Good morning. Welcome to EQB's earnings call for the third quarter of 2024 on Thursday, August 29, 2024. At this time, you are in a listen-only mode. Later, we will conduct a Q&A session for analysts. Instructions will be provided at that time. It is now my pleasure to turn the call over to Mike Rizvanovic, Managing Director of Investor Relations for EQB. Please go ahead.
Thank you, Ludi, and good morning, everyone, and welcome to EQB's Q3 fiscal 2024 earnings call. Your hosts today will be Andrew Moor, President and Chief Executive Officer, and Chadwick Westlake, Chief Financial Officer. In addition, Marlene Lenarduzzi, EQB's Chief Risk Officer, will be available for the Q&A portion of this call. For those on the phone lines only, we encourage you to also log into our webcast to view our presentation, which may be referenced during the prepared remarks. On slide two of our presentation, you'll find EQB's caution regarding forward-looking statements, as well as the use of non-IFRS measures. All figures referenced today are on an adjusted basis, where applicable, unless otherwise noted. As a reminder, due to EQB's change in fiscal year end to October 31st, prior period comparisons for the remainder of this year will be relative to the closest historical period.
As such, for a year-over-year comparison, our Q3 and year-to-date results will be compared with the three-month and nine-month periods ending June 30th, 2023, respectively, and with that, I will now turn it over to Andrew.
Good morning, everyone, and thank you, Mike. This is Mike's first call as part of our team, and we're looking forward to leveraging his deep expertise as an equity research analyst covering the Canadian banks, as we continue working hard to achieve the full value of our Challenger franchise. We appreciate everyone's early morning participation on this busy day of bank reporting. We promise to get to your questions quickly after brief opening remarks. I'm very pleased with the way our team is executing as we navigate the credit cycle. Despite the challenge of restrictive monetary policy, our results demonstrate resiliency and consistency, the hallmarks of Canada's Challenger Bank for over twenty years. Once again, we paired strong financial performance with the continued development of product innovations that are driving change, Canadian banking, and enriching people's lives. In short, a productive summer.
As evidenced, I said last quarter that our outlook for the back half of the year would reflect the growing value of our franchise and improve credit loss trending. Performance in Q3 reflected that expectation, with record quarterly revenue, a 5% sequential increase in pre-provision pre-tax earnings, EPS growth on the same basis of 5%, ROE well above 15% and in line with the long-term average, and a 24% year-over-year increase in dividends declared. We had expected a decline in PCLs in Q3 from Q2 levels, and that occurred. We also expected impaired loans might remain elevated, and they were, increasing by 20% from last quarter to 567 million, representing 109 basis points of total loans, net of allowances, compared to 92 basis points at Q2.
While this increase follows a moderate decline from Q2, it was not a surprise. Looking closer at the underlying reasons, first, commercial was CAD 53 million or 25%, up quarter-over-quarter, with two loans accounting for nearly 90% of that total. Commercial is and remain lumpy as we move through this cycle. We remain confident in our ability to resolve the majority of the remaining commercial real estate loans within the reserves already set aside, with the bulk of those resolutions likely to occur in the first half of fiscal 2025. Second, within the personal loan book, impaired grew at a much slower pace, CAD 21 million, or 10% quarter-over-quarter. This continues to be attributed to the timing in the cycle, but with interest rates starting to ease, we expect improvement here over time.
Even so, we maintain a very high coverage ratio and expect losses, if only to be minimal on these impaired. I said last quarter that it certainly felt like we'd reached the trough of the real estate cycle. The evidence from Q3 will continue to support that view. Third, equipment financing impaired represented the rest of the increase at CAD 20.6 million or 45% quarter-over-quarter, and was primarily focused on the long-haul transportation sector. Key to satisfying our Challenger Bank ambition is the ongoing development of products and services that deliver better value for customers. The latest success story is EQ Bank's Notice Savings Account, the first of its kind in Canada, with no fees or minimum balance requirements, introduced in June.
We were inspired by similar account styles popular in more innovative banking markets, such as the U.K. and Australia, and are proud to bring innovation to the Canadian personal banking market. During its initial nine-week launch, one in five all new EQ Bank customers Notice Savings Account on the very same day they began banking with us, suggesting the product was appealing, and customers appreciated the ability to earn more interest than traditional savings accounts in exchange for 10-day and 30-day notice periods. I would also give credit more broadly to our competitive everyday deposit rate strategies, as well as the success of our recent Second Chance campaigns featuring the upcoming Emmy Awards host Eugene and Dan Levy, and the Québecois household names, Diane Lavallée and Laurence Leboeuf.
In June, as part of follow-up on research, we surveyed two thousand Canadians to measure EQ Bank brand awareness on a national scale and noted a significant increase since February, with EQ Bank's highest results ever. We believe higher recognition of this sort primes Canadians to accept the innovations we're bringing to the banking marketplace. We continue to be very pleased with customer growth in Quebec and uptake in payroll deposits across the country, which indicate more Canadians are seeing EQ Bank as their preferred everyday choice. Next up is cascading our EQ Bank for small business service to a broader audience. When we last spoke, we had just soft launched the service to test and perfect our onboarding with a hundred business customers.
With this behind us, we're rolling out the mobile app to our existing wait list of EQ customers, many of whom are business owners, before broadening their offering to Canadians later in the year. Further good news, our market share in single-family remains strong, and that puts the bank in a great position to serve the housing needs of Canadians going forward, in an environment where there remains a fundamental mismatch between supply and demand. One of the ways Canadian cities are looking to address acute housing shortages is urban densification. Most recently, this includes approving the addition of laneway homes on land that already has a primary unit.
The support of homeowners who wish to take advantage of the opportunity to build laneway homes or garden suites that can be used to generate rental income, house relatives, or downsize without leaving their property. We now offer the Equitable Bank Laneway House Mortgage. To start, we are marketing this innovation in the GTA, Calgary, and Vancouver through the mortgage broker channel. Over time, we believe this innovation will make a positive contribution to the growth of our single-family portfolio and the vibrancy of Canada's major cities. This quarter represents an important milestone, a successful completion of our five-year plan to increase the common share dividend at a compound rate of 20%-25% per annum.
As noted, our latest increase of 24% year-over-year brings the payout in fiscal 2024 to CAD 1.74, and fulfills the commitment we made to shareholders five years ago. Together with other key medium-term performance measures, we will introduce new guidance with our Q4 results, including for dividends. Our board certainly believes in rewarding shareholders with a growing dividend while still reinvesting the majority of earnings to deliver high ROEs through our proven capital allocation process. In that context, it will be reasonable to expect us to continue growth at a favorable pace compared to our peers. Should you wish to offer your thoughts on our dividend plans, please reach out to us in the coming weeks.
It's a bit early to make a call on the broader single-family market, although over the past couple of weeks, we have started to see some encouraging signs of improving activity levels. This bodes well for renewed loan growth momentum into fiscal 2025, especially if we see additional Bank of Canada rate cuts as early as next week. It's certainly our intention and expectation to grow earnings and deliver ROE at more than 15%. Now over to Chadwick.
Thank you, Andrew, and good morning, everyone. As we state consistently, our top performance metric is generating return on equity, and we continue to execute with another quarter closing at 15.9%. Excluding the four months Q4 last year, Q3 results include record quarterly revenue of CAD 327 million, up 3% sequentially and 15% year-over-year. I'll speak more to our allowance and provisions for credit losses shortly, but importantly, PCL declined from what we expected to be peak level in Q2. With more moderate expense growth, efficiency improved to 44.5%, and overall earnings increased to CAD 117.2 million, 6% higher than Q2 and + 1% year-over-year.
With our highly successful inaugural limited recourse capital note, or LRCN issuance in July, combined with strong organic growth, we experienced material expansion in total capital, increasing approximately 130 basis points to 16.6%, including CET1, climbing about 60 basis points to 14.7%. With this elevated capital position, we'll continue to be highly strategic about how we deploy it. We're now turning off our EQB common share DRIP, and we're redeeming both our EQB and Concentra Bank preferred shares over the next couple of months. Now, some additional context on our performance before moving to Q&A. First, credit. Total adjusted PCLs were CAD 19.6 million in Q3, down 12% from Q2. Stage 1 and 2 provisions were a modest CAD 1 million reversal this quarter, reflecting slightly better forward economic indicators in our models relative to the prior quarter.
Adjusted PCLs on performing loans include a CAD 1.7 million adjustment due to a 1x addition to our ACL, which resulted from a 1x change in our ECL modeling methodology from five to four probability weighted forward-looking scenarios and change in their associated weights. This makes EQB more comparable to peers and allows management to better reflect expectations of the probability and severity of downside economic outcomes. Stage 3 provisions were CAD 20.5 million, down 15% from Q2. Consistent with the past couple of quarters, this was largely attributed to our equipment financing portfolio, which accounted for nearly 80% of the total Stage 3. Outside equipment financing, personal and commercial Stage 3 PCL declined 59% quarter-over-quarter to CAD 4.5 million.
The sequential increase in personal Stage 3 was more than offset by an 87% or CAD 10.1 million sequential decline in commercial, which reflected provisions on a handful of loans with a weighted average LTV in the range of 70% and better than expected execution on certain resolution plans. Andrew already commented on gross impaired loans. As a reminder, problematic loan workouts can take time and be inconsistent from quarter to quarter. We remain confident that higher impairments will not translate into commensurately higher PCLs, as evidenced in our historic trending. We expect our PCL trajectory moving into 2025 to continue to improve and act as a tailwind to our earnings. Next, a few points on margins and lending.
As we outlined last quarter, we believed our sequential NIM expansion in Q2 was sustainable, with the exception of the fewer days in the quarter impact, and that was the outcome in Q3. I would attribute this to a few components. First, gross yields in our loan book were stable overall quarter-over-quarter, with improvement in personal banking roughly offsetting lower yields in commercial banking. Second, on the funding side, even though we maintained our EQ Bank bank rate so far through two Bank of Canada rate reductions, growth in this lowest source cost of deposits, combined with our broader funding diversification, enabled us to sustain our margins. Third, we experienced higher prepayment income over Q2, which is trending upwards in pace with Bank of Canada rate reductions and changes in market activity.
Total loans under management increased 2% from Q2 and 11% year-over-year to nearly CAD 67 billion. Growth was driven by strength in commercial, insured, multi-unit residential, up another 7% quarter-over-quarter to CAD 24 billion, and decumulation lending, including reverse mortgages, which increased 11% quarter-over-quarter to CAD 1.9 billion. These were our top targets for growth in 2024 and trending at the high end of expectations. Overall, personal lending was flat, but up 5% year-over-year, excluding prime insured single-family residential, where we made a strategic move to exit the broker origination channel for this product due to tighter spreads. While loan originations will likely remain relatively modest for the rest of fiscal, we see a better outlook for fiscal 2025 originations in a lower interest rate environment. Irrespective of loan volumes, we will maintain our pricing discipline.
In terms of funding, given asset origination levels in the deposit note and benchmark European cover bond issuance late in Q2, we did not return to the wholesale markets for these types of issuances in Q3, but you might see us return in Q4. Although it was a capital transaction, the LRCN issuance provided validation of the wholesale market's strong appetite for our credit at favorable costs. I'll say again here, EQ Bank had a fantastic quarter. Our customer base increased 6% sequentially or 32% year-over-year as we close in on the 500,000 marker. Customer transactions increased 119% year-over-year, reaching roughly 12 million in the quarter. These are clear indications that engagement is strong and growing.
As an outcome, and similar to strong growth in the prior quarter, deposits on the platform increased by nearly CAD 250 million or 3% sequentially, trending swiftly towards the CAD 9 billion level. EQ Bank represents high-quality customer deposits and is our top priority for stable funding growth. Amid what is widely expected to be a falling rate environment, we will be strategic about pricing in EQ Bank, particularly as we continue to build our franchise value, while at the same time still optimize the lower deposit beta advantage endemic to EQ Bank, compared to peers who lack our levers. And then moving to our biggest quarter ever for non-interest revenue, that landed at nearly CAD 56 million, 13% higher than Q2 and +70% year-over-year. There are a few factors at play here.
The largest driver is our strategic focus on growing gains on sale from our multi-unit residential securitization business, which was over 40% of the total in Q3. The corresponding gains on sale and income from retained interest from fair value recognition through the CMHC, CMB, and NHA MBS programs amounted to CAD 22.8 million in Q3, representing a solid 41% increase year-over-year. We expect to maintain a similar level of revenue in the coming quarters as the pipeline for insured multi-unit remains robust, and Q4 should reflect further expansion. In our fee-based revenue, which increased 10% quarter-over-quarter and 56% year-over-year, key drivers are fee income from Concentra Trust, expanding payments revenue, and a growing contribution from our alternative asset management business, ACM Advisors. On ACM, we're really pleased with the performance since closing the deal in December 2023.
The business continues to grow, with managed mortgage funds performing well, reflecting industry-leading returns for the asset class. The declining rate environment is starting to lead to more deal activity, which will allow ACM to deploy its pipeline of investor subscriptions. We look forward to the upcoming launch of a new ACM Social and Climate Fund, which will give institutional investors access to commercial lending assets that meet social purpose and climate initiatives. Key performance measures are ahead of our expectations so far for ACM. Broadly, we intend to maintain a strategic focus on growing non-interest revenue as a percentage of total revenue, and we will provide an updated guidance range for this in Q4 compared to the 12%-15% range we provided at our 2022 Investor Day. Switching now to efficiency.
Revenue growth outpaced expense growth compared to Q2, resulting in about 1.5% positive operating leverage sequentially. The modest expense growth to CAD 146 million from last quarter was due mostly to continued investments, particularly in core technology and digital innovation projects, offset by deliberate product and marketing spend reduction. While we continue to invest in growth initiatives that will benefit our franchise over the long term, we do have the flexibility to ensure that our spending is commensurate to top-line growth. Our general goal would be to continue to generate around flat to positive operating leverage on average across several quarters. We are also elevating our operational effectiveness programs to ensure while we scale, we focus on our resources on the highest value opportunities. We make some references here in our MD&A and adjustments.
In closing, we are reaffirming our guidance for ROE to land above 15% for the fiscal year, a positive and predictable outcome anchored in our differentiated approach to capital allocation. As you will see in our Q3 MD&A, we also expect to deliver on our original guidance of 8%-12% growth in loans under management, pre-provision, pre-tax income of CAD 660 million-CAD 700 million, and a CET1 at 13% or above. As a result of yesterday's declaration, our dividend growth guidance of 20%-25% has already been achieved. Our EPS guidance for 2024 now reflects PCL trending through the first nine months, such that we expect to earn between CAD 11.50 and CAD 11.75 per share for the year. Our expectation is that book value will grow by 11%-13%.
Part of the update to book value per share growth is accounting for what we previously disclosed in Q1. In terms of a contingent liability, we booked for our option to acquire the remaining 25% interest in ACM Advisors. As Andrew mentioned, we will come back to you with 2025 and new medium-term guidance ranges, together with our Q4 results and investor call. Now, we'd be pleased to take your questions. Ludi, please open the lineup for analysts.
Thank you, and ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star, followed by the number one on your telephone keypad. If you're using a speakerphone, please speak up your handset before pressing any keys. To withdraw your question, please press star followed by the number two. Once again, please press star one to join the queue. One moment, please, for your first question, and your first question comes from the line of Meny Grauman with Scotiabank. Please go ahead.
Hi, good morning. Chadwick, I wanted to-
Good morning.
Just clarify your comments on fee income. The guidance that you could maintain this CAD 56 million that you delivered in Q3, is that the new run rate? And if so, just trying to understand what changed this quarter. We see obviously a big sequential step up. So what does that inflection point represent?
Thanks, Meny, for the question. The general trend line, yes, should be consistent. What you will find sometimes in fee income is some inconsistency across quarters and when we book certain fees in Concentra Trust. That's just the nature of the business. But otherwise, our run rate for gains on sale and other fee-based income, particularly with ACM, should be consistent from here. Otherwise, it just reflects the strategic growth and volume business.
Got it. And then just turning to credit, just wanted to get a little bit of a better understanding of the dynamics in the equipment finance business in particular, impaired provisions continue to climb higher. And so just wanted to understand when you see that coming down and how you're managing that book of business? Just an update on that, please.
Thanks, Meny. I'll pass it over to Marlene. I think, you know, this has obviously been getting a fair bit of senior executive attention, and I think we're feeling somewhat encouraged, but maybe Marlene can give some color on that.
Sure. Thanks. When I look at our leasing portfolio, we think about our portfolio in terms of the portion that's related to the trucking, long-haul trucking. You know, that there have been issues there. We've talked about that in the past. We see that stabilizing. It's coming. So I expect that to turn a corner into 2025. If you look at the rest of the leasing portfolio, which is not related to transportation, it's been stabilized for quite a while now, and so it's doing quite well. So we expect throughout the next couple of quarters, we'll see those numbers start to improve, outside of any idiosyncratic issues.
Could the impaired provision for this portfolio specifically keep going up for a few quarters?
I think we're well provisioned at this point in time, and so I think we're appropriately provisioned as we are right now. I don't anticipate material changes.
Thanks.
Your next question comes from the line of Lemar Persaud with Cormark Securities. Please go ahead.
Yeah, thanks. Good morning. I wanna just kind of dig in a little bit on this Pride exposure here. First, when you guys are saying that the impact, if any, is not expected to be material to EQB, what do you mean by that? Is that PCLs, earnings impact, capital impact, long-term business approach? Like, any thoughts on that specific commentary there?
You know, hand Chadwick to sort of fill in some of the kind of more technical details there, but certainly, we just want to make sure that investors were aware that, you know, there is this issue out there, and I think, you know, the disclosure is just kind of there to – and there's a fair bit of uncertainty, frankly, about how this is going to unfold and how long that'll take, so but maybe Chadwick can give some more color on that.
Sure. Yeah, and I'll just repeat that, Lemar. So, like, we believe, to be clear, we are appropriately provisioned for credit losses in that portfolio, to be very specific. This disclosure, we chose to add proactively. This is a CCAA process for that company, so we thought the comment would just be helpful for investors. It's an operational and litigation-related comment, but to be clear, at this time, we don't expect any losses outside of our credit provisioning, but adding this comment as the process with the court monitor continues. Nothing more than that.
So there is you guys have provisioned something, re-
Yes.
What you find is reasonable against this. Okay. Okay.
100% .
And then, outside of, like, just parking the loss, because I know you guys can't probably dive into that one, are there any other income statement impacts, say, you know, higher legal costs that we could expect? Or is that already kind of in your non-interest expenses?
That's already in our non-interest expense, and it's modest in the overall scheme of the, you know, few hundred thousand CAD type of thing.
Okay, that's fair. Okay, and then just on this Laneway House initiative, obviously, it's new to us, so I feel like I should ask. Does it feel like this offering could offer kind of the same growth trajectory as the wealth accumulation product? I'm just trying to, like, think through this. Are there any other competitors out there? Anything you could offer would be helpful.
No, I mean, nothing, nothing like that in terms of scale of the actual assets, particularly related to laneway housing. But as you can imagine, you know, we're too super focused on making sure that we service the mortgage brokers and their needs. So if we, for example, help them with a laneway house, it might be that another mortgage, you know, we're likely to get more of their share of flow of business because people are used to dealing with us. So it's really about building up. You know, on the business side, it's really about building our brand with the brokers to capture more market share. And then I think it also aligns very, you know, deeply with our social purpose of helping improve the communities in which we operate.
So it's really got a bit of a ESG, corporate social responsibility layer to it, along with just enhancing the range of products with which it gives us, you know, good reasons to talk to brokers. Every time we talk to a brokers on one opportunity, it opens up other opportunity. That's very much how we think about approaching that channel.
Okay, appreciate it. Thanks for your time, guys.
Thanks so much.
Your next question comes from the line of Gabriel Dechaine with National Bank Financial. Please go ahead.
Good morning. A couple questions, one more on the growth side and one on the you know, this trucking stuff. You know, I'll start with the trucking stuff. Just, I wanna get a bit more, I guess, specificity on the exposure so I can kinda, you know, get a better sense of how this could evolve going forward. Is the portfolio within equipment finances around CAD 500 million, unless I'm mistaken? Over the past you know, 12 months, let's see here, it's been about, we've seen about CAD 50 million of Stage 3 provisions against the equipment finance portfolio. Would that be entirely the trucking industry or 90% of it? What would you say?
Hi. Hi, Gabriel. That would be mostly trucking, not 100% for sure, because the portfolio contains both trucking and non-trucking leases. But trucking is about 60% in terms of transportation and other kind of trucking-related leases. So but I would say roughly, you know, probably close to about 90% is related to trucking, to long haul.
Lucky guess by me. So would you say this quarter we're probably around the peak? 'Cause, because the loss rate has been trending higher, and I kinda wanna get a, you know, glide path sort of perspective.
Yeah.
'Cause you mentioned we could still have some of these losses, but in this portfolio, but moderating into 2025.
That's right. We're expecting as we look at the formations and how the earlier delinquencies are showing up in the portfolio, we see that slowing down and stabilizing, as I said. So I expect that into 2025, that will start to come down.
Okay, so another quarter like this one, or on par with this year's performance in Q4?
I wouldn't expect it to be materially different. I don't expect it to increase, but I certainly wouldn't expect it to be a significant drop in the next quarter. I would expect it to be relatively around this, where we are, down slightly maybe, but not a significant change.
Okay. And you know, compare the guidance that was given at the start of the year for, you know, elevated losses in the first half, fading in the second half, you know, what's changed over time? Is it just the economy is sluggish and, you know, that's persisted longer than you anticipated?
Yeah, I think it's very similar to the conversation we had last quarter, Gabe. You know, the certainly feeling that is true in commercial real estate and single family lending. You know, in fact, I mean, if you look at total provisions on, say, our single family book, it's less than a basis point for losses. So those feeling really comfortable about that, and then I think as we discussed last time, you know, this relatively newer asset class for us in equipment leasing is the one that's surprised us a bit on the, in a negative way.
But, you know, I do think, you know, we are on downward trajectory here. Don't forget, these are relatively short-lived assets and so you do tend to sort of see the loan impairments happen fairly quickly, and then but the portfolio amortizes also fairly quickly. So it feels encouraging, but a bit like as we last left last quarter, that is the area with the least conviction about how the future is gonna unfold. But I spent a lot of time thinking about this over the last quarter and certainly feel more confident than I did this time last quarter.
Okay. And then on the growth side, I guess, I guess my comment is really on the you know, the mortgage book. Another, I guess, deviation from expectations has been pretty flat. We all know why that is. The rate environment has been helpful. We've had a couple rate cuts, probably more coming. You know, you know, how many more cuts do you think we need before, you know, the transmission effect takes place? And I know you're not giving 2025 guidance or anything like that, but it would seem to me like the setup is, you know, you know, stronger for next year and you know, get the NII moving in the right direction on the back of you know, better mortgage volumes.
That's certainly how I feel about it. You know, and I think you can't. I don't think it's the absolute rate that it hits, and all of a sudden, you know, the market jumps into life. It's a bit Keynesian, you know, when are animal spirits released because of, you know, lower rates? And so I think, I think we might be surprised by how quickly things turn, frankly. I think we're going from an environment where there's a bit of a standoff between buyers and sellers, and it might q uite quickly, the narrative changes, where if you don't buy now, you might miss sort of decent value real estate.
So, you know, I don't think anybody can really be sort of precise about when that would happen, it will happen, but I would certainly think it's gonna happen between now and next April, that's for sure. And so I think we're watching that carefully. And as I mentioned in my prepared remarks, you know, the last couple of weeks have actually seen some encouraging mortgage applications. One swallow does not make a summer and, you know, we can't necessarily extrapolate that forward, but it feels encouraging.
You know, what we're preparing our teams for is for higher volumes, make sure that we're delivering fantastic service to the brokers so that we keep our share and gain our share.
Got it. And then actually, I lied, I'll ask another on deposits this time. Like, what's your, you know, you know, in a rate cutting cycle, you know, what's your pricing strategy gonna look like? Or what should we anticipate? I expect the, you know, big six banks will cut their deposit rates and by the full amount. Would you be, you know, holding back just to build the deposit market share, and, you know, achieve that, you know, progress towards, you know, your 2/3, EQ Bank, deposit kind of objective?
I think we're seeing that as a bit of an opportunity, Gabe. I mean, it's while it might have short-term margin compression, I think, you know, standing out a little bit longer, perhaps to offer better rates to attract deposit growth, you know, as we, you know, long talked, you know, getting a new customer onto the platform, showing the broader value of the platform is really valuable in terms of customer lifetime value to the bank.
So we're gonna be a bit more nuanced as we. You know, we will be reducing rates generally to think about, you know, looking after our NIM for the benefit of, you know, all stakeholders, but also potentially being a little bit lagged compared to others to try and drive that deposit growth. So it's, you know, it's gonna be a bit of a nuanced play, frankly, as we move through it. But it's, you know, it's gonna be arm to arm combat in terms of kind of tactics around trying to figure out how to play that.
But also not just a rate play, right, Gabe? So we'll make that clear again. It's. We tested that for the last couple of years. This is about the new products that are coming on, Small Business Account comes on, the Notice Savings Account. So it's, we're gonna grow their franchise as a primary franchise. We don't want it to be about ever attracting hot money or ever being based on rate.
Got it. Thanks, and enjoy what's left of our summer.
Thank you very much, Gabriel.
Thank you.
Your next question comes from the line of Paul Holden with CIBC. Please go ahead.
Thank you. Good morning. I guess first question is, I can't remember if it was last quarter or the quarter before, you talked sort of about that cohort of trucking loans that was problematic, that two hundred billion. Is that? Like, are the impaired issues still specific to that cohort, or has it grown beyond that?
Hi, Paul, it's Marlene. I'll take that question. That cohort in particular, we see that stabilizing, as I mentioned before, so it looks like long-haul trucking has stabilized. We do think that, it'll. It's, you know, the resolutions are taking a little longer, come true. But I would say that, that cohort is sort of performing as we expected, and it's starting to stabilize.
How about the remaining trucking loans? Are they also performing as expected, or have you seen some deterioration there?
No, we're seeing it actually stabilize. I think it, I look at long haul overall, it's actually doing, the forecast is looking quite well in terms of what we expected. I expected it to drop off a little faster, to be honest, but it's, it has definitely stabilized. It's not getting worse.
Okay. Okay, understood. And then maybe to continue a little bit with the discussion on net interest margins, based on Gabe's question. Like, how should we be thinking about this longer term? Like, maybe you give up a little bit of NIM in the short term to gain those banking deposits, but to the extent you gain banking deposits and need a little less broker deposits, shouldn't that actually be beneficial to NIM over time? Am I thinking about this the right way?
Yeah, absolutely. You're thinking about this the right way, both beneficial to NIM. I mean, there's a lower beta on those deposits, and they're attractive price deposits for us. And then, of course, just generally, you know, franchise values, franchise deposits, we see as being inherently more valuable than broker deposits from a, you know, building a digital bank into where, you know, our aspirations to have franchise customers and where we can offer a range of services. So it's all part of that longer-term journey. I think it's always good to look back, and let's forget, we only launched this digital bank back in 2016, and today we've got, you know, as you know, Chadwik talking close to CAD 9 billion deposits, 500,000 customers.
When you look around the world, this is, you know, what I've seen in other digital banks around the world. This is a dramatic success, and we're only a few steps in this longer-term journey to build a truly digital bank that, you know, is gonna sort of change Canadian banking to some degree.
Okay, thanks for that. And then, next question. Maybe you can talk a little bit more about the outlook for multifamily. Obviously, the last twelve months have been fantastic in terms of the growth. If I look at sort of secular trends and need for more multifamily, I think this is probably a decade-long story, but anything, any nuances we should be thinking about in terms of the upcoming year and why growth may be similar or different, whether that's higher or lower?
We have an extraordinarily strong franchise in this area. I think, you know, we are the largest securitizer of multifamily in the country. We feel very well positioned to your point, you know, all of the people, participants, centers of influence that we're dealing with in multifamily. We seem pretty well organized to continue this strong trend. Don't forget, we take sort of the big picture. Multifamily purpose-built rental for many years was hardly being built in Canada, and what supplanted that was actually condos owned by mom-and-pop investors that were put up for rental. But we seem to be moving to a shift driven in some ways by government policy, some ways by the market need to more purpose-built multis being built.
So we help. We're very active in providing the construction financing for that and also then terming out in these securitization vehicles. So it feels like we've, you know, we're in all the right spots for that to continue to grow and build that business.
Okay. Final question from me, and Andrew, since you brought up the condo market, and we've seen a lot of supply over the last 10 years there. Demand and dynamics specifically have changed a lot in the condo market, at least in the GTA market. So maybe talk a little bit about your exposure there, and any kind of risk you're seeing over the next 12 months, 24 months in terms of your exposure to GTA condos.
We certainly read the reports from CIBC, and that to kind of gauge us on our risk assessment. So maybe, Marlene, you can provide some of the color for our exposure.
Sure. Thanks for that, so our condo exposure, in general, if I look at the single family business, it's pretty small. It presents less than 2% of our uninsured single family portfolio, and it's performing exactly like the rest of the portfolio is performing. There's no difference there, and we've had no losses to date.
Okay, that's great. That's it from me. Thanks for your time.
Thanks, Paul.
And your next question comes from the line of Graham Ryding with TD Securities. Please go ahead.
Hi, good morning. My first question, just on the PCL side. You know, they were down quarter-over-quarter, I think primarily just due to lower provisioning on the commercial side. Yet your impairments in that area, that they were up 25% quarter-over-quarter. So maybe just some color on why PCLs this quarter were not moving directly in line with the impairments.
Hi, it's Marlene again. When we look at our commercial provisions, we do that on a loan-to-loan basis, and so we look at each deal. They're supported by strong structures, strong loan-to-values, and so that's, that really guides how we set our provisions in terms of, like, what you saw on Stage 3. And also, when we look at the outlook for the market and we look at our portfolio, we adjust it based on what we see and the quality of the portfolio, as well as our forward-looking macroeconomic variables, and that's really what's driving what you see in the provisions versus the GILs.
Yeah, it's always good to remember, Graham, too, just how lower LTVs are, right, right across the board versus the appraised value. So that's why you'll very often not see a Stage 3 on a lot of these impairments, and why we made the comments on it's very isolated to a couple of commercial where we don't expect to actually take for the P&L.
Okay, understood. And then, this next question would be for either Marlene or, or Andrew, I guess, bigger picture, but just equipment finance, like, what have you learned through this cycle here, particularly around the trucking area, in terms of, you know, you've seen elevated losses. Going forward, will you make any changes to how you sort of underwrite this area, or any changes to growth in this space going forward?
Yeah, I mean, I think our focus over the last couple of quarters is getting on top of the portfolio we have and, you know, trying to manage this situation. And certainly we'll be relooking at what were the learnings from this. I think certainly there's something that was fairly idiosyncratic about the circumstances of COVID and how we reacted in that kind of fairly unique circumstances hopefully none of us have to face again in our careers. But certainly there's almost a back to basics, what do we have to believe about our credit approach in this part of the market going forward? So I think we'll be in a position to talk more about that in December. Certainly that's a process we're really sort of kicking off now.
We feel like we've moved through the phase of really dealing with the, you know, the portfolio we have and on top of that, and now can start to think more broadly about the future.
Okay, understood. And one more, if I could, just Chadwick on expenses. Slightly lower marketing spend, I think was a factor this quarter. Is it reasonable to think, just given the, I guess, the lower portfolio growth, that you might take a similar approach through the rest of this year and then look to maybe increase marketing spend next year if we're in a more, sort of a higher loan growth environment?
Yes.
That's it for me. Thank you.
Good way to think about it. Thanks. Have a great day.
Once again, to ask the question, please press star one to join the queue. Your next question comes from the line of Étienne Ricard with BMO Capital Markets. Please go ahead.
Thank you, and good morning. To circle back on equipment financing, what is your expectation for through the cycle credit losses, given the allowance for this portfolio now exceeds 300 basis points? And just more broadly, given the shift towards the prime segment, how can Bennington compete more effectively in the prime relative to non-prime markets? Thank you.
Oh, yeah. I mean, again, thank you for that. I mean, I think our general view was that through the cycle, we'd be at about 1.5%-2% annual loss rate in this portfolio, and the loans are priced roughly to sort of hit that kind of number. Obviously, we've exceeded that in this current cycle. So I think we've definitely got to sort of think through that. Under the hood here, we actually are starting to shift more and more into prime. Partly that's a question as well of reorienting the distribution channels that we deal with to be more prime-focused.
So it always takes time to shift your kind of brand in the marketplace, but that is the shift that's currently underway at Bennington, and we've put one of our high potential guys from within the bank into Bennington to help with that shift. So we are supplementing the team to think about that strategic move in the business.
Just to be clear on that point, at EQB, call it three-quarters range of originations are in that prime, super prime category already, so that we are executing to that intent.
Okay. Staying in commercial, growth in construction loans remained high. Given the labor and the, you know, the material cost increases that we've seen across the industry, what's giving you confidence to continue growing this segment of the portfolio?
I think it's important context to know that most of those loans would be insured by CMHC, so we've got a government guarantee on those loans. That doesn't mean, though, that we're not careful about exactly the issue you speak of. So we review budgets very carefully with cost consultants, make sure that we've got contracts in place with reputable suppliers to bring projects in on cost. But if you combine those two elements of diligence around the projects plus the government guarantee underlying the loan, you know, we feel pretty confident about what we're doing in that area.
Thank you very much.
Okay.
Your next question comes from the line of Nigel D'Souza with Veritas Investment Research. Please go ahead.
Thank you. Good morning. I had a minor question first, just for clarification. The nonrecurring operational effectiveness expenses, could you tell me a bit more what specifically that refers to? I think it's been mentioned the last two quarters, how material of a contributor that was, and how do you expect that to trend going forward?
Yeah. Thanks. Good morning, Nigel. You can think of it in relation to 1x cost reductions in our business as we continue to look at the updated business model. For example, I made the comment that we reduced our operations in the prime broker for single family. As you enter and exit businesses, you might make some 1x changes, and just as we continue to grow, we'll continue to reflect what is the right operating model and maybe reduce some costs or redeploy some costs across the business. It's really that simple. You know, we continue to be, I'd say, best of peers, potentially globally when it comes to efficiency, always anchored in ROE. ROE will always come first, but we're always very thoughtful about every dollar we spend and how we deploy that in a capital allocation.
In terms of the magnitude, like the CAD 2.7 million, is that mostly acquisition integration, or is that what you classify as the nonrecurring operational effectiveness expenses?
It's a bit of a split. It is in the MD&A, Nigel. So we do have a page that specifically breaks down the CAD 2.7 million, and you can see some of that was, we had about CAD 1.3 million in there of severance, and the rest you can see across integration and other costs.
Okay, that's helpful. And then, when I look at your rate sensitivity disclosure to 100 basis points parallel shift, you're not particularly rate sensitive, but I do notice that there's a slightly greater benefit expected to net interest income from a decline in rates versus an increase. I'm wondering if you could elaborate on what's driving that dynamic, where there's a bit more benefit when rates move lower.
Are you talking EAR or EVE?
100 basis points parallel shift disclosure. The net interest income sensitivity disclosure, I believe your net interest income is expected to move up by CAD 3.7 million if there's a 100 basis points parallel down shift.
Yeah, sorry. I can answer that question. I'd like to just kind of put frame it slightly bigger than that, because we tend to think about EVE, so the economic value of equity. And this 100 basis points shift is actually a slightly artificial test because we'd actually be rebalanced as we move through that. We think about running a one-year duration of equity. So if you think about a 1% parallel shift downwards, roughly speaking, the equity value would increase by about CAD 30 million through that period. In the EAR, what we're reflecting here is the fact that many of our floating rate loans actually have floors on them. So to the extent that interest rates generally drop, the cost of borrowing to our borrower does not change that much because they're hitting floors.
That leads to NIM expansion that drives that EAR up. And that's why it's not symmetrical, because we don't have caps, we just have floors. So the bank doesn't lose as much if interest rates increase, but we do have some gain as interest rates drop. Does that make sense?
Yeah, that makes sense.
I think it's about CAD 1.1 billion-CAD 1.3 billion or something at the money right now in those floors.
Okay, that makes sense, and then just a minor last question for me. Some pockets of weakness that we're seeing in real estate in Canada are the smaller investment funds that focus on real estate. Any exposure to the mortgage investment corps or smaller, I guess, more vulnerable balance sheets in the real estate sector?
Well, we certainly have a business in lending to mortgage investment corps, and we actually like that business. Effectively, we're margining pools of mortgages. We have very tight controls, we believe, in around most of those exposures, and we don't feel vulnerable. We generally don't margin second mortgages, so it's mostly first mortgages, so we've got first lien mortgages. A typical structure might be a portfolio, let's say, of CAD 100 million first lien mortgages. We might lend CAD 75 million against that CAD 100 million. So we feel that that's, you know, it's got lots of reserves, you know, with a waterfall type payment structure, lots of reserve, and don't feel that that's much in the way of a credit risk. The risk there relates to operational controls, and we're certainly very diligent around trying to button down the operational controls in those areas.
Okay, that's it for me. Thanks for the comments.
Thanks, Nigel .
Your next question comes from the line of Stephen Boland with Raymond James. Please go ahead.
Good morning, guys. Just a question on ACM Advisors. Chadwick, you mentioned that, you know, the business is growing, you're starting to see more deals. Can you just elaborate, like, has this, you know, entity still, is it still very independent? Like, are you showing them deals? Is there any cross-selling opportunities there? Just wondering. And when you mention deals, does that mean within the funds or creating more products? You did mention that the new climate fund that they're gonna be launching, but can you talk about the interaction between, you know, the bank and this asset manager?
Yeah, I think there's sort of three elements to that. You know, first of all, kind of putting controls in place to make sure that, for example, things like cyber risk and so on are being managed properly in ACM. So we're certainly having really good dialogue in that area. Marlene's been out with the ACM team as our internal audit to make sure that we've got the appropriate controls, which I think is helpful to ACM as much as to us, to make sure that's in place. You know, we're very careful to sort of think about how the relationship works between our origination teams and the ACM teams. Don't forget, we have a fiduciary responsibility to the individual investors in those funds to make sure that the assets being added to those funds are good for them.
And but on the other hand, there are loans that don't work for the bank's balance sheet that might work for an ACM investor profile that looks like ACM. So I think there might be one loan where that, that's actually sort of happened so far. Still fairly modest integration, but we are hoping to work together a little bit in there. And then to your last comment, yes, we are trying to set up another fund, and Chadwick mentioned that in his prepared remarks. But we are looking to set up a new mortgage fund that's got a sustainability component to focus to provide an opportunity for investors looking for that sustainability component. And that's something that will hopefully expand ACM's kind of go-to-market approach. This is a very strong team.
We're really comfortable with how we're operating with them. It's a really engaging relationship, and we're really, really pleased with this acquisition.
You know, longer term, Andrew, is it, you know, medium term? Like, is this kind of like? You mentioned obviously the controls, you're being careful about the funds, and you're setting up a new fund, but is it the medium to long term that this business is really gonna stay somewhat, you know, independent of the bank? Do you know what I mean? Like, it's really, like, are you in a position to refer some of your clients to their funds? Like, is that a plan at all, or you know what I mean? Like, I'm just trying to. How separate this business is gonna remain.
Yeah, I mean, certainly it, it's, you know, this is an investment in the HoldCo, not in the bank. So while, you know, these are brother and sister companies, this is run independently with its own management to ensure that, you know, all of the right relative controls and there's no, you know, no crossover there. The bank, the bank's the bank and ACM is ACM, even though it's under common ownership at the top of the house from a public market perspective.
And we're happy to talk more off the line, too, Stephen. Just even as we go forward with guidance, or to understand the business, but there are top-line synergies. There are opportunities, but Andrew's point, it's very distinctly a separate entity. But there's certainly. We believe we can help ACM achieve their full growth potential over coming years.
So, you know, roughly speaking, just to ground everybody back in the data, you know, this is about CAD 5 billion of mortgage assets sitting within ACM. And the broader goal would be if the market's right and so on, to double that for the next five years or so. That's the trajectory.
Okay. That's great, guys. Thanks very much.
Have a great day.
There are no further questions at this time. Mr. Moor, back to you for closing comments.
Thank you, Ludi. If you haven't already done so, I encourage everyone on today's call and webcast to open an EQ Bank Notice Savings Account to experience the latest advantages of banking with us. And if you own an operating or holding company, please give our investor relations team a call to gain early entry to our EQ Bank Small Business Account to give it a try. We look forward to updating you on our growth, progress and outlook at the time of our Q4 call in December. Goodbye for now.
Thank you. That concludes today's call. You may now disconnect your line.