All right. Thank you, everybody, for joining us today. I'm Graham Ryding. I cover the Canadian diversified financials sector for TD Cowen. With me today is the CFO of EQB, Chadwick Westlake. Chadwick's been CFO since 2020, previously spent 18 years at Scotiabank and across sort of finance and enterprise executive positions. So, Chadwick, thank you for joining us today.
Thanks for having me. So excited to be here, Graham. Really appreciate it.
Yeah, I'm looking forward to this. So, before we get into some of the good stuff, I'll just remind our attendees, if you have any questions at the bottom of your screen, you should have a question box that you can throw in a question, and I'll try to get that into our conversation. So, Chadwick, maybe I'll just start with, you know, maybe you could give our audience a bit of an overview of, like, who you are. So, what are your key products and services that you're offering to Canadians, and maybe how are you positioned differently than the big six Canadian banks, but also some of the smaller, regional Canadian banks?
Yeah, sure. I appreciate that. And again, I really appreciate you and TD welcoming EQB to this really important conference. And I love the opportunity, any opportunities I can get, to be honest, to take a minute for anyone newer to the EQB story, to share a bit of perspective. And I think it's first important to take note of the really competitive landscape, Graham, in Canada. It's rare in any country, but especially in Canada, which is dominated by the large six banks, as we all know, to achieve a status of the only challenger, focused on bringing real, lasting, positive change for people. Canada remains the most profitable banking market in the world, which is a reflection of lower competition, less incentives to switch from where people have always banked in options that haven't been keeping up, to be honest, with population growth.
At EQB, we've literally carved out our own space and customer offerings, scale, and capability to challenge this status quo. We're truly focused on improving and changing Canadian banking to enrich people's lives. Now, at over 50 years old, 20 publicly traded, and more than 1,800 employees across Canada that view themselves as challengers, we have the technology, talent, balance sheet, strategy, and market position to expand our momentum in making a difference. And this can include helping people question and demand more of their financial institutions, to expect more with more options. And that's not always common in Canada, to be honest. And that leads me to three things, Graham, to consider of why EQB, and why is EQB different. And number one, we're the trendsetter. This is what tomorrow should look like in Canadian banking.
I've said this before, that if any Canadian bank could redesign today, take a blank piece of paper, they would effectively create EQB and EQ Bank. We're digital and broker-led versus branch-led and cloud-based in EQ Bank. Our Chief Technology Officer, Dan Broten, and I were actually just speaking with investors earlier today at this conference about advantages, including being digital and cloud-first. We're 100% focused on capital allocation within Canada, too. When people talk about global innovation, there's thinking that exists on banks and fintechs being sort of diametrically opposed, but we sit at the intersection of both worlds. We play sustainably in banking while also supporting and investing in the fintech community, including as a proponent of consumer-driven or open banking. No games or tricks or high fees.
We're delivering high daily rates and features on the best technology stack, also reflecting EQ being the most efficient bank debatably in the world. For every dollar we spend, shareholder money, more of that goes towards innovation and service to stay ahead versus investing just to keep up. So that's number one. And then number two, Graham, building off that, EQB owns the bank with growth. We own the seventh largest Schedule I bank, up from ninth a few years ago, and have a combined assets under management and administration of more than CAD 123 billion now, with a balance sheet that's doubled just over the past few years. We're at the cusp of starting to become more of a household name across Canada, including with our recent Second Chance marketing campaign launches.
That also reflects the hundreds of new customers joining us every single day, including 31,000 just in the past quarter with EQ Bank. Our balance sheet and earnings are about split; for a little bit more detail, they're about split between personal and commercial growth businesses. Our top line continues to grow in double digits, up another 20% in revenue year-over-year in Q2. Our personal bank operates five business lines ranging from single-family mortgages to unique decumulation lending solutions and payments, to commercial banking with seven different business lines indexed to insured multi-unit lending, where we do all that we can to help fund more affordable housing in the Canadian supply gap, and really closing that. Further in commercial, we have specialized lending for growth, equipment financing, plus supporting credit unions across Canada as they serve their 6 million members.
Then for our direct consumer platform, EQ Bank, our shelf of products and services continues to increase by the day. The story's just starting, and with over 460,000 Canadians now experiencing options, including very easy sign-up and money transfer, high everyday rates, a leading payment card, First Home Savings Account, a virtual mortgage marketplace, I can go on all day. It's really exciting. And there's new offerings still coming out, like small business recently, and much more. We're becoming a true primary everyday bank for growth for customers we serve. And then also on growth for EQB, I'll say we started our journey into accumulation and wealth management with EQB closing our majority acquisition in December last year of ACM Advisors, a CAD 5 billion alternative asset manager that's been winning in Canada in the asset classes they focus on for their fund investors for 30 years now.
We're diversified in revenue and funding sources and distribution, and it's all that's going to enable higher growth ahead. And then lastly, number three, Graham, I'll just note, being purpose and social-driven from our perspective can equal the best returns for investors as well. There's something to keeping that top of mind for EQB. Our products and services are designed with the intent to help those underserved and are with huge growth to unlock in the years ahead. And our products reflect some of the best you can find in ease, rates, and simplicity to no and no or low fees. And you've also heard the federal government in Canada talk more about the importance of this recently. We're very focused on responsibility and published our last report actually just a few weeks ago, including coverage of how we're Scope 1 and Scope 2 GHG neutral.
We are the first Canadian bank to disclose our Scope 3 emissions. We recently became the first Canadian bank to issue a social covered bond and much more for how we make an impact in our communities to the structure of our board of directors, management, and all of our employees. We deliver all of this while at the same time being one of the best performing for total shareholder return of peer banks in the TSX over the past 10 and 20 years, including compared to peers in the S&P 500. We're not even close to being done, and we remain deeply discounted from a price-to-book value and price-to-earnings multiple perspective. We're really well positioned for what's ahead.
Okay. Very thorough answer. You stole a lot of my questions, actually. But I'll hopefully I can pivot here. Okay, today, or this afternoon, I want to talk about, you know, your loan growth, your margins. I also want to get into the credit side, and then, of course, I want to dig into your digital EQ Bank. So let's start with maybe just on the margin side. So net interest margin, it did gap higher last quarter, 2.11%, and it had been around the 2% mark for several quarters. And you gave a few factors or several factors that were contributing. So outside of maybe the fact that there were some extra days in the quarter, you know, do you feel like the components or the pieces that drove the NIM higher this quarter are sustainable?
Maybe where would you see some areas of potential upside or downside as we're sort of looking through the rest of fiscal 2024?
Yeah, sure. That's right. It's, I'd say the expansion was by design, and we've actually been steadily increasing for many quarters now. But Q2, you're right, was the biggest increase in a while, also reflecting really the recut of how the math comes together in our newly designed fiscal year. That is 1.2. The core sustainable aspects of that margin expansion would be a good part of that NIM expansion. Things like we talked about with our results goal, lending to higher growth conventional asset classes with pricing discipline from our ROE calculator. All of our lending needs to hurdle at 15% + ROE.
And then funding diversification is supporting NIM expansion as well, with EQ Bank core deposits growing as our lowest cost of funds, combined with a really flourishing wholesale program now, including the more than CAD 1 billion in funding we added with our social covered bond issuance and the deposit note just in Q2. Higher renewal rates as well. Those are sustainable, and they contributed to that margin expansion, plus some net benefit as prepayment picks up. On the non-sustainable side is what you teach too, Graham, that that aspect of fewer days in the quarter that will now be a little bit more symptomatic of Q2 as we go forward.
Okay. Okay. And then staying on that theme, in 2023, you saw some pretty decent NIM expansion, you know, and that's when we saw rates really moving higher. As we're looking out to fiscal 2025 or calendar 2025, similar, if we do see a potentially declining interest rate backdrop, is it reasonable to expect some NIM compression, you know, if market activity picks up, or what would be the key factors that you're thinking about for next year?
Yeah, sure. Well, building off my prior points, we focus and invest heavily in our treasury management capabilities and posture. We've talked a lot about that in the past couple of years. And we're primarily term matched, right? And we run the entire bank on a one-year duration of equity. So that's shorter than most, I believe, as well. So as a result of that and changes in Bank of Canada rates that might come, it might have a more limited impact. We generally believe in stability and expansion over time due to the continued opportunity to lower our funding costs. So that's going to be an advantage in the coming years, over time with our diverse funding stack, combined with a return to more origination growth in the higher-yielding conventional asset classes.
You'll see a range in the next year or two, I think also more dictated by the strategic choices we'll make, including how we decide to continue to position that everyday demand rate in EQ Bank. That's an important lever for us and why we also have today a lower deposit beta in EQ Bank deposits.
Okay. All right. That makes, that makes sense. Maybe we could switch to loan growth. So this year, your guidance is 8%-12% overall, but you've got a bunch of different sub-components to that outlook. Maybe can you touch on where you have the most confidence in achieving, you know, your targets, and where is the potential for the market to perhaps be a bit softer?
Sure. Sure. Yeah. From relative basis, I'd say our top areas for growth remain as our highest conviction. So our highest category guidance, right, that people can see in our MD&A disclosures, for example, the highest category was 40%-60% growth in the decumulation lending, which again includes things like reverse mortgages and insurance lending. Those are trending extremely well, currently tracking at about +57% year-over-year at the end of Q2, right? So that's on track when you think of that 40%-60% guidance. And the potential is far ahead of that current market, especially for reverse mortgages. We're one of two banks, remember, and the market is 5-6 times the size from where it is now. We're keen on this solution for Canadians, and more education and awareness is key to unlocking that.
The next in relative and highest dollar terms is our focus on insured multi-unit lending as part of that overall 8%-10% guidance you asked about. So our guidance for that was 20%-25% year-over-year. And at the end of Q2 that many would have seen, we put up 35% year-over-year growth. And now we have about CAD 23 billion in loans under management. And we believe we'll end up on track for that by the end of Q4 as well. So those two carry a lot of weight. There's a lot of runway here. A lot of Canada, even think of the multi-unit, Canada needs a lot more supply. So that need is not going to go away anytime soon. And then other asset classes like single-family uninsured, huge part of our portfolio for sure, just about CAD 20 billion on the uninsured side.
Our guidance this year is 4% year-over-year, but with rates moving down, we believe this will start to pick back up in the second half more towards our guidance. And then remember on single-family, right? We're a 100% B-20 lender, first position only. We underwrite all of our lending, but we focus on serving mortgage brokers and are particularly effective with self-employed borrowers, which will continue to be growing in significance in this country. Then all the other asset classes, to be honest, Graham, when you look at our disclosures, they're all generally trending as expected. And the message was always a little bit less probably first half, a little bit more second half. And that's playing out possibly as we thought even more so now that the Bank of Canada started reducing rates yesterday.
Do you think that that rate reduction yesterday is going to be enough to sort of get the housing market moving in a more positive direction, or are we going to need to see more sustained sequence of declines?
I think it'll help, but I don't think it's enough yet. I think it's going to help trend it in the right direction. There's always going to be a little bit of recency bias, but I think there's just been a need to wait to see something to unlock the pent-up demand, because there's definitely pent-up demand. There's definitely the life events that mean people need to move either way. So I do think that's a very constructive start, but it will take a little bit of time. Not everything's going to change just with that 25 basis points.
Yeah. Yeah, that's fair. Maybe we could talk about credit. Equipment finance arrears is probably your, your favorite topic. But it has been a bit of a headwind in, you know, fiscal 2024 to date, particularly around that sort of long-haul trucking cohort of loans or leases that you've got on your books. But, you know, your recent comments suggest that you think this is, this may have peaked and it should be declining. So maybe you could just flesh out for us, you know, what's driving your confidence or what's the visibility that you're seeing behind that?
Yeah, well, there's a couple of things in our guidance when it comes to credit. So for equipment finance, that was the big one, right, for conversation. And I'll mention that one. So because equipment finance has experienced the aftermath of a cyclical downturn in the long-haul transportation market. And we're seeing improving signs of stabilization in this industry, especially. Leases typically have about a, I don't know, about a 60-month term, so they do amortize down fairly quickly. The long-haul transport represents about 40% of the equipment financing portfolio, or less than 1% of the bank's total loans under management. And year to date, early defaults are trending more positive and better, I think, than the historical averages, which is validating our always evolving credit standards. And that's in the context of current market conditions.
Data is also showing us that used transportation equipment prices are more stable now, giving us confidence that new lease production is improving, and it's informing our teams managing the inventory of repossessed equipment. There remains a supply of a pretty big supply of long-haul equipment in the market, but newer equipment is selling well. Our company maintains a national network of resellers and brokers allowing us to find buyers. Then leasing application volumes also, when we think of the equipment financing side, leasing application volumes up year-over-year despite a slowdown in the core industries. Though we're applying a conservative credit appetite, our relationship with brokers remains strong. It's evident that our position as a leader in Canadian equipment financing will stand to advance as the competitive landscape adjusts. So the core businesses are improving each month otherwise as well.
And then outside, otherwise, you know, when you think of some of the other parts of the portfolio, you know, we talked on the call and in our guidance around personal loans too. So I'll repeat what we said before, that, you know, nearly 90% of our uninsured single-family mortgages have already renewed into a higher rate environment. And then the average term in our single-family mortgage is actually about two years. So it's a much shorter duration than peers face. So we don't have that mortgage renewal cliff still. And we're really comfortable with the 71% weighted average LTVs on the personal impaireds. And as of May, we've actually closed about. We've already cleared roughly 18%, 15%, actually about 15% of those personal impaireds that you saw at the end of Q2.
So that's, when you think of conviction, that's another one of those conviction points. And at the end of the day, we expect very minimal losses either way, given the structure of how our lending works in our borrowers. And then on the commercial side, I'll just note too, we take comfort in the ACL levels, noting that the allowances are determined on a loan-by-loan basis and supported by up-to-date independent property appraisals. So as we guided in Q1, remember, we said positive resolutions were expected for commercial in the second quarter, which actually resulted, as we anticipated, in an improved impaired position by about 22% quarter-over-quarter.
Okay. Yeah. That, that's a good overview. Loan-to-values are giving you comfort, your ACLs, the way you've provisioned already are giving you comfort as well, plus how things are trending.
That's right.
Okay. Maybe we could talk about EQ Bank, your digital your digital platform. So it's it's a source of low-cost funding. It adds to your funding diversification. But, you know, perhaps you could just go through some of the initiatives you have in place, because you have a fair you have a few, both on driving deposit growth, but also making that customer stickier. Maybe you could flesh out some of the, the initiatives you have underway.
Well, will you admit if you've switched from TD to EQ yet?
I'm not allowed to switch, but I can have a second account.
Well, I'll ask you off the line. But we we love, honestly, we love EQ Bank and how this is going to continue to shape banking tomorrow in Canada. Very honestly, Graham, the recent initiative of our Second Chance marketing campaigns, actually, which just launched really at the end of January this year, featuring the celebrities Dan and Eugene Levy. Have you seen that? I don't know if you've seen those.
I have. They're good. They're funny. Yep.
Great. Then similar in Quebec, right? We had the mother and daughter celebrity duo of Diane Lavallée and Laurence Leboeuf. It's been hugely successful so far in translating the results. And part of what is what you just saw last week, right? Deposit growth increased 4% over Q1. That's the best sequential increase in two years. Plus, we had the 36% year-over-year growth in customers. So when you think of the investments, we are seeing some translation. Now, in terms of things we're doing, just a few days ago, we launched our new first-of-its-kind in Canada Notice Savings Account. So this one allows customers to choose between 10- and 30-day notice periods to withdraw their money during higher interest rates.
And this provides more rewards for Canadians while also, from a shareholder's perspective, it also adds even more deposit stability in a faster payments world when it comes to demand deposits. And then the launch of EQ Bank for Small Business, which represented, which does represent a target market of millions of underserved Canadians with hundreds of billions CAD in deposits, is in a minimum viable product launch now, actually, Graham, to a subset of the millions of small business owners it will eventually be extended to this year.
Offering a higher everyday rate also on deposits for customers that are payroll with EQ Bank is working well. So we're seeing a significant increase in these customers. And we'll actually end up starting to publish this as a KPI for EQ Bank in coming quarters. Not about you, but for payroll, we offer 4%. So I'm not sure what TD is offering here. And then there's actually more to come still in areas of unsecured lending, wealth that we've talked about too. That's often commonly. And all that actually helps complete that view of what is a primary offering for the customers that we serve.
That 4%, is that a premium to what, like a 2.5% if it was not a payroll account?
That's right.
Okay. Okay. Okay. So you got lots going on there that's driving. What about driving sort of the deposit growth and the stickiness of that? Maybe you could elaborate a little bit on the revenue-generating side of, you know, initiatives at EQB or, sorry, EQ Bank. You know, how are those developing? I know you've got maybe half a dozen different areas where you can generate fees and stuff. What's actually gaining traction and maybe just some an outlook there?
Yeah, it's all gaining traction. And that the deposit side is really important, right? Because that does represent a low source cost of funding that we then lend out. But for sure, on the other revenue sources, one I can mention, for example, is our BIN Sponsorship. So more broadly, it's known as Payments as a Service. This has been a great emerging source of fee growth. And our rationale behind getting into this space was to leverage the payments infrastructure we built actually for EQ Bank to generate a new source of revenue, especially fee-based. And it comprises two parts. One for issuing. So EQ Bank becomes a sponsor bank for other entities looking to issue prepaid and credit cards. This has allowed us actually to foster innovation and competition in the Canadian market in a different way.
And then there's the merchant acquiring side of it, where EQ becomes a sponsor bank to entities who enable merchants to accept payments from their customers. So it's really interesting that way. We launched this line of business in late 2022. It's growing pretty well, but I think it actually has about 10x the potential over coming years relative to where it is now. And then on our EQ Bank platform, we continue to think of innovative ways to grow in our EQ Card, that EQ payment card. It's actually one of our most popular products on the platform because it has really unique features too, like the reimbursement of ATM fees and no foreign exchange fees. It generates fee revenue for us through the interchange. We're getting a better deal for customers.
And then we also have other products generating revenue, such as the international money movement through our partnership with Wise, that fintech Wise based in the U.K. And then currency conversion fees as well as an example for moving funds in and out of our U.S. dollar account. So a lot more to come.
I actually got a question here from a client that sort of follows on from your comments around the payment card. But the question here is, thoughts on a credit card offering? What value can you add here and what are the challenges in doing so?
It is, I'd say we discuss it regularly. We've discussed it many times in terms of understanding what problem are people trying to solve with a credit card versus the prepaid card that we introduced, right? You need an ability to transact. You want to earn rewards. In Canada, the credit card market is very dominated by few rewards programs. And then otherwise, what do people want, right? For us, there was a couple of thought processes. One, our credit card is always in people's best interest if they end up with revolvers and paying a very high rate. And we want to support things that are very good for Canadians. And we were unsure if, say, a 20.99% credit card was always in people's best interest. But there is a need and a demand.
The way you can think about it as a challenger is how can we help ensure people have that payment vehicle with some unsecured access? So there may be a creative solution you might see of where we can introduce, say, an additional unsecured overdraft type offer through EQ that you can actually then connect to the payment card that you have and then benefit from the rewards programs that we have. You know, I wouldn't say we're in the market to acquire a credit card merchant. But one thing to consider is from an investor perspective, you know, that's the customer perspective, is we want to help them solve the problem they're looking for, both the need and want. But from an investor perspective, we also wanted to address the ROE opportunity. So that's why you see on our balance sheet consumer lending.
So, as we talked about, we do Business as a Service, and we provide the balance sheet for a couple of credit card issuers, one in particular that's a fintech. So you see those consumer lending credit card receivables show up that we've also secured through cash reserves to less risk, but you get the yield. So we're trying to solve it in different ways. It's more to come, thinking about it regularly, but it needs to be the right solution for Canadians and for shareholders.
Okay. Okay. Well, we'll stay tuned on that.
Maybe we could talk from one of your clients.
What's that?
Was that question actually from you or one of your clients?
No, no. It was.
We'll get you an EQ Card.
It was definitely from somebody who was listening to me at the beginning of the call that said there's a question box at the bottom. So this thing over here on my left is actually working.
Perfect.
Maybe we could talk about, like, your guidance and sort of bring it back to valuation a bit here. We've got five minutes left. First of all, so can you just talk about, you know, you've put out this EPS guidance for this year, CAD 11.75-CAD 12.25. Consensus, it looks like, is still forecasting that you're going to come in below the low end of this guide. So maybe you could talk about what are some of the key differences that you see in your outlook versus where consensus is sort of has some concerns? Or is it loan growth? Is it NIM? Is it credit? Is it a combination? Maybe you could tell us what you're seeing.
Sure. Well, I frame it in a way of how we think about guidance. So we don't start our guidance with EPS. We actually gave this more precise EPS guidance even this year. It's not usual to give, say, a dollar range to a dollar range. We really also just did that because of the fiscal change. So remember, we're going this is the first time we had this new Q2, Q1, and our year-over-year is versus a 10-month year. So there's been some work to make that nice and clean for folks. But our first point in guidance always that we remain focused on is, can we achieve our North Star, a 15%+ ROE guidance? That truly reflects the return on invested capital for shareholders. We do this distinctly, I think, more than peers, and we generate it more consistently as well with our 10-year average at 16%.
So do we have conviction first in that 15%+ ROE for 2024, which was our guidance? And yes, we do. That's our North Star. So we land that. The other important measures should come together, Graham, when you think of then how that impacts total shareholder return and then that dividend, right? We'll pay out maybe 2% of that in terms of a dividend. Then we get the book value per share growth after that as a residual. And then we reinvest the rest into the business, into those asset classes. And then if we do all that properly, we start to see EPS land about as you would expect. And we focus on that equation versus a few cents here and there with EPS. The real delta, I think, in EPS is just credit reserves. So where does that land, right?
It was higher as we expected in the first half. Does the second half land as you expect, plus minus? But in any of the scenarios we're running, we remain high conviction on the ROE top of house and then how that flows through the important measures.
Okay. Okay. And then maybe we could try to bring this back to valuation because I do think, you know, stocks do trade around sort of performance relative to management expectations. So to me, it looks like concerns around credit have historically been the overhang on your valuation, banks largely, but also, but you know, your valuation. So if you think if you can successfully navigate through this credit cycle, could this potentially be like a valuation opportunity or a re-rate opportunity for you if investors' sort of attention coming out of a credit cycle shifts back towards your fundamentals, which would be around, you know, loan growth, earnings growth, ROE, your North Star, and then perhaps the digital bank?
Yes. Yes is the short answer, Graham. And I'd also say, importantly, though, for context, I wouldn't say or use the word as much if we can navigate like we already have. We experienced what we still believe was peak PCLs in Q2. That's a very good reflection of how resilient our book is if we're actually gone through the credit cycle and that's as bad as it gets. I think we have some pretty high conviction in that. So the re-rate is something we're absolutely focused on for our shareholders. We have the ingredients in place to do this. We'll keep executing and getting out with our name even more and our story even more because there is this huge discount in price to book value and price to earnings multiples that we've been trying to close. And that's for a variety of reasons that it's been there.
Very focused on that. I think we're doing the right things. We do, of course, again, have the best total shareholder return over the last 10 and 20 years, but there's a significant opportunity to close that and re-rate the stock to its actual full potential. From my perspective, I'd like to debate why at some point we shouldn't be trading at the premium price to earnings multiple for a whole variety of reasons.
Well, that was perfect timing. It's 3:30 P.M. So I think we should sign off, but Chadwick, I really appreciate the time you've given us today to sort of dig into a few themes here. And thank you, everybody, for logging in and joining us today.
Thanks, Graham. Thanks, everyone. If you haven't had the chance to experience EQ yet, I heavily encourage you to try just even opening an EQ Bank account if you can. That will introduce you to the world of EQ. And then maybe you want to try some of our other businesses and then understand why you want to be an investor for the long term as well. Thanks very much for making the time for us.
Perfect. Thanks, Chad.