Welcome to EQB's second quarter analyst call and webcast on August 10th, 2022 . It's now my pleasure to turn the call over to Richard Gill, Vice President, Corporate Development and Investor Relations at EQB. Please go ahead, Mr. Gill.
Thanks, ma'am, and good morning. Your hosts today are Andrew Moor, President and Chief Executive Officer, Chadwick Westlake, Chief Financial Officer, and Ron Tratch, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our webcast as well to see our accompanying slide deck, including slide two containing EQB's caution regarding forward-looking statements, and slide three concerning non-IFRS measures. All figures today are adjusted where applicable or otherwise noted. It's now my pleasure to turn the call over to Andrew.
Thanks, Richard, and good morning, everyone. This is our first earnings call under our new EQB umbrella, reflecting our shareholder-approved name change from Equitable Group. EQB is a name that we think dovetails perfectly with our challenger bank image, and we look forward to socializing it with our shareholders. For our core operations, Q2 performance was one for the record books. Conventional loan growth increased 36% year-over-year. Net interest income was up 18% compared to last year. Thanks to effective margin management by our treasury team, NIM was strong and consistent with our own guidance. We performed in line with our own industry-leading track record on credit, and we had added thousands of new EQ Bank customers. In short, all the things you've come to expect from Canada's Challenger Bank. Yet, this was a tough quarter report.
Despite taking a by the book approach to achieve and ultimately deliver strong core earnings growth, our efforts in Q2 were offset by mark-to-market declines, primarily in our strategic investment portfolios due to a downdraft in North American equity markets. What we've learned by participating alongside really smart fintech invest entrepreneurs since our first strategic investments over five years ago is incredibly valuable to the advancement of our challenger bank approach and our all-digital platform. As part of this capital allocation, we invest in fintech for knowledge and access, not for investment gains. While not the focus, we have had the benefit of positive mark-to-market P&L gains on some of these investments over the past few years and continued to generate a very strong ROE on our portfolio. For strategic investments in Q1 2022, we booked a gain of CAD 15.9 million.
In the second quarter, we had a partial reversal of some of those gains, lowering revenue overall for Q2. Chadwick will have more to say about these fair value and mark-to-market adjustments. He'll touch on some of the six-month year-to-date highlights, including north star ROE performance of 15.6%, and the benefits of funding diversification, including our now nearly EUR 900 million European covered bond program. For my part, I'm gonna share thoughts on what you can expect from our performance stability perspective for the balance of the year. Lots of positives in my estimation, and talk about the tactical adjustments made to respond to heightened economic and market risk.
For our Q&A, Ron will contribute his subject matter expertise as he did at our Investor Day, a recording of which is available on our website, and worth referencing for more information on mature and proven risk management strategies. Turning to our outlook, I will say that performance, including conventional asset growth of 36% year-over-year across our core personal and commercial lines, puts us on track to achieve our earnings guidance for 2022. This guidance envisions consistent NIM, 8%-10% adjusted EPS growth over 2021, and adjusted ROE of 15%+. Asset growth in one quarter creates natural earnings momentum in ensuing quarters.
We're confident in confirming our guidance because when we published it, we assumed that market activity would moderate during our forecasting horizon, and because our conventional asset growth was well ahead of guidance over the first half of 2022 in virtually all parts of the bank. To get deeper into our outlook, we do expect the four increases in the Bank of Canada's overnight rate since March, with more to follow as early as September, will reduce activity in property markets for the second half of 2022. Like you, we've seen a variety of market forecasts all point to sales volume declines of varying proportions. While those forecasts and our own risk appetite suggest that origination in our personal and commercial bank segments will most likely reduce from last year, I think context is important.
We expect a reduction compared to the very strong originations posted in the past few quarters in both segments. Even with that, we expect to achieve on-guidance conventional portfolio growth by the time our books close on December 31st. As a reminder, that guidance is for 10%-15% growth in conventional commercial loans and 12%-15% growth in conventional personal loans compared to December 2021. In my view, this is all doable in the context of the outlook for the housing markets supported by our team's performance in the first half of the year. Looking at recent performance, our alternative single-family business certainly set a high bar. We've bested annual guidance so far with portfolio growth of 35% year-over-year.
These results, including a 6% increase in Q2 alone, was driven by higher originations and decline in loan attrition. Strength of our market share position in the broker channel, supported by our fundamental focus on good service, augmented by our new Equitable Connect broker portal, will also play to our advantage in securing the high-quality origination opportunities that we covered in a tighter market. Into a period of greater housing market stability will challenge today's homeowners with a mortgage. A case can certainly be made that strong employment opportunities for Gen Y and Gen Z cohorts, rising immigration, and shortages of housing stock in our regions of focus will provide the support the market needs to be healthy in future years. As Ron told you in Investor Day, our risk appetite is designed for the long term, and we are prudent bankers in risk-on and risk-off environments alike.
The risks we see today include the bank's response to elevated inflation and our expectations of changing collateral values. Accordingly, the assets we put on the books in recent quarters originated such that the average LTV on the bank's uninsured residential mortgage portfolio was 57% at the end of June. While house price declines would naturally cause that ratio to increase, we still have plenty of protection. That said, and to be prudent, we ratcheted back on LTVs in certain suburban areas in Ontario, adjusted debt service coverage ratios on certain mortgage products, and we're taking a more cautious view to refinancings. To be clear, these are tactical moves consistent with our past practice, not wholesale changes in our already sound approach.
A fundamental factor that works in our favor in a down market is that we lend in larger urban areas which are buttressed by forces such as population growth and diversified sources of employment. The outlook for our deaccumulation business is very positive as we continue to gain profile, market share, and assets. Year-over-year, our reverse mortgage portfolio grew nearly 2.5 x to CAD 421 million and 38% in the second quarter alone, with June being our best month for originations yet. While this business is not as closely correlated to housing market trends as single family, we also made tactical moves to tighten up our reverse mortgage lending approaches. Portfolio growth and insurance lending amounted to 95% year-over-year and a very solid 24% in Q2 itself.
While trending a little below our 100% 2022 growth guidance, we believe we can end 2022 on or above target as we gain strength from partnerships with nine leading life insurers. On the commercial bank side, total asset growth year over year was 25% and 11% in the quarter, which puts us well ahead of annual guidance. Every part of our commercial business expanded year- over- year and sequentially. I'm particularly pleased with recent growth in our Commercial Finance Group, specialized finance, and equipment leasing portfolios. Looking ahead, we do expect the pace of conventional commercial originations to slow in the second half, but we also anticipate lower loan attrition than we've seen in recent quarters. We expect to meet annual guidance for asset growth.
When we think of the many positives of running a diversified commercial bank, our top consideration is our strong position in apartment lending. Apartments are an attractive source of housing for many Canadians and will continue to be in the event of a recession. This asset class has also experienced rapid rent appreciation and low vacancies. Another positive is our multi-unit insured mortgage business. Year- to- date, you will have seen that we have grown the portfolio by 15%. Our pacing guidance for the full year is 0%-5%. We expect our performance to continue in the final half of 2022, and some technical dynamics in the marketplace will act as strong tailwinds.
From a risk management perspective, the commercial team, and frankly, our own customers, dialed back on construction lending and demand for such products earlier this year in order to be prudent while there is a greater uncertainty around the cost of finished products and in the underlying collateral values. In equipment leasing, we continue to shift the portfolio in favor of higher credit quality business. Two-thirds of new assets in our Bennington book are comprised of prime leases, and we are focused on more economically resilient business sectors with overall excellent margins and ROE well above our 15% target. Canada's challenger bank is committed to long-term growth and proactively makes moves to adjust its risk appetite. These changes are fundamental to our reputation as an institution with much lower loan losses than our peers.
A reputation that was reinforced over the first half of 2022, with realized loan losses of just CAD 2.4 million on a portfolio of CAD 40+ billion . The levels of arrears are the lowest in my entire 15 years as CEO of Equitable. An important reminder also is that under IFRS 9 rules, when a bank originates new business, we book new provisions. With our high growth in originations of CAD 4.5 billion in Q2, these provisions were also naturally higher in Q2 too, even though losses may not ultimately be realized. The majority of the small losses that we actually did incur were within our leasing portfolio, which is where we expect to see them with the offset, the returns are much higher with this form of lending.
As you heard in Investor Day, we never sacrifice loan quality or compromise risk management for growth. Each and every transaction must meet our stringent lending criteria. While preparing for new market realities has been an obvious priority, we have not lost a single step in moving forward on all the exciting initiatives you heard about in Investor Day. I'll mention just a couple as they relate to EQ Bank. We're launching our payments card this fall, a move that will invite our customers to use our all-digital platform as their primary bank, as well as a great place to save. The difference between these two realities is a whole lot more functionality for EQ customers who will be able to pay wherever Mastercard is accepted.
We're also looking forward to the full launch of EQ Bank in Québec, a move that will leverage our proven technology to bring a differentiated value proposition to a large digitally savvy population. EQ Bank has a really good customer following in Québec through our broker deposit and broker mortgage businesses. Our presence there for over a decade should give our early marketing efforts a boost. These two advancements will allow us to build on EQ Bank's recent momentum, which featured year-over-year growth in our customer base of 26%, including over 13,000 new customers in the second quarter. Another 5,000 Canadians joined us in July, during July alone. Of equal importance that now more than 285,000 Canadians at the end of July who trust their banking needs to EQ are using the platform more than ever.
Digital transactions increased 7% in the second quarter, and we saw continued growth in products held by each customer. While bringing great value to EQ customers, EQB has benefited from improved economics as customer lifetime value grows while customer acquisition costs remain stable. Thinking about the deposit market generally, rising interest rates should act as a catalyst for continued growth and demand for savings solutions, particularly of those offered by Canada's Challenger Bank through EQ Bank, but also within the rest of our now CAD 15.9 billion deposit business. Rising interest rates have caused investors to take a much more active interest in GICs, with issuances through the major broker platform up more than 2.5 x in June 2022 compared to the same month last year. The significant increase in liquidity in GIC markets is certainly encouraging for our approach to business.
Our outlook would, of course, not be complete without mentioning how much we look forward to completing the acquisition of Concentra Bank. As you saw in the quarter, we received unconditional clearance from the Competition Bureau Canada, so a good check mark there in terms of ongoing regulatory review. As that process proceeds, our transformation management office continues its important work with the help of Concentra's team to ensure that we hit the ground running quickly in bringing our two organizations together. The scale impacts and opportunity benefits are significant, and we're excited by what we can do together to deliver value for customers, including credit unions and all EQB stakeholders.
While it's important for you to know that our performance prospects remain strong, as we are managing for heightened risks in the housing market, you should also know that all eyes remain on task with respect to producing industry-leading returns on equity. As a result of our risk management approach, we will continue to lend with confidence in this rising interest rate environment and achieve our traditional 15% plus ROE when the books close on the year, adjusted for Concentra cost closing and integration costs. It's too early to put a pin in the wall on 2023 guidance, but as with last year, we will offer initial guidance together with our Q3 results in November. I'm also pleased to note that EQB shareholders can now look forward to the third dividend increase of 2022.
This latest increase of 7% sequentially or 68% year-over-year is in keeping with our longer-term commitment to grow our dividend while reinvesting an attractive ROE. As CEO, I see one of my major accountabilities being to ensure that we reach our longer-term goals by allocating capital in a disciplined manner, such that an EPS and book value per share grow at a compound rate of over 15% annually. Though not every year will always be consistent toward our five-year average targets. We shared our economic value added model at our recent Investor Day, but to reinforce what I said, 15% annual compounding takes us towards an EPS of CAD 18.20 in 2027, a book value of CAD 127.98, and a dividend of around CAD 4 using 2022 consensus estimates as the baseline.
The recent quarterly results give me more confidence than ever that this is achievable, although we're gonna have to hustle hard and work hard to get there. To summarize, I'm confident in our ability to build value for our shareholders in the quarters ahead as we're able to reinvest in our many businesses to create consistent compounding capital. Now over to Chadwick.
Thanks, Andrew. Our bank entered and exited the first half of 2022 with strong capital and liquidity, resilient margins, and strategic momentum. As Andrew said, we are again confirming our earnings guidance for the year, which takes into account core personal and commercial banking business performance year- to- date, including net interest income and fee-based income growth. Our expectations for continued risk-managed expansion in our conventional lending portfolio, as well as the current and quickly evolving market sentiment on Canadian housing, inflation, and rising rates. There are two distinct areas to cover this quarter with core and non-core considerations. Core performance remains strong and stable, positioning us well for the rest of 2022 and then into 2023.
While not core to earnings, part of our broader strategy does include priorities that have an impact on our quarterly non-interest income, including realized and unrealized changes in the value of strategic investments, as well as fair valuing certain securities through the P&L to offset fair value changes in derivatives. Given these mark-to-market and fair value adjustments were a sufficiently large outlier for us in Q2. I'll first start with additional clarity here before moving to comments on our earnings engine that is progressing well to annual guidance. For the CAD 2.5 million net loss we booked in non-interest income in Q2, you can see the reconciliation on the slide in the Q2 investor presentation and in our MD&A. There are three main drivers to consider for reconciling non-interest income in Q2. First, fee-based growth, which we view as core revenue.
At CAD 7.9 million in Q2, this is up a solid 41% year-over-year. It's a priority to continue to grow this revenue over coming years as we comment on regularly through new products and services. There are two sides to the coin for how you can look at the negative offsets in the quarter. It's in part because of these types of offsets why I say regularly, we don't manage for the quarter, but we do set targets and expectations for the average across quarters in the short term, and most importantly for the medium term. First side of the coin is the strategic investments. You can think of this as around 2/3 of the negative net impact for Q2. This line item was marked down through the P&L by about CAD 8.7 million in Q2 with unrealized losses.
With corresponding gains booked of a positive CAD 15.9 million in Q1, we remain at a net gain year to date of CAD 7.2 million. To add even greater transparency, we started reporting this strategic investment line more clearly as of the Q2 2021 MD&A. Even after including the negative impact in Q2, we've booked cumulative gains of nearly CAD 20 million on these investments over the past four quarters. I indicated at our Investor Day that I expected strategic investments to come down for at least a quarter or two from Q1 2022 levels, and that's exactly how it played out, consistent with the significant declines in North American equity markets and also private market corresponding write-downs. This includes an investment such as Portage Funds, Framework Venture Funds, and Wealthsimple.
We continue to be enthusiastic about these investments and to repeat what Andrew said again, we don't actually make these investments for the gains, but we do generate well above target ROE notwithstanding on them. There is potential for further moves up and down on a mark-to-market basis in coming quarters. This is the volatility that comes with accounting treatment of recognizing changes through the P&L regularly, even when they're unrealized. The other side of the coin is primarily the impact of fair value gains and losses on derivative financial instruments. This comes back to accounting treatment and includes the treatment of cost of funds hedging and CMB swaps.
Unlike items such as changes in the value of strategic investments, gains and losses on derivatives used for hedging often reflect timing mismatches, where income or expense recorded in any period will be reversed over the life of the derivative. There are a couple lines that net out in the MD&A, but as you see in the slide in our investor presentation, you could view these generally as a net fair value negative adjustment of CAD 3.9 million in Q2. Our hedging has been effective at reducing interest rate risk and reinvestment risk, but again can be impacted in a particular quarter when there are very significant shifts in interest rates. From an outlook perspective, we do not forecast the impact of mark-to-market or fair value adjustments in our guidance given the variable and non-core nature.
I'll also make note of gains on sale from securitization activities which are booked under non-interest income. These are expected to normalize and improve from Q2, but I'll caution as always that these gains fluctuate from period to period based on volumes you recognized, which are driven by consumer preferences. Diversifying and increasing non-interest income by growing fee-based and other income with new products and services is part of our core business strategy and will provide long-term benefits and stability to this revenue line. This growth will be very positively accelerated upon closing our agreement to acquire Concentra Bank. Now turning back to the core business of EQB, performance was strong in both the quarter and for the first six months of 2022. This reflects disciplined risk managed capital allocation in a fluid but generally constructive economic environment.
As usual, as Richard noted up front, all the numbers I quote are the adjusted numbers we publish, which exclude Concentra Bank-related acquisition and integration costs. At CAD 167.6 million, quarterly net interest income was ahead of Q2 last year by 18% and up sequentially from Q1 by 3% on strong, stable margin performance. While core revenue was of the usual high quality and personal and commercial business lines grew sequentially compared to Q1, the marks and accounting treatment of fair value adjustments are referenced under non-interest income resulted in total revenue still up 4% year-over-year in Q2, but down 12% sequentially, resulting in diluted EPS of CAD 1.75 for Q2 with ROE at 12.1%.
Even with that diluted EPS for the first half of 2022 was still record setting at CAD 4.40 per share, 10% above last year at the top end of our 8%-10% growth guidance, and ROE landed at 15.6% year to date. That's aligned with our historical ROE average and on target for the year's guidance of 15%+. Book value per share increased 16% to a record CAD 59.25 per share, well ahead of full year guidance of 12% growth. Now, Andrew already profiled the strong growth in our lending portfolio. I'll move right to providing comments on our sources of funding, where the story is equally positive.
During the quarter, we completed our second European covered bond issuance, this time in the amount of EUR 300 million at a spread of 20 basis points over Euro mid-swaps. Meaning from a comparison to GIC pricing, relative pricing on our second issuance was even better than our first. Based on the timing, the benefits of this second issuance won't be fully flowing through the quarterly results yet. Our capacity for covered bonds will further increase with Concentra Bank, and we may proceed with another issue before the end of 2022. Our broker deposit business expanded again to CAD 12.8 billion, with double-digit year-over-year increases in both term and demand deposits. Volumes in this channel are exceptionally high based on customer preferences for GICs, also corresponding to the sell-off in equity markets.
While this will continue to become a lower relative proportion of our funding stack over time, the opportunity for broker deposits has been excellent in 2022. As Andrew profiled, EQ Bank showed strong growth in customers in all measures of engagement. We expect it will perform to guidance by the end of 2022. Moving to our NIM or net interest margin, our 2022 guidance was for consistent to moderate expansion in NIM from the 1.81% at the end of 2021. Trending to date is right on point. In Q2, NIM was 1.81% and year- to- date stood at 1.84%. We see the positive effects of the asset mix shift towards higher yielding conventional loans on a year-over-year basis.
Although this was offset by a couple of factors, including an expected decline in prepayment income. We profiled in depth how we manage margin and the ROE on every dollar we lend and invest at our June Investor Day, with great details shared by our world-class Treasurer, Tim Charron. I encourage you to listen to my finance update section in the playback on our investor relations website if you haven't had the chance yet for this content. In a rising rate environment, our margin strength and potential is also being enabled by the scale of our EQ Bank deposits with our everyday savings account. This is proving to be the best digital bank in Canada, plus a great source of lower cost, diverse funding with margin expansion contribution. Moving to expenses or again, what we view as our investments in the bank.
In Q2, we continued to invest in people, process, and platform innovations. With core revenue growing at double-digit pace, non-interest expenses were up 16% year-over-year. Normally, this would allow us to achieve a trending of positive operating leverage. However, the marks against our non-interest income within Q2 reduced revenue, thereby inflating efficiency for the quarter to 45.8%. The impact was not so dramatic on a year-to-date basis when efficiency was 41.1%. If non-interest income was more normalized to recent trending, efficiency would have remained tight to our 40% average range. Expense growth in Q2 year-over-year was mainly due to a 24% increase in compensation and benefits as we expanded our FTE by 29% to over 1,300 colleagues.
Expense growth generally reflects our focus on acquiring the best talent, including in both banking and technology, and compensating our top talent accordingly. This momentum and growth will slow in the second half of 2022. For process, including our corporate and marketing categories, expenses were up 10% year-over-year on a combination of factors, including campaigns promoting our new and growing offerings in reverse mortgage and insurance lending, and building the EQ Bank brand in the Canadian marketplace. In platform, product costs and technology were up 13% year-over-year and 1% quarter-over-quarter. Baked in here is amortization of investments for projects completed over the past 12 months and a continued increase in innovation investments as we prepare for more product and service enhancements.
Looking ahead, we expect relative expense growth to be lower compared to the growth in the first half of 2022. We will actively manage our investments in the bank accordingly towards our general target of approximately flat operating leverage on an annual basis. Again, that excludes costs associated with our agreement to acquire Concentra Bank. All integration related spending remains on target. As a reminder, the integration expense budget we communicated at the onset was CAD 45 million-CAD 50 million, which relates back to our previously communicated goal of generating mid-single digit EPS accretion within the first year of closing the acquisition. In the quarter, these costs were CAD 3.6 million or CAD 0.08 per share after tax.
CAD 2.7 million of that was specifically for acquisition and integration related expenses, and the rest was the dividend equivalent amount paid to subscription receipt holders in accordance with the terms of the offer, which shows up as an interest expense until those roll into common equity. Corresponding updates on our expectations on transaction synergies will be provided following the closing, including updated guidance for EQB. On the next slide, you can see the trend line for credit metrics, another great chapter in EQB's long history of prudence and risk management responsiveness. Andrew mentioned the low level of realized loan losses in the quarter, which is an outcome of our approach and the health of the economy. Following five consecutive quarters of net PCL benefit booked due to improving macroeconomic variables, in Q2, we resumed a more normal pattern and booked a PCL expense of CAD 5.2 million.
The majority of this PCL expense in Q2 reflects the growth in our business with higher stage one and a shift in macroeconomic variables in our models that contributed to higher stage two. However, the stage two is not a result of higher delinquency. Net impaired loans contributed a small amount, but over a third of that NPL relates to one loan where we don't expect to take a loss. Net impaired loans declined to 18 basis points of total loan assets compared to 22 basis points on March 31st and 41 basis points a year ago. The improvement over last year reflects a reduction of CAD 36.7 million in conventional commercial loans, CAD 17.5 million in single-family mortgages, and a CAD 2.7 million dollar reduction in equipment leases.
The 4 basis points sequential improvement reflected the full discharge of one delinquent commercial loan. EQB remains well reserved with allowances as a percentage of total loan assets at 14 basis points at quarter end. This is lower than 19 basis points a year ago, but in line with pre-pandemic rates. In coming quarters, PCLs are expected to be consistent with Q2 levels, assuming current economic forecasts prove to be accurate and borrower behavior is consistent with what our credit loss models anticipate. Excluding PCLs as a consideration, our 2022 guidance for pre-provision, pre-tax earnings growth was 12%. Year to date, we're precisely on target at 12%. Moving to capital.
Our current CET1 level of 13.5% means we continue to operate at the top end of all bank peers in the S&P/TSX Composite Index, and we remain ahead of our 2022 guidance of 13%+. This stability reflects a combination of organic regulatory capital growth and a capital investment in Equitable Bank funded through EQB's funding facility established in Q1, offset by conventional loan growth and corresponding risk-weighted assets. Risk-weighted asset growth does remain above our target level of around 15% on average across years, and Q2 was up 29% year-over-year to about CAD 14.7 billion. This higher RWA growth is all within our risk appetite framework. With actions we've taken and our expectations for the portfolio of coming quarters, we do see a general return to our target range over time.
Upon closing the Concentra acquisition, we expect to continue a CET1 ratio of 13%+. To summarize, core business performance was strong in Q2, and the momentum created in all lending positions us to deliver our 2022 guidance. We're attuned to changing risk dynamics and have adjusted our underwriting to protect shareholder capital such that we have confidence in lending in this environment. Our messages at our June Investor Day are the anchor point. We're continuing to build a bank that we expect will generate 15%-17% ROE on average over the next five years and beyond, same as the past 10 years. We're building innovative products and services for Canadians. We're bringing needed and significant change to Canadian banking to enrich people's lives.
We're building technology capabilities distinct from all peer banks in Canada, and our business model is built and proven to perform across all economic cycles. We don't manage to the results in a quarter, but we are very thoughtful about our guidance across an average of quarters. I again encourage you to check out the June Investor Day replays posted on our investor relations website if you haven't had the chance. Pam, can you now please open the line for Q&A?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Meny Grauman with Scotiabank. Please go ahead.
Hi. Good morning. A question on originations. They beat expectations. Is there any color in terms of the timing as the quarter went on? Did you see a more pronounced slowing towards the end of the quarter? If you could talk to what you're seeing early in Q3, if there's anything notable there in terms of the pace of originations.
Yeah. I mean, Meny, I think, you know, applications obviously predate closings, so we continue to see strong closings and loans right through quarter end. And, you know, we've definitely seen a bit of a slowdown continuing in terms of new applications through July here. But it's still a bit spotty. I think yesterday was, you know, similar to the prior year. So it's definitely not entirely consistent. There's definitely activity in the real estate market contrary to some of the commentary we're reading. But we are seeing a bit of a slowdown to start the quarter.
Are there any portfolios in particular and any specific loan categories or sort of any way to focus on areas that are weakening more than others? Or if you could highlight sort of anything more specific in terms of where you're seeing more weakness, compared to the broader book.
Yeah, I mean, let's start with strengths as well. We're still continuing to see the, you know, the prairies in the west generally seem to be, you know, bucking the trend a bit, which perhaps you would expect with improved commodity markets there. You know, this was a bit of a negative going back five years ago for Equitable, so showing the strength of standing into those markets. You know, as is widely reported in the press, you know, the slowdown is probably mostly around the Ontario markets, which is obviously a, you know, a critical market for the whole country and for us.
In terms of Andrew, you talked about tactical moves in the mortgage book, including adjusting LTVs in some areas. Can you just give us a little bit more color in terms of where you're making those changes and maybe clarify what's driving you to make those changes? Are you seeing certain dynamics that you don't like, or is this more about being proactive?
Yeah. I think we always try to be proactive, Meny, and sort of think through how consumer preferences might be changing. You've got a few things going on. Obviously, rising interest rates, but you also got the pandemic kind of moving more into the rearview mirror. The view is that we saw asset prices or house prices moving upwards most over the last couple of years in areas further from the city centers as people were looking for more space to work from home, place for the kids to play, that type of thing. We're expecting that and we are seeing that preference start to swing back to more, you know, high density urban living. The result of that is that we're more concerned about those areas where large commutes would be
Required to get back into the major urban centers, and that's where we focused our efforts in terms of sort of just being a little more. We're still constructive, but being a little more concerned about those areas. We also think that people that are already stressed and therefore looking for refinancings might be, you know, an area that we just need to show that additional caution in this environment. That's another area we're quite focused on. I would say this is very much kind of trimming rather than a wholesale change, as I mentioned, and consistent with our past practice has been proven through cycles up and down.
Got it. I'll recue. Thanks.
Thanks, Meny.
Your next question comes from Étienne Ricard with BMO Capital Markets. Please go ahead.
Thank you, and good morning.
Good day.
On the funding side, what level of competition do you expect on deposit markets over the next few quarters, given that, you know, on one hand, loan growth appears to be slowing, while on the other hand, inflation pressures could be draining household savings. How do you see those two dynamics interplay on the cost of deposits?
Certainly, I'll speak to EQ Bank and maybe Chadwick will talk more to the wholesale GL, not the wholesale, but the broker GIC markets, if that makes sense. On EQ Bank, you know, I think we're just differentiating ourselves from the competition. We have the best digital experience of any bank in Canada. As I mentioned in my remarks, you know, we're adding more features and capability with our payments card coming soon and launching in Quebec. You know, even as recently as yesterday, I saw our NPS scores, you know, how customers are thinking about us. Those are improving quarter over quarter. I think we're moving into a whole different environment and creating a different category almost.
Super confident about that and then what that means for our shareholders and for funding costs. As I mentioned, you know, huge liquidity in the broker deposit market, just extraordinary. I don't know if that got called that in the script, but the volumes in the CANNEX market are up 2.5x year-over-year. Chadwick, if you could maybe have some comments around what that means for costs and deposits, that would be helpful.
Yeah, you've certainly seen, as Étienne, as you've probably seen directly, the pricing has certainly moved up on the broker deposit boards. Our market share has maintained pretty well consistent in this, and we've certainly taken on some more deposits. The important benefit to remember, as you know, is the diversification in our funding, so we're not entirely reliant on that channel. I wouldn't necessarily view it as a competition perspective, but a lot of people want the funding there. We may do more, for example, in the covered bond market, right?
That's why we did that issuance, and we may do another one in the wholesale side, the unsecured wholesale, those margins have widened, but they're still pretty tight when it comes to secured wholesale and the covered bond market. That's part of why Europe is such an excellent choice for it. So we can dial up and change our levers accordingly. So competitive, yes, but we have great options, and I think the balance will result in some continued relative tailwind in our funding. Again, a reminder, as you know, too, once Concentra Bank closes, that's going to expand our options and diversification even further.
Étienne, if you're looking to buy a GIC, I'd recommend you look at the EQ Bank platform. You'll find the rates pretty attractive there.
Noted.
Étienne, like the one point too, it's even to that point, though, with the beauty of our diversification, our strategy, we don't have to always have a top of market price, right? Because of our diversification, we can focus on margin management. It's a very important differentiating factor, too.
Chadwick, on one of your last points on the uncovered bonds and deposit notes, given where spreads are today, how do you plan to scale issuances over the next year?
It's probably what I would say without being conclusive, as you'd see maybe a higher propensity likelihood for another covered bond versus another deposit note in the near term. I think the normal expectations of the cadence we've set of one to two deposit notes per year and at least one covered bond issuance per year should continue. You could see another covered bond, as I mentioned, possibly as early as this fall. That market is exceptional still.
Okay. Lastly, just on your deaccumulation segment, how is demand for reverse mortgages holding up in a higher rate environment, relative to a traditional mortgage? I mean, in other words, given the lack of scheduled repayments, how do you think about the reverse mortgage affordability when rates rise?
I mean, affordability doesn't really change from the consumer's perspective because as you say, there's no payment to be made. You know, where we do adjust our actuarial models and thinking about the LTVs that we lend at. Actually, I didn't mention it in my remarks, but we've also tinkered with that a little bit and kinda cut back LTVs a little bit in the face of relatively higher interest rates vis-à-vis the expectations for the housing market. So we've been feeling pretty good that we've got the risk appetite dialed correctly.
We continue to see, as you saw, you know, very strong demand for reverse mortgages, perhaps tempered a little bit over the last two or three months as people have seen the higher, you know, house sticker shock effectively on the underlying interest rate that will accrue on the mortgage. Again, we've got some strong tailwind, say, in a preference for moving away from communal living as a result of the pandemic, the broader acceptance of the product. Don't forget we're one of two lenders in this space, and we really believe we're cementing a really strong franchise in this business.
Thank you.
Your next question comes from Geoff Kwan with RBC Capital Markets. Please go ahead.
Hi, good morning. My first question was just on the originations in the quarter. It was a good number. Your key competitor also, I think had a pretty good number there. Just trying to get a sense from your side as to, you know, what was driving it. Was it just a matter of strong sales activity in the spring with the deals closing by quarter end? Or was there some market share gains from other direct competitors, maybe some people at the banks that were falling into your lap, or alternatively some people on the mix side that are higher quality that you might have been able to get at better rates because there might have been less appetite?
Yeah, I think, you know, we continue to dial in on the broker experience. I mentioned we've opened up a new portal in the quarter that you know I think it was already in pilot at the beginning of the year, but really got to a broader group of brokers during the quarter. We're feeling good about market share. As you know, the data can be a bit hazy in that area, but feeling fairly good about that. Don't think we're really yet seeing any spillover from the big banks, but that may well be one of the outcomes as we move forward here with you know GDS ratios and TDS ratios getting tougher.
Don't think we've really seen that flow through yet.
Okay. Just my second question is, if we looking ahead here to 2023, if we see greater EPS growth pressure, let's say we're in a more or a much softer housing market environment, loan losses are rising, do you still stick with the dividend growth strategy given the payout ratio is still really low? Or is there a scenario where you might slow or even kind of halt the dividend growth? I'm just trying to understand here if there's a reasonable scenario where you might deviate from what you've articulated on your dividend growth strategy over the next couple of years.
You know, I think, Jeff, we can always create scenarios, but as you know, we're pretty committed to this program, and I would. Oh, by the way, I wouldn't necessarily expect rising losses in our single family book. I just don't think we expect losses. There may be stresses, but not losses. And frankly, a slowing growth in the book actually leads to more, you know, more regulatory capital accumulation. I would expect that we're pretty committed to living with this dividend. Not gonna be imprudent, if there's need to preserve capital, but I think it's extremely unlikely we're gonna get to those kinds of scenarios. I think our investors should be confident that we're gonna live with our 20%-25% dividend compound dividend growth over the next few years.
As you point out, the dividend, our dividend payout ratio is very low compared to the other banks. That's a core part of our value creation model, but, there's lots of room for us there.
Okay, great. Thank you.
Your next question comes from Lemar Persaud with Cormark. Please go ahead.
Yeah, thanks. Just maybe on these mark-to-market losses on the strategic investments. I just wanna circle back to that. Would it be fair to say that if the quarter was to end today, you wouldn't see much more in terms of mark-to-market impacts on the strategic investments, derivatives, loans, and investments? I think the CAD 8.7 million and CAD 3.9 million losses in Q2 from Chadwick's slide.
Sorry. If we were to end today, if we were to end Q3 today, how would that be playing out? Is that the question?
That's right. That's right.
Yeah, I think it would be hard to say, frankly. I haven't even seen July's results yet. You know, I know that some of the ones that are more observable in the market are actually up since quarter end, but I don't think we can make a generic comment about where we expect to be in Q3.
Yeah. Like I know where you're going, Lemar. It's obviously the activity is pretty negative in the quarter, but that's why, you know, it could be up, could be down. But we're taking a bit of a neutral stance, and that's why we said we don't forecast those lines. But we could say it was certainly some pretty extreme activity in the past quarter. And obviously been lots of headlines on this topic. But we took some prudent actions and, obviously as we refer to these as unrealized losses to that point too, right? We haven't exited these positions. You're right that they could be marked up or down further, but I think there'll be some volatility for a little while longer in these markets.
Okay. Maybe just moving on, I guess to kind of operating leverage. I noticed that you guys are still confident in kind of the neutral operating leverage for the year on an adjusted basis. That would imply, you know, quite a bit of an improvement from the first half of the year. I think it's negative 4.4%. Talk to me about what gives you the confidence in that, what kind of levers you have to adjust maybe expenses up or down and, you know, the assumptions baked in from a revenue growth perspective.
Yeah, I mean, I think one of the interesting things about operating leverage is that there's two elements to that, right? The cost sits on the as a numerator, and then the you know, your earnings is your denominator. What you saw here was frankly a more of a denominator issue than a numerator issue in the sense that with those mark-to-market changes that you just talked about, it drove down the value of the denominator. We're fairly, you know, we're always pretty diligent about looking after our cost base. You know, we travel in the regular part of the plane, and we don't have private jets and any of that kind of stuff.
We keep a really tight focus on costs, as with an expectation of lower originations through the next quarter or two. We certainly haven't been adding to our underwriting teams in the way that we used to. There is a bit of room to constrain costs there. What I can assure you of is that Chadwick keeps a beady eye on the cost of his team, and I think we're on top of it, you know, we wouldn't be expressing this level of confidence if we hadn't done a pretty detailed dive to be able to give you that confidence.
Yeah, a reminder too, Lemar, so part of the delta that you're seeing with other banks, right? We were targeting approximately flat because we have the best efficiency ratio by a mile, right? It's the goal was, in general, maintain our competitive advantage through efficiency and our bet on digital. Operating leverage was just to indicate we want to stay in that range versus saying we are going to be precisely X% in efficiency. To the normalized point or year-to-date point, we're still within that range, even around the 41%. It's meant to be more of a guide point. Our first point is always gonna be the ROE as our lead anchor either way.
Okay, that's great. You know, just last one for me then. Just a high level question, but you know, given the increased macroeconomic uncertainty, are you seeing any hesitation from commercial borrowers? Maybe you know, discussions about pushing out planned CapEx, that sort of thing? Or you know, are all signs still flashing green?
You know, I think as I mentioned in my remarks, if we're talking about say our commercial borrowers, you know, we have engaged kind of business-to-business relationships, mature relationships with many of these players. They're certainly concerned about a lot of conversation about inflation and construction costs, not choosing to go in the ground with new projects as a result of inflating prices. They're concerned about where, you know, ultimately they're gonna be able to sell the product at, that kind of conversation. You know, I think the Bank of Canada is having its impact on the market in terms of slowing down new construction starts, which is presumably one of the things we're trying to do, just take some demand out of the economy. That those conversations are going on.
Having said that, you know, it does seem like there's a lot of optimism about the longer term story for building housing and other kinds of real estate in Canada's major cities if you take a five to 10-year view. We continue to, you know, keep our customers close to us so that as those opportunities being clearer, inflation gets more in the, you know, gets under control, we'll be well-positioned with our clients.
Great. Thanks for the time, guys.
Thanks, Lemar.
Thank you.
Your next question comes from Graham Ryding with TD Securities. Please go ahead.
Hi. Good morning. Maybe I'll stay on the same theme. Just, I think it was a record quarter for commercial originations. What, I guess for the commercial sectors in particular, drove that volume? Just, it seems like a fairly fluid market, so maybe just some commentary on your comfort level around sort of pretty active originations in the quarter.
I mean, a lot of apartment lending was a big driver. Much of that ending up which will provide the pipeline, as a reminder, for some of our CMHC activity. Sometimes we're originating these as we would call them a CMHC bridge loan. These are good apartment buildings that perhaps the purchaser is planning to increase the rents. Once they've increased the rents, they'll get a CMHC certificate of insurance, and then we'll securitize it in the CMHC pooling. That was certainly a big one in the quarter. You know, continuing funding into pre-committed construction programs I think would be another that was good. We also saw our specialized finance group continue to really step up, and that's. I really love that business.
It's got some operational complexity, but we've really got a good group of specialized lenders that we invest advance funds to in that area. I think right across the board, frankly, our commercial teams just did a fantastic job. I know that they're very confident they did a also fantastic job of doing a deeper dive into the risks in the portfolio, and I'm feeling really good about. I think we have a great team on top of that brief.
Okay, perfect. On specialty finance, can you just elaborate on that? I think there's a fair amount of lending to sort of private mix is part of that business. Can you sort of talk about your comfort level there? Or is that now perceived to be a higher risk area in the market right now?
Yeah, it's funny how people I mean, many would perceive that as high risk, and generally speaking, we're lending somewhere around 70%-75% margined against first lien mortgages, with a waterfall type structure, so like a private securitization structure. A lot of operational risk controls in behind the scenes there. To knowledgeable people in the space, it feels like a pretty low risk sector to us, actually, and that's been our experience. We've never had a loss in that portfolio.
Okay, great. My last question would just be, maybe just, Chadwick, some color on sort of the key inputs in your credit loss model that drove some of the higher, or the PCL expenses this quarter. I was surprised to see that I think the outlook for employment over the next twelve months in your model seemed to improve quarter-over-quarter. It likely wasn't employment that was driving the higher, the PCL expense this quarter.
You want Ron to.
Yeah. Sorry. That would be more of a Ron issue.
Yeah, Ron can hop in on that.
Sure. Graham, this is Ron here. Yeah, the key inputs in our models is consistent with most of the industry is unemployment, like you just noted, as well as GDP. From Q1 to Q2, I've described the changes in our forecast as very moderate changes, but what we saw in the quarter was in the near term, reflecting what we're currently seeing in the actual markets with respect to unemployment being stronger than were anticipated a quarter or two ago. As you get out to about the you know 15th to, 15th month into the portfolio, seeing some moderate reduction in the strength in unemployment numbers.
What that does in our book is for the stage two losses, which I'll remind you are a lifetime loss as opposed to stage one, which is just a 12-month look. When you get out there that far into the forecast, those lower unemployment numbers do result in a modeled increase in our stage two. It is a modeled increase, and as Chadwick noted it, our stage two did not grow as a result of current delinquency.
Okay. Understood. Thanks. That's it for me.
Sure.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Jaeme Gloyn with National Bank Financial. Please go ahead.
Yeah, thanks. Good morning, guys.
Yes.
First question, just on the NIM, and the drivers quarter-over-quarter within compression you guys are talking about in the MD&A. Higher funding costs or prepayment, higher yields on cash. My first observation here is the net impact of these drivers seems likely to remain negative in the next quarter, so we should expect NIM to push down quarter-over-quarter. Is that fair?
I actually don't think so, no, quite clearly. There's a couple of things behind that. You're not seeing some margin expansion. You may see from the lower funding costs from EQ Bank coming through to the fore. EQ Bank is a diamond in the Equitable Bank crown, and it's gonna really show for you in Q3 and Q4 here in terms of that funding cost. The other thing is that Chadwick is not boasting proudly enough about the covered bond program. We got another covered bond program done in Q2, and you haven't really seen the lower funding costs associated with that start to flow through the statements yet.
That next issue will see that lower funding cost, you know, flow through in its entirety for Q3. No, I think I'm optimistic that NIM will. You know, the numbers you see even in the quarter were pretty marginal changes, and that can be, you know, that can always happen. I think in general, we're feeling confident about the outlook for NIM with expansion possibilities.
Hey, Jaeme, you can look at the numbers, right? Like Jaeme, if you look at, for example, with EQ Bank, that's Andrew's point is really important one to crystallize. We already have a great everyday rate on that. With Bank of Canada up 225 basis points so far this year, EQ Bank is up 40 basis points. You already have that level of expansion too within it while we're doing extremely well for Canadians. It's a great opportunity for us. It's a bit of a timing one as well. That's why you see the flow-through coming a little bit later.
Got it. Just still in the NIM, I noticed that business mix, it had been a positive NIM driver for the past several quarter-over-quarter and year-to-date comparisons, but it's not a driver whatsoever in this quarter. I was wondering if there's anything more to that given that conventional loans are still growing more, far more rapidly than insured loans?
You know, I don't think there's much behind that. You know, generally, in my broader comments, if you look at NIM by business line, if you look out over the next couple of quarters, you should see pretty much stability. As I mentioned, you might see some slightly faster growth in the multifamily loans on book, which do have a skinnier margin associated with them. The net-net, we're still expecting NIM to be strong.
You did see the yields go up, right? When you look through it in the MD&A, you do see the yields go up when you have the product by product breakdown, they did increase, quarter-over-quarter, and some of that pricing will continue to increase. You'll see how that's done on the yield side too.
Okay. Shifting to the PCL guidance. My understanding is that it should be in line with or consistent with Q2 levels. Does that guidance apply to each of the asset classes or just on the aggregate?
Sorry, Jaeme, we're just having a hard time hearing you. I think what you're asking is just back to the point I made on will PCLs be consistent. I guess there's a couple things, right? We made the point that part of why PCLs increased because the business increased. If we have slightly lower originations, could there be slightly lower stage one? Yes, that could be true. Part of why we said there could be some consistency is it depends as well on consumer credit behavior and the macroeconomic variable assumptions that we have. Those two will be connected here. For the general tone we said was some level of normalized consistency. I don't know if Andrew Moor-
Yeah, it was more on asset class perspective. Is that a comment on the aggregate business, or does it also apply to each asset class?
Yeah, we wouldn't expect to see any sort of additional piece in differential PCLs by asset class. I think Chadwick's comment about loan, you know, portfolio growth slowing a bit, you know, should mean there isn't too much pressure on PCL this current quarter unless something surprises us between now and quarter end.
Okay, great. With the Concentra acquisition, I presume you have a little bit more insight as to the performance of that business than maybe what we can see in public filings. Are there any of Concentra's key performance metrics? Are they vastly different than at the time of the acquisition? For example, you know, has growth been stronger, weaker? Same thing for NIM, PCLs, things along those lines.
Certainly, the earnings are stronger than we anticipated when we concluded the deal. At this point, wouldn't like to comment much more on that, but I'm sure you can see it in the OSFI filings, so probably better than you might have expected. There's a number of moving parts behind that, and we sort of need to peel that apart as we want to tell our story in a more integrated way with Concentra. I think just to pick that up, some of those single variables out without the broader story about, you know, how much synergies we can get and so on. I think the way that Chadwick continued to frame it as accretive to EPS is still the right way to think about it.
Nothing that we've seen out of the more recent performance data would change our broader perspective to the theme.
Okay, great. Thanks, guys.
Thanks, Jaeme.
Mr. Moor, there are no further questions at this time. Please proceed.
Well, thanks, Pam, and thanks for everybody for their interest today. As there are no further questions, we look forward to reporting our third quarter results in November. Thank you for listening today and goodbye for now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.