Great, so I guess we'll start our next session. Happy to have Andrew Moor here, the CEO of EQB, and before we begin, though, I do want to remind the audience that Andrew's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections, or conclusions in these statements, and listeners can find additional details in the public filings of EQB Inc. Okay, so with that, welcome to the conference.
Thank you for having me, Darko. I'm really pleased to be here. Thank you, everybody, for attending. For a smaller bank, sometimes we see people flooding out of the room, so I appreciate you being here.
And what I think with our session today, I think I'm going to sort of break this up into sort of two pieces. So the one piece is maybe just the immediate short-term and recent results and sort of an outlook. And then I want to talk longer-term, which for me is actually the more interesting part of the discussion. But maybe we just start off with maybe a review of the shorter-term thing. So, I mean, and I think it's clear we want to start with provisions for credit losses. The equipment financing, you saw elevated losses there. And we did see that you reduced your exposure to equipment financing and that the long-haul trucking certainly came down as well. So on the call, you had mentioned that the non-long-haul portfolio has been stable.
So maybe you can provide some more color on that and differentiation between the non-long-haul and the long-haul and give us a sort of a discussion point to help us walk through why we're going to get comfortable with this portfolio.
I mean, let's start with the kind of the more challenged part of that portfolio, which is long-haul. So long-haul transportation, trucks and trailers that move across the North American continent represent sort of 40%-ish of our Bennington business, which just to put in context is just over CAD 1 billion of our CAD 50-odd billion of loans outstanding. So a smaller part of our overall portfolio, for sure. We got into this business back in 2018 and, frankly, sort of let the entrepreneurs running that business continue to run it while providing what we believe was an appropriate degree of risk oversight. I think in retrospect, we probably should have had more oversight there. But particularly as it relates to long-haul, this is a more volatile business in the sense that when freight capacity is tight, rates can go up a fair bit and revenues can go up.
We were lending into that environment through COVID. As we came through a post-COVID period where demand for goods got reduced and demand for experience went up, that came off and that affected the value of these trucks and trailers as well as the ability of our borrowers to get the contracts. We certainly suffered there. Then, over and above that, we had this one kind of idiosyncratic exposure to a company called T-Pine that affected two or three of the other large Canadian banks. Those things are inherently more volatile than the balance of our portfolio, which I think deals with things that are much more sort of settled in the community. Short-haul transportation, if you think about dump trucks, construction equipment, typically people have long-term contracts to use these things. The equipment retains its value more.
It's not worked quite as hard as a long-haul trailer. So we feel pretty good about that. Having said that, we've migrated our long-haul transportation more into a prime credit criteria. We have a new CEO in charge of that business, and we're kind of feeling pretty confident about where it goes from here.
Can you just quickly define prime? What does that?
Yeah, so typically for us, that's a higher Beacon, I think over 700 Beacon. Typically, we're dealing with a homeowner, but these are independent truckers despite that. That's what we're thinking about.
Okay. Great. Thank you. And so when I think of the guidance for 2025, 12 basis points, it's well below 19.
Yeah.
Can you give us a roadmap on how you must have a lot of confidence in the other parts of the portfolio to not have potential spikes in losses? So maybe you can give us a bit of a roadmap.
I mean, we do. Frankly, over many years, we were running two or three basis points of losses. So just to give you some sense, we expect losses in our equipment financing business, which again is an overall small part of our portfolio, to be in the 150 to 200 basis points a year. And in our other businesses, we try to lend to have no losses, but there's always going to be the odd idiosyncratic loss lending against homes, which is basically the biggest part of that, as well as kind of pieces of commercial real estate, which again is mostly multifamily mortgages, so loans against apartment buildings. And so our experience over the years has been very low losses, lower than 12. So actually 12 would be relatively high compared to prior experience.
Clearly, monetary policy using rates coming down is going to be a fairly strong tailwind to reduced credit provisions in the book.
I guess truck values are pretty important in here too. I mean, are those kind of solidified here? Or how should I think about?
I think they're sort of holding. And don't forget, they also trade on a sort of U.S. dollar basis. So we are seeing recovery values holding up fairly well. But really, the key for the long-haul transportation is going to be lower default rates. And over the last couple of months, we've seen lower default rates, lower non-sufficient funds on the checks to pay those leases. So things appear to be heading in the right direction.
Okay. So then moving on, I think we want to touch on total loan growth, I think, at this stage. And relatively muted in 2024. And the margin was relatively 207, more or less where it came in. So I think the way I'm thinking about it is loan growth is really a key driver of revenue for you. And it's tough to see residential lending at least strong in the beginning of the year. But I could be wrong on that. So maybe you can talk a little bit about your growth prospects and what you're seeing early on so far and talk about how you expect loan growth to sort of evolve.
Certainly, I mean, I don't know if wrong is the word, but I'm more encouraged by what I see in the real estate, in the home sales of homes and the mortgage originations that we're seeing. So we're seeing more than double-digit growth we expect in originations in the first quarter compared to last year. Don't forget, we were under a lot of monetary constraint a year ago. So as interest rates come down, we would expect this to be a positive year for single-family lending. Canadians don't like to move in the winter, so it makes sense to me that we wouldn't yet see. The tail of the tape is really going to be March, April, May, and onwards when we see the spring market come to fruition. I'm frankly fairly confident with lower rates. We've got to have pent-up demand in housing.
People that would have liked an extra bedroom when a child's arrived didn't choose to move in the last couple of years with higher interest rates. There's more product on the market. Houses are more affordable, although albeit still expensive. So I'm fairly optimistic about growth in that market this year. We're expecting, I think what guidance is showing, sort of loans under management moving up by 8%-12% this year. So compared to other banks, we're a growth company. We're a growth bank. There's no doubt about it. And this is a year we're going to reassert that growth. When we look at what we've tried to achieve over the last decade or so, we grow at sort of 13% compound over many years. So that would not be an extraordinary number by the standards of our history.
And maybe just give a gentle indication as to where you see. I mean, so when I think of that number, low double-digit, let's say, there's some categories that will be much stronger and some that maybe you can talk a little bit about the categories of loans where you expect some.
We've got a number of really strong franchises. Hopefully, we'll touch on many of them over the course of this conversation. But certainly, things like our decumulation businesses, so our reverse mortgage, one of two players in the reverse mortgage business is seeing outsized growth, and we would expect that to continue, albeit off a smaller portfolio. And the other one that's with the largest securitizer of multifamily apartment buildings in the country. These are all insured by the government of Canada. So obviously, the credit counterparty is very good. And we're expecting to see strong growth there. I think last year we originated about CAD 8 billion, and we're expecting to see again strong growth in that area.
When I think of that, I mean, the multi-unit insured residential units, when I think of that, I'm trying to imagine how it is that you force that growth, or is it just market, or is it expansion of sales? What is it that's really pulling that growth for you? I mean, I have to think about that in terms of the context of when I speak to other banks. That isn't necessarily something that they talk about.
Yeah, mostly it's because of the way they use. So we fund this through the Canada Mortgage Bond, through the Canada Housing Trust. Most of the other banks would use that to fund their single-family mortgage portfolios. We've chosen for very good reasons for our business scale to use that for multifamily origination. And we've got at least two really strong pockets of capacity to fund these loans. It's really more about the capacity to fund the loans than the ability to actually secure, to actually find the loans. It's the ability to fund them. And so over the years, we've done a good job in building out what's called an aggregator to give us more capacity as well as the bank's own balance sheet. So we're finding great opportunity there.
And so bringing this all together to thinking about an overall view on Net Interest Income. Because we can talk margin, we can talk volume growth, but in the end, we all care about your revenue growth. It's a big chunk of your revenue is NII. So maybe you can talk a little bit about NII and how you're expecting to see that grow in 2025 and 2026 and some of the puts and takes to that.
Yeah, so yeah, very reasonable thing to care about. So we are expecting to see asset growth this year. Of course, asset growth this year doesn't translate so much directly into if you originate a loan halfway through the year, you only get half a year of NII against that loan. So that sets us up well for next year if we're assuming we're seeing this asset growth. We are expecting NII to go upwards this year, sort of 3% or 4%. Marginal compression on NIM. That's largely because we're trying to build our EQ Bank franchise. We've chosen to hold our rates a little higher to attract more deposits into that platform. When rates are dropping, you can potentially afford to lag the market a little bit, and that can help grow the deposit base with a view that you can catch up later on.
So that's sort of how we're thinking about it. Fairly constructive view for this year, but next year should be stronger again because we should end this current fiscal year with a higher asset base that can drive NII for the following year.
And how much, just on that topic, because it's interesting to me, as rates fall, the appetite for you to keep those rates higher on the deposit side, is there any competition at all in that space for you? And I guess where I'm going with this is if rates come down significantly, well, you can just sort of do you have to kind of keep it relatively wide to see the growth? Or maybe you can just.
Yeah, I mean, I think that's what we've tried to do over the last few years is actually kind of create ways of tackling that. There are going to be everyday bank accounts where people are just putting their payroll in, using it to make the mortgage payment, pay the credit card, where the rates can probably come down. In order to attract new money into the platform, you probably need a sort of a headline rate in the front window that looks a bit higher. One of the ways we've tried to solve for that is introducing a Notice Savings Account where you have either 10 or 30 days of notice to pull the money out. We offer a higher rate on that account. It's not going to be an applicable account for everybody, but for those people that are more concerned about return than access to cash.
I think we launched that sort of middle of last year, and now we've already got CAD 900 million plus close to a billion of deposits in that platform. Having more products that we can offer that can offer different attributes of rate and convenience allows us to follow down in some areas where that convenience is highly valued and offer higher rates where it's got a sort of different value benefit for the consumer, if you like.
So with NII talked about, I mean, a much smaller component of your revenues is fees. So maybe you can talk a little bit about your.
Yeah, so we've done a great job. I mean, I think on our investor day back in 2022, we had about 6% of our income was coming from non-interest revenue. I think last year we were at 16%. So we've been turning the dial on that. And we expect to continue to turn the dial on that. It's not in itself a strategic objective to increase non-interest revenue, but it's great if we can find services that generate that. It doesn't chew up capital typically. And so we certainly would expect, as we think about things like wealth, that we could end up with a higher NII going up to 20% over the next few years.
And so this is where the next question is, where we're sort of going to talk about the short term and how that might affect the longer term. So one of the very interesting things about my journey and learning about your company is that you really are a long-term growth story. And a long-term growth story requires spending. It requires a big investment. And so I wanted to touch on your outlook for flat to slightly positive operating leverage in 2025. And maybe just the philosophy around that, because if there is a hiccup in the market, if it's a tougher revenue environment, what can you do on the expense side? Can you pull some levers? And do we actually want you to do that? That is another side question.
So maybe you can talk about your overall philosophy on the expenses, some of the levers you can pull in a tougher revenue environment, and/or give us a view on the long-term expense growth trajectory. So there's a lot in there. So take your time. And let's first start with positive operating leverage for 2025.
Yeah, so I mean, I think we try to be very disciplined around is there a positive net present value to the investment we're making. I'd start back at the fundamentals rather than what does this do to operating leverage and try to manage to the operating leverage alone. Clearly, as we're building, there are things that we need to do. We need to have better data marts, make sure that our AML protocols are all up to snuff. And all those things need to be invested in and are non-negotiables, frankly, in terms of what does it take to hold a bank franchise. You've got to have good risk controls. You've got to have good compliance mechanics.
And so I think we do want to make sure that we're not getting over our skis or thinking as a positive net present value when there isn't, because maybe the volumes aren't going to be there. So we do have some room to dial back. Some of the things that we might have dialed back in the past on are things like the advertising on driving EQ Bank accounts. I think probably, frankly, we'd be a little bit, to your point, if we've made an error there, we've probably dialed back too fast to control costs rather than invested to build the franchise. So I think we're always trying to look with a really clear eye. Is this investment going to produce a net present value to our owners and sort of deal with things in that environment?
Having said that, if things are a bit slower, we don't need quite as many underwriters as we otherwise would, and so we can, say, delay hiring or not replace people quite as quickly, so there is some control, but you're unlikely to hear we talk about our operating leverage to make sure that you can think about how we're thinking about it as other banks do, but clearly, if you're running an enormous branch network with enormous numbers of people, keeping control of that cost structure is a really important thing for the larger institutions. For us, it's a much more discrete kind of surgical thing that we can either choose to not do or not do, and that's how we think about making sure that we're building a franchise for longer term.
You had a fairly strong advertising campaign last year. I kind of got the sense that you didn't want to continue. Maybe you can touch on, I mean, because my understanding was it was a good campaign.
Yeah, so I hope many of you saw it. If you didn't, we were not advertising properly. So Dan and Eugene Levy were our spokespeople last year. The whole point of the campaign, and we had to actually a mother, daughter, a couple in Quebec, who are iconic French Canadian actresses. And the general mindset was we were trying to unpick the idea that many people bank with the same bank as their parents led them into when they were a teenager and there are opportunities in banking of which EQ should be in your decision set. So that was really the mission we were trying to get out there. We were trying to break through the noise with the Levys, I think, iconic Canadian actors by any standard. And that had an enormous amount of success in our view. The sort of aided name recognition has jumped dramatically.
If you ask people on the street, have they heard of EQ? That has jumped dramatically. And that will help drive down the cost of customer acquisition going forward. There's a familiarity that's really important in banking. And strangely, when you actually advertise on TV, it gives you that sense of credibility. This is a real company as opposed to something that's coming just through social media, although that's where we actually get the most effective spend in terms of converting into bank accounts. So that was a one-year contract we had for the likenesses of these two groups of actors. So we won't be using this advertising collateral in the market, but the message will be very similar going forward. There are opportunities to think again outside of banking.
People are noticeably complacent to stick with their existing bank when there's sort of demonstrable reasons to believe why you're going to be better off banking with EQ Bank, better FX rates, better interest on your savings accounts, the ability to make payments much more cheaply, the ability to draw money out of any ATM in Canada without any fee. So there's demonstrable reasons why you should think about EQ as part of your decision set. And we're trying to make sure that people sort of think about that and potentially move all or part of their banking services to us.
So you recently announced, and you're just switching gears now to think about capital, you recently announced a Normal Course Issuer Bid. And renewed, I guess. But it's 6% of the outstanding shares, which is a big number. I mean, I'm typically used to covering the bigger banks, and it's typically in the 2%-3% range, right? So the question is, one, why such a large size? And two, maybe we can talk about capital deployment activities outside of the NCIB. Or I guess maybe a succinct way to ask this is, with such a big NCIB, are you signaling that really capital deployment outside of organic is less likely in 2025?
Yeah, no, absolutely not, to be clear. I think having a bigger NCIB, having the paperwork filed for a bigger NCIB rather than a smaller one gives you more optionality and flexibility. If something happens in the market, the stock price drops dramatically, it can be bought back cheaply. We would get much more aggressive about an NCIB than if stock prices are higher and we've got ways of deploying capital. But certainly, we're very clear about how we want to deploy capital. Our first choice is to organically develop into the business, loan growth, support the risk weights that way. Secondly, inorganic acquisition activity that would build to our capabilities, build around our challenger bank idea, bringing innovation to banking that's useful and valuable to Canadians would be our second choice. And then beyond that, NCIB to make sure the capital's being deployed properly that way.
It's clear we've got excess CET1 right now, quite a bit of it, frankly. So we feel in a very flexible position to be able to execute our business ambition and goals while at the same time being able to think about NCIB at the point that it might make sense given where the market's at.
Can you elaborate maybe a little bit on inorganic opportunities for you and what you're looking for?
Yeah, I mean, there's a couple of things. I think just standing back, even if I can take that question up one level, I used to get together with the CEO of HSBC, Canadian Western Bank, Laurentian Bank, and Equitable. And you can see two of those banks have disappeared over the last little while, and we've become very clearly the seventh largest bank in the country. And in that context, we're the largest bank that doesn't have any kind of wealth offering, or our wealth offering is nascent at this point. And we don't offer a credit card. So we do offer a prepaid card, which, by the way, if anybody's traveling overseas and thinks, well, take the EQ card with you, the magic card that gives you great rates on foreign exchange, you'll save money in Paris or Bangkok or anywhere, wherever you happen to be.
But so those things are obvious kind of gaps in our retail franchise that we would certainly like to think about filling over time. It's not as though they've been empty because of a lack of attention on our part. We certainly believe a certain amount of scale is required before we could be relevant in credit cards and cover the cost of the fixed cost of operating credit card platforms, actually quite high. So you need a fair number of customers. We're probably getting to the scale where that starts to make sense to be thinking about more aggressively. And similarly, in wealth, we come from a banking business, taking deposits, making loans. Wealth is a bit of a step beyond that.
But having said that, we believe that if we've got a wealth offering that aligns with our challenger bank message to our core consumer, that will be helpful to getting more deposits with us, as well as having kind of a broader part of the kind of household financial services bucket. And so we've been doing a lot of work, and Chadwick's in the audience, but he's been doing a particular lot of work in thinking about where we should be going in wealth.
I mean, wealth is a very broad-ranging term. So maybe can you define that a bit more?
Yeah, I think, yeah, for us, it's probably more like digital financial planning rather than manufacturing. So it's kind of trying to deliver the way that people should be thinking about setting up their savings and wealth-building goals and probably take people from the entry point where they've got a GIC within EQ Bank to where they're starting to buy equity products, probably sitting on ETF rails. Frankly, ETFs are actually relatively low penetration in Canada versus some other markets, probably because of the way that the banks have approached marketing those things. But clearly, a growing trend, I mean, more than a growing trend, but that's kind of the future of wealth, I think, for at least sort of the entry-level players on wealth.
Okay, so we touched on your capital ratio being high. Yet, I think you're working on advanced AIRB. Is there anything you can update anyone on?
Just that we continue to believe that the regulator would have a positive stance towards us moving to AIRB eventually. We're probably into sort of a 2027 type timeframe and sort of beyond. The models built, most of our models are all built. We're testing our models in terms of kind of this advanced approach. We're sort of continuing to invest capital to get to that point. Just to give you some sense of that, I think if we were on AIRB, our CET1 ratio would move from somewhere around the sort of 14%-19% plus. It's a pretty meaningful capital implication to that.
The bigger thing, though, really, frankly, is allowing us to compete across a wider range of asset classes, allowing us to have a more sophisticated risk management approach so that we can live up to the responsibilities as we continue to grow and become a larger, more important financial institution.
I did come up to the time where I should probably look at some of the questions coming from the floor. So the first question is, there have been elevated losses in equipment leasing. You acquired the portfolio in 2019. Would you be open to disposing of this portfolio if losses persist?
I hope the if is untrue. I think it's true. In the last conference call, we really committed to come back to the market with a broader game plan of where we're going long term on equipment leasing. I do think it feels to me that there's a great opportunity in there if we reposition it properly. We've got Ashley Yancey's gone in there as our new CEO in that market and in that business. We're certainly going to think constructively about how we build on the capabilities that we have there.
Another question from the audience. Oh, okay. This is the AIRB question. We just discussed that. Another question: how do you educate clients and scale up the reverse mortgage business?
Yeah, it's a big journey. But we have experts in the market. We've done some good digital marketing so that people call into us, people thinking about a reverse mortgage. Often it's the child of the potential borrower as well that's involved in that process. We have some great collateral material. You look on our website. And we're not trying to sell it like snowflakes. This is not necessarily the mortgage for everybody, a reverse mortgage. On the other hand, if you've got a lot of equity built out on a home, don't have other savings, this is a great place where you can kind of age in place, stay in the community where your friends are in the house of worship and all the things that you might want to have around you.
And so we see it as naturally a very fast-growing business with an aging Canadian population and frankly less put aside for less defined benefit pension plans around. And so people seeing this as a useful.
I mean, it's a fairly prevalent product in the U.K., not so much here. I think there's a bit of a bias here.
Yeah, I think in North America particularly, I mean, in the U.S., this product was mis-sold. I made that comment about not selling it like snowflakes. Typically, as is often the case, that was sold like snowflakes probably by some unscrupulous folks in the States. I think here in Canada, we've had a very responsible major participant over the years. We have a no negative equity guarantee, so we can never force the senior out of the home for non-payment of the mortgage interest. So it's a good product, but as I say, not necessarily the product for everybody. And so being responsible in how we advertise its virtues and what the challenges with it are is kind of where we're at in it. But we're seeing very strong growth.
I mean, I think you could easily say the size of this market increased by a factor of four without even starting to think about this saturating the market.
Yeah, I mean, it's an interesting product for sure. I bumped into it myself, actually, personally, and with that, I think we're at the time now where I typically ask you for some key messages that you'd like to leave with investors for 2025 and beyond.
Yeah, great. Well, thanks, Darko. This is actually the first time we've ever been on the stage here at the RBC Conference. We have attended and met with investors here in the past. So really appreciate Darko inviting us along this time. If I can be the avatar for Darko, he just put out a report on us yesterday, which I thought was exceptionally well done. Being an initiation report, it also kind of gave you a bit more background than perhaps if you're reading the regular quarterly reports. So for those of you that might be new to our name, it's a great primer to sort of start your work and research. This, by the way, being picked up, being here is not a kind of happenstance thing.
It's really the result of, like in many things in our business, a very deliberate strategic effort on the part of our finance team and our investor relations team to be seen in the Canadian bank firmament, if you like. We've engineered the bank now to be the seventh largest bank in the country, and we've done things like change our year-end to align with the other banks and talk about the bank in a way that's more consistent with the other institutions and also move much of our research coverage to those people who are looking at banks that understand capital. For those of you that kind of haven't thought about this before, I actually have six messages to deliver. So I saw that Scott had only three, so I've got six key messages.
We are Canada's differentiated, very differentiated than the other six within your kind of investment universe here as Canada's Challenger Bank. I think the first thing to think about is we're able to reinvest all the retained capital. We pay a small dividend, but that high degree of capital generation is reinvested sensibly in a way that produces high returns in a differentiated way. We have a great digital technology stack. In fact, 93% of our applications run already on the cloud, higher than the other banks, gives us some flexibility and technical prowess to kind of move forward and flex and change with the market. We're a Canadian pure play. I think this is a really interesting point. The return on equity on banks in the Canadian operations is actually much higher than what they're able to generate in the U.S.
So, having, and I think you see that kind of superior returns from National Bank as well. Frankly, those banks that are more committed to this country seem to be generating higher returns, and we're that Canadian pure play, so think about that as being an interesting opportunity, and clearly you see much higher returns in those domestic businesses. Many people sometimes are concerned about the resilience of a smaller bank, but we did well. We worked our way through COVID. We worked our way through unprecedented monetary tightening, I think, with some ease, if you like, and so I do believe we can be resilient to whatever the world holds going ahead. Our capital position is very strong.
As I mentioned, over 14% set one is probably quite a bit of room to substitute that with tier two capital and actually move our set one down a little bit, can return capital to shareholders who otherwise invested in productive assets. And finally, we've got diversified growth businesses across both sides of the portfolio. So whether it's reverse mortgages, our single-family mortgage lending business, multifamily insured products. On the lending side, we do very well. And on the deposit side, it's similarly with EQ Bank. And with all of those benefits, all those six benefits I just talked about, the valuation is still modest. You could see a more than 40% appreciation in the stock price, as Darko called out for, without it being the stretched valuation. And really, we thank you for attending today. Thank you, Darko, for having us.
If you want to do some quick research, I would suggest the best way is to open an EQ Bank account and experience it and see how. If we don't get any new investors today, hopefully we get at least a few more bank accounts, which drives value. Really appreciate your attendance. Thank you.
All right. Thank you very much.