Thanks, Paul.
Thank you.
Next question will be from Etienne Ricard at BMO Capital Markets. Please go ahead.
Thank you, and good morning. With deposit growth picking up at EQ Bank, how do you expect declining rates to impact demand for EQ Bank? Do you see rate cuts as a net positive for deposit growth to the extent you maintain your current 2.5% rate while others may actually decrease rates? Thank you.
Yeah, I think it's hard to say. As rates went up, clearly there was more sort of deposit seeking, you know, interest rate seeking behavior, but people realized that perhaps they weren't getting the right treatment at their current bank, and we are a bit of a beneficiary from that. But we're certainly hopeful that we've built our brand to be strong enough. You know, our position is strong in the market, and as you pointed out, you know, our notice deposit in particular will stand out as having a relatively strong rate in the marketplace as rates decline. So I think it probably provides a somewhat positive backdrop to the growth in the portfolio.
Great. Thank you very much.
Thank you. Next question will be from Gabriel Dechaine at National Bank. Please go ahead.
Oui, merci. Good morning. First question on the prepayment.
Bonjour!
Thanks. I haven't seen you since Montreal.
Oh, yeah.
Yeah, yeah. The prepayment income there, you used the word normalizing. I just want to try to understand the dynamic of what's driving that type of income. I wouldn't think it's borrowers refinancing because we're in a high rate environment. Is it the pay downs or, you know, the borrowers that are going to the conventional loans with other institutions? What's the story there?
It's insightful .
And if you.
So, yeah. Okay, sorry, carry on, sir.
Oh, I forgot that. And if you can give me a number there, like how much of the 10 basis points are? I don't know if you mentioned that.
Yeah, I think if you could deal with that piece with Chadwick offline, but if I can explain the dynamics of the prepayment calculation. It's coming from loan liquidations prior to the maturity of the loan, which could either come from the sale of the property or indeed somebody.
Mm-hmm.
Looking to do a refi, moving to a, to another bank, let's say, to do a refinance, because they want to take money off the table. And so typically, the way that calculation is done is the difference between the rate on the mortgage and the prevailing interest rates. So if the rate on the mortgage is relatively low and prevailing interest rates have risen, then the calculation of the prepayment penalty due to us will be lower. As we reprice the mortgages up to higher rates relative to, you know, broader interest rates in the market, then you'll see the calculation have an increased amount. So with the same number of loans being prepaid, then the margins, you know, come up a little bit.
And what we saw as interest rates went through the first sort of Bank of Canada cycle was a drop in prepayment income because we had exactly the opposite dynamic. We had low interest rate mortgages, which were fine with us because we funded them with low interest rate GICs.
Mm-hmm.
But when it came to a prepayment, the amount was just a little bit less.
Okay, so if you know, from a volume standpoint, if rates are cut and market activity picks up, you should see more of that type of income?
Yeah, that's the other dimension. Yes, we should see more because you would see people presumably liquidating mortgages, you know, prior to maturity with a higher propensity because they would have refi opportunities or, you know, maybe they sell their house for other reasons in the way that they have.
Yeah, yeah.
Holding on today. You know, I would say it's not necessarily a good news story. So yeah, we get the higher prepayment impact come, but obviously we lose the asset. So it creates income upfront, but it's not necessarily a good thing to see that higher liquidation rates.
All right. All right, good point. Then on the credit story here, I just wanna maybe get more of a visual sense from you, if you will, the gross impaired loans balances were down a bit overall, but we still saw a pickup in the equipment finance portfolio. Sounds like you're through the worst of it, and that trucking portfolio could see a bit more in Q3, but then a drop off in, not to the same degree as we saw this quarter, but then it really drops off in Q4, and that, the PCL tracking that kind of, you know, slope downwards trajectory. Is that how you're anticipating things to play out?
I think you framed that really well as a visual. I'm feeling really good that we may take enough provisions for commercial, single family, and I'm feeling good about trucking, but I'll feel much more confident to be able to give you a message around that in Q3, I think, on the Q3 reporting.
All right. That's it for me. Thank you.
Thanks, Gabe.
Thanks, everyone.
Next question will be from Graham Ryding at TD Securities. Please go ahead.
Hi, good morning. On the personal PCLs, there were some reversals this quarter despite your arrears moving higher, and I think the broader stats suggest the Canadian consumers, you know, the trends are weakening somewhat, particularly for unsecured consumer lending. So was that entirely model driven, or, you know, why are you comfortable reducing your your allowances in this area when you're seeing, you know, your arrears build?
Chadwick may want to kind of help post this call with the more technical response. But we deal with one of the kind of major data providers, you know, a global brand name around our economic forecast, which, as you know, are what we use to calculate our Stage 1 and Stage 2 provisions. And as Chadwick mentioned in his script, that entity had been actually forecasting a decrease in home prices over the next five years compound. As I said, this is the biggest one. I'm just giving you a more CEO kind of big picture story here. They flipped from having a view of declines in home prices over the next five years and count to modest increases. That, as it shows, a fairly meaningful impact on kind of model-driven calculations.
I felt a little bit uncomfortable, frankly, with some of this, but, you know, it. We were always very rigorous around following our models to make sure we're making appropriate divisions, appropriate provisions, and, you know, it seemed as we thought through that, that it was appropriate to do, to take the action we did.
Just remember, Graham, the other only point I mentioned, you mentioned unsecured and consumer for our book, right? Nearly 98, 99, actually, if you consider cash reserves, just about 100% secured, different business mix than others that you're seeing. So always remember business mix plus the models make it more unique in terms of our strength and why we have the lowest losses of all peers in Canada.
Yeah, sorry, this all relates to single-family mortgages, particularly.
Okay. Okay, that's fair. Just jumping to your guidance, and the different sort of components behind that, it sounds like you feel most pieces that drove the NIM expansion this quarter are sustainable outside of maybe the days in the quarter piece. Correct me if I'm wrong there. So when I'm looking at your sort of outlook for the year, would you say you're equally confident in your ability to sort of achieve your loan growth targets and also your expectation for PCLs to be lower in the second half? Or do you see, you know, one of these areas potentially, you know, more very, you know, uncertain than some of the others?
I think, I think we've talked quite a bit about PCL, so I have a high degree of conviction around that one. Again, always with the caveat that predicting the future has always had its uncertainties, but, you know, I wouldn't be saying the things I did without kind of having done the work to be able to have that level of conviction. We're seeing, you know, good activity in the loan growth side, so I feel decent about it. Otherwise, we would be clear about our messaging. You know, I would say that if, you know, if we hear noise that the bank account would, is actually pivoting and starting to tighten rates or something else, or, or, you know, the mood, the political mood changes in the country, that can always have an impact on loan growth.
You know, it's not terribly sensitive because driving earnings this year now, basically, the loans that are gonna drive the earnings are already on the book. So there's definitely some room for, you know, our customers gonna make that call to book those loans. But I still feel pretty good about it. We seem to be well positioned in the marketplace with our key suppliers, our brokers, and so on. Our teams are doing a great job. We've just put in a new technology system to make it faster for us to turn around on loan and reduce the cost of that. So there's a lot of good tailwind, I guess, to that loan growth story. But that's probably where the variables lie.
Yeah, it's that, it's that 8%-12%. Remember, that's the overarching loans under management guidance you might be referring to as well, Graham. And do we have a conviction in the 8%-12%? Yes, we do at this time. And the core asset classes, especially the ones we talked about, the wealth accumulation, the multi-unit lending, it would take some idiosyncratic events to take that off our flight path right now. And one thing I'd say again, you know, we've talked a lot about this year for a couple of quarters now, that we thought the first half would play out a little bit different than the second half. This is playing out as we expected in our guidance, and we have a consistent track record of doing what we said we're gonna do.
So we expect that will play out as well on the balance sheet for the second half.
Okay, understood. If I could just do one more. The originations on the personal side, I think they were down, like, 29% year-over-year, so I was a little bit surprised there, just given housing market activity, I think, is up year to date. So maybe you could just sort of try to flesh out what, why the disconnect there. Is the near prime side of the market maybe stronger than the near prime, or are you seeing elevated competition? Maybe just some commentary there.
Yeah, I think it's more related to that first point. I think my understanding is, you know, we do operate in the prime insured space, not in the sort of core prime space. You know, my sense is that that's where the activity, you know, that the non-traditional borrower, that segment that we address, you know, is still we're holding share pretty well. That's what all our data suggests, we're holding share pretty well.
Yes.
It is a segment that kind of bears the growth story.
Yeah, and to where Andrew is going, it's the higher. Remember, it's originations were one thing, but part of the expectation was higher renewals, which has different economic benefits, and our renewal rates continue to increase quarter-over-quarter. So I'd focus on the total portfolio and how we thought we were gonna arrive there as well.
Okay. That's it for me. Thank you.
Thanks, Graham.
Next question will be from Nigel D'Souza at Veritas Investment Research. Please go ahead.
Thank you. Good morning. I have a few follow-up questions for you. The first on the interest margins, and, you touched on this, but I was wondering if you could expand on the 10 basis points in the quarter-over-quarter and the five factors you outlined. Any numbers you could put on, on how much you'd attribute each factor, or should we just assume it's about 2 basis points, 3 to those?
Again, if you wouldn't mind, Nigel, we kind of, we're getting closer to time, but could you take that offline with David? I think, you know, we've been a little careful to kind of break it down into that level of detail, but I'm sure David can give you some color that'll be helpful to you.
Sure. Okay, I'll pivot and ask maybe broader questions. You know, on the rate dynamic impact on your margins, you know, if we get rate cuts, there's higher prepayment penalties, so that could be offset by lower margins on new business volumes. And then your term deposits will take longer to reprice. So could you just refresh me, like, if we do get 1-2 rate cuts as expected, is that immediately NIM accretive, or is that NIM accretive in 2025?
I don't think we're really saying it's NIM accretive, it's NIM neutral, to be clear. There's a number of offsetting factors there. The degree to which we reprice our, f irst of all, the term deposits don't really matter, right? That's all matched. So that, as Chadwick talked about, we run a one-year duration of equity. Actually, if you've got a term deposit with a fixed term on it, then we've got a mortgage with a fixed term on it on the other side of some other fixed price asset, so that the asset and the liability will reprice on the same basis.
There's a little more complexity where you're dealing with demand deposits, so the everyday savings accounts within EQ Bank, you know, how fast we choose to change rates on that is a management decision that we make, and there'll be some trade-off between the lower cost of funds there and what that does to deposit growth. There are also some options embedded in the mortgage product itself. So some of the floating rate mortgages, for example, particularly on the commercial side, have floors associated with them. So as rates generally drop, as prime drops, some of those mortgages will hit floors and the spreads will improve for us in those mortgages as rates come down. So there's this fairly complicated story.
I'm sure our treasury team and, Chad, we'd be happy to give you more color on that, but, you know, in general, those things start to offset each other in the book.
That makes sense. And then just a quick question on credit. I think in the MD&A, it was mentioned that single-family residential early stage delinquencies declined quarter-over-quarter. Just wanted to confirm if that's correct. And then, could you speak to how that ties to the broader trends we're seeing, where delinquencies appear to be picking up in the near prime space and there's more strain on the consumer?
It's starting to break up a little bit. I think, I think though you were, the question I understood it was that the early stage delinquencies, early stage dels in 30 and 90 and 60+ have been declining in single family. I think we can confirm that that is the case. I'm sorry, second half of the question, you broke up a little bit. I'm happy to.
Sorry, the second half was just the broader industry trends. There appear to be higher delinquency rates for near prime mortgages and also more strain on households with the higher for longer rate environments. So just trying to reconcile why you're, you know, how you're seeing improvement on delinquency rates while the broader environment is a bit more strained.
Well, I mean, these are improvements against our own book, of course, and we do have higher dels as a percentage of the assets than the, a nd the Canadian Bankers Association is reporting 17 basis points across the industry, I think. So we've got higher impairments than that at this point. And partly, of course, because our customers have already been through the rate repricing that we discussed earlier, so, you know, we're comparing an apple with a banana here.
Okay. That's, that's helpful. That's it for me. Thank you.
Thanks, Nigel.
Thank you. There are no further questions, Mr. Moor. Back to you for closing comments.
Thank you so much, Julie, Sylvie. B efore we leave today, I'm pleased to note that after many years of advocacy, and this is a really positive thing for Equitable, we're pleased to see that the federal government finally is legislating the start of open banking. It feels like I've spent half my career talking about this. The first part of the Consumer-Driven Banking Act is being tabled with part two to come this fall. This should be of significant interest to everyone on this call, as well as all Canadians, as we gear up for what we hope will be a more competitive and innovative future for financial services. I look forward to speaking on this topic at the upcoming Open Banking Expo on June 11 in Toronto. Meantime, please check out our new and innovative EQ Bank deposit notice product.
Opening an account is a great way to add context to your EQB investment thesis and even value add value to EQB. We look forward to speaking to you on our third quarter call at the end of August. Thank you. Have a great day and a great summer. That concludes today's call. You may disconnect your lines.