Sure, never tired of learning your questions. Stéfane's presentation is he really is one of the most compelling economists in the country, so it's great to hear his view of the world. I guess I just sort of thought I'd start with sort of three simple kind of comments. I think we've really cemented our position as Canada's challenger bank over the last few years. Structurally, I used to get together with the CEO of HSBC, CWB, and Laurentian, and we kind of sat there as sort of four of us, similar-sized institutions in some ways, some larger than others. Today, we sort of feel like we're standing alone a little bit, having clearly established our position as the seventh-largest bank in the country.
In terms of kind of the more recent sort of highlights, of those three things I'd like to highlight is our EQ Bank franchise is really going from strength to strength. We're seeing deposit growth now in this current quarter. We really believe that we took our brand to another level with advertising last year with Diane Lavallée and Francine Labrief here in Quebec, and I think it really resonated with Quebecers. We seem to have seen really good traction here. Dan and Eugene Levy in the English-speaking channels, again, sort of iconic Canadian actors. We've really taken our brand to another level. We continue to add new product that's really driving traction. Most recently, we brought our foreign exchange capabilities together. It's a bit of something we're advertising more.
If you're looking to trade USD either way, we're charging lower commissions or lower spreads than big six banks. We offer a good rate on our USD. We've got other great solutions. If you're traveling around the world, use our EQ Bank Card. You're going to find you save on foreign exchange. I really feel like EQ Bank is emerging as Canada's sort of premium digital banking franchise within our collection of assets. In our last quarter, we talked about our kind of future journey on our capital position. Today, we have about a 14.2% CET1 Ratio. We want to maintain a really strong capital position, over 15% total capital.
Over time, we want to add a bit more complexity to that capital stack so that CET1 will perhaps make up 12% of the stack, and then between Additional Tier 1 and tier 2, get up to that total 15.5%. That does imply that we've got surplus equity of around about CAD 400 million on the balance sheet, that over a two or three-year period, we can deploy for the benefit of shareholders. Finally, in amongst all this sort of negative talk, and I mean, I subscribe to it too, the issues with the geopolitical situation, tariffs, broader attacks on our economy from the United States, of course, certainly significant concern to me. On the other hand, we're seeing good, strong mortgage application flows, even in recent days. Yet to see that translate into a more muted response from our customers.
I'm not expecting necessarily that's going to prevail through the year. It seems really odd, frankly, that we're seeing this level of activity given what I would regard as kind of the great kind of economic uncertainty of our time. That is actually what we're seeing in the marketplace.
Okay. Thanks for that. That kind of segues into my first question. You're sounding, if I interpret it correctly, some of the volumes you're seeing on new business are actually surprisingly strong, given the backdrop. That would suggest that some of the, I guess, cautiously optimistic guidance you gave on the last call, 5% growth or whatever this year, you're sticking by that?
I think the back end of what I really thought coming into this year as we saw monetary policy getting back to a more balanced position coming into the year, we normally expect housing markets in Canada to really take off in the spring and summer. I was expecting a sort of more muted start and then to see strong growth towards the back end of the year. I think clearly that back end of the year question is back end of the year is still a bit of a question out there now, given these broader uncertainties. The start of the year has been stronger than we might have expected. I cannot forecast further than that. I am surprised by the activity we are seeing today. That is good news.
For those of you actually operating the business, you read the headlines every day, pick up a Wall Street Journal in the morning, you think this has got to be bad for business. So far, we're seeing good underlying trends, at least in our single-family business.
It came up on the Q1 call. One of the bright analysts was asking about the nature of your borrower and how they are, I guess, positioned vis-à-vis the current economic backdrop and how resilient they are and what kind of impact that has on the demand for mortgages.
I mean, certainly, we're over-skewed to self-employed borrowers. I think many take that view that those borrowers are more exposed to economic turbulence. I think I take a bit of a different view that they can pivot as an economy has to transition away from traditional strengths to new things. Many of our self-employed borrowers, I believe, can sort of adapt to that. We saw that, frankly, during COVID, where people might have been operating restaurants. Now we've got into sort of food delivery or serving people at home and so on. I think it's sometimes more difficult for people that have perhaps been working in a unionized job in a steel plant for 20 or 25 years if they were to lose their jobs as a result of economic uncertainty to pivot into new areas of the economy. I feel reasonably confident about that.
Clearly, you can't say that about all of our self-employed borrowers, but generally, these are more entrepreneurial sort of characters that can move from one sector of the economy or find a relevant place to apply their trade as the economy pivots around.
Okay. Oh, that's a good example, actually. Another element of your mortgage business is the insured portfolio, which you're deliberately shrinking just because of better allocation of funding to higher spread the business over time and the competitive dynamic with the big six, et cetera. Is that a portfolio you want to exit completely? I'm just trying to get a sense of what's the ideal size for that insured portfolio over time?
Yeah, this is a business that takes no capital. These are mortgages insured by CMHC, so the government-insured mortgages. To the extent we can originate them and they make a positive spread, it's always going to be good for, by and large, it's always going to be good for the bank and add value to the shareholders. If we can find mortgages of that character with the right spreads, we will buy them. We actually are tiptoeing our way back into those markets in a few areas. We bought a modest portfolio since quarter end. It was about CAD 9 billion last quarter end. Last year, it ran down 20%. I would expect we're still going to see it run down a bit this year, but perhaps not as much as last year.
When the dynamics are right and the spreads are there in the mortgage market, depending on how the SIBs are competing, there may be opportunity for us to participate.
Okay. The goal is not to go to zero, though.
No.
Okay.
I think we actually still want to keep capability. It's a business I see that potentially spreads can widen out. You actually want the capability to originate mortgages in that world and have them on the book.
Okay. Another subset of the mortgage has b een growing quite nicely. Just conceptually, I could see a lot of demand because parents wanting to help out their kids with a home purchase or whatever. That immediately springs to mind. On the other hand, with house prices not appreciating as much, maybe that affects the willingness to tap into that equity or even the willingness to lend against it when pricing and trends aren't as favorable. On a net basis, where do things stand?
I think most of the use cases for reverse mortgage are actually to fund somebody's lifestyle. I think of an archetypal customer as being a 75-year-old person that might have lost their partner. They now own their house free and clear. They want to continue to live in the same neighborhood as they've lived amongst their friends.
We call it aging in place to make it sound more glossy in the parlance of the industry, next to the place where you worship and in your community, which is shown to be a good place to age. Most of it, frankly, is pensions as we moved away from defined benefit pensions to more DC pensions and people having to fend for themselves. There is clearly a need there to help fund that sort of last stage of life. We see strong demand in these areas. I mean, as you think about strategy, where do you want to be positioned? The graying of society is clearly something that will be with us for many years to come. This feels like a great place to be. Canada, by and large, is underpenetrated in reverse mortgages.
I think for most of our customers, it's more a case of necessity and lifestyle. There is the odd one that's trying to help out a grandkid or a child or something. Mostly, it's about just staying at home for maybe an extra five years. Clearly, through COVID, we learned that living in communal living arrangements may not be the greatest thing. People would rather stay in their home. Maybe if there's a healthcare need, bring people into the house, maybe fund that healthcare need. I think that's mostly the nature of the business. To be clear, in the overall context, it's about a CAD 2 billion portfolio today of total assets over CAD 50 billion. It's a small but growing portfolio.
Just from an educational standpoint, I know in other markets, there have been some regulatory issues with the product, and maybe that's some stale thinking on my part. What is different about the way you've approached the market compared to what other companies have done?
I think we've approached it in a very similar way to a really one competitor in this market, which is Home Equity Bank, which is owned by Ontario Teachers . We offer no negative equity guarantee. What happens is if you're older, we'll lend you slightly more against your home. When you want to move out of that home, you're going to pay the mortgage back. If you actually choose to stay in that home for longer to the point that the mortgage is accrued to more than the value of the house, we're not forcing anything, and you're not on the hook for any shortfall in that equity. It is an actuarial sort of model from our perspective. We only want to lend enough that we rarely get into that negative equity world. That is how the product works.
In other markets, there have been sort of different variants where some things that might seem slightly unsavory kind of come to bear, and you're turning a senior out of their house because you don't have this no negative equity guarantee. I think the product really works well. Take a reverse mortgage from us. You can stay in your house for as long as you want to, as long as you pay the property tax and can keep the place maintained. It's a very kind of clean product. I think there's been too much product variance, and particularly the U.S. developed a bad name in this area. Too much product innovation that wasn't particularly helpful. You end up with some slightly weird things people can think about.
Somebody that might not be wanting to live in the house for longer because they're sick, you would lend more against that house. You can see some slightly unsavory things developing in Canada. I think both of the major participants play in a way that I think we can all be pretty comfortable with.
On another product line that's interesting, the development portfolio, you talked about $2 billion of advances you've got lined up this year because you know when projects are needing funding and all that. Is that portfolio overall going to grow because you have advances, but then you have paydowns on projects that have completed? Is it going to be flat, or is it going to be?
We're expecting, so I think we've got about $3.6 billion totally undrawn right now. The way this works, sorry, just to kind of fill in a bit, we are a big participant in lending on construction projects where Canada Mortgage and Housing Corporation guarantees the credit on the loan. This could be a large or smaller, but often they're quite large multifamily development. Maybe the total project is $50 million. We'll advance in the funds, and as we advance them in, Canada Mortgage and Housing Corporation is providing a guarantee. When the building gets finished and gets the lease up, that will be termed out, and the mortgage will go into, say, the Canada Housing Trust programs. The nice thing about that is we advance 10, and we know we've got another 40 to go, but it's going to take another two years to build the building.
We get a fair bit of visibility on when the drawdowns are going to happen and get sort of confidence that assets continue to grow in that environment. I think today we have about CAD 3.6 billion undrawn. We think about CAD 2 billion will pay off this year. We have sort of CAD 3 billion drawn. It does depend a little bit on each project. When do they get finished? You end up with some bad weather and things get delayed for a few weeks and so on, and then how long it takes to lease up these buildings. In general, we find these portfolios grow a bit faster than we expect because the paydowns do not come quite as quickly as we would expect. There is a nice sort of commitment there to continue to advance another CAD 3.6 billion undrawn.
You mentioned the security, I guess, of the CMHC, the nature of the loan. We've seen impaired loan formations in the commercial mortgage portfolio. Are those primarily CMHC insured, I guess, because you don't book too much in terms of provisions against them?
I mean, there'll be some CMHC. The vast majority of that would actually not be CMHC insured. We've got about $18 million of stage three provisions against that group of impaired loans. What we communicate to the market, I think we do still believe this to be true, is even coming into this year, so October last year, we had elevated impaired loans compared to where we've been historically. Higher interest rates did that to some extent. We're expecting a lot of that to resolve in the second half of the year. We're not expecting much loan resolution in this current quarter, but in Q3 and Q4. The nice thing about that piece is you can look at a sort of group of fairly chunky loans and see how confident you are about the resolution.
There may be contracts and sell plays, but it takes two or three months to actually sell a big commercial building, for example. You may have commitments to pay you off, but it takes a while to get it to happen. I think we're still feeling pretty good about the back half of the year and reducing that impaired balance.
Okay. I guess the other source of impairments has been the equipment finance portfolio, largely the trucking. That fell off this quarter. The gross impaired loans balance dropped quite a bit this past quarter. We'll talk about the Pride Group thing in a minute, but just across the broader portfolio, you truly believe the worst is behind the bank?
Yeah, I think the worst is still behind us, but there's still work to do, to be clear. We did change the management team in our equipment finance business in December. Certainly had some challenging long-haul trucking. We believe it's confined to that portion of the portfolio, which is about a $400 million or so portfolio. What happened through COVID, incredible demand for trucking, and then all of a sudden, as we came out of that, the demand wasn't there, and the equipment values dropped fairly fast. It's definitely been a sort of a mistake that we've made in the bank, but I think we're largely through it at this point.
I guess from a go-forward standpoint, $400 million portfolio, and that's specifically long-haul trucking.
That's right, yeah.
Is that how committed are you to that business in the future? Are you going to run it at a smaller level?
I think we're still the jury's still out a bit of that. We've got to say we've put a new executive leading that business who has good experience at General Electric and TD Bank in these areas. I think his job in the first instance has been to kind of control the losses on the book as it is. I think towards the end of the year, we'll come out with a clearer message to the market about the success of our future trajectory on that business. We've certainly seen Canadian Western Bank have success with National Leasing, I think, over the years, now sitting in the National Bank of Canada business. We believe this is a good business for banks to be lending secured by equipment. There's no doubt you end up with higher credit losses than against real estate.
These are depreciating assets and generally got a slightly higher risk profile. We still think it's a good business to be in. It's just a matter of finding our spots and making sure we've got the right controls in place for those spots.
Okay. Now, just to drill into the Pride situation a little bit, I think it was Q3 or Q2 of last year that total exposure was quantified at about $115 million and Q1 at $70 million. So between, I guess, cash reserves that were, have you collected already against that exposure? And then the clean is provisions and.
Yeah, some sort of truing up of the kind of accounting in a sense. There is $10 million of cash reserves I think got used to reduce that number. We're collecting at about the rate of about $1.6 million a month of kind of just coming down based on the collections. It is coming down and resolving. Part of that drop was actually taking the write-off rather than just have provisions. That is what caused it.
Just from a keep it simple, stupid standpoint, you've treated it a bit differently from a provisioning standpoint as non-core. That's because the way I understand it is that you're a lender in a certain hierarchy of preference, but then they'd maybe pledged assets to multiple lenders. Different lenders might have the same theoretical priority against those assets. Is that how?
I think that's how we think about it. The reason why the adjustment was really because this is more of an operational risk around establishing security than it was necessarily a kind of a pure credit loss as one might think about. Straightforward loss credit provision where you had all the right pieces of paper in place, but you lost because the asset wasn't there or the bottom line in default. In this case, some of the losses associated with the imperfections in the paperwork. That's the rationale for the adjustment that way.
I guess that's why it's going to take maybe a couple of years to work out?
That's what we think. This is a complicated process. I think a large number of banks are involved with this particular borrower. There is a bit of an arm wrestle about who's got priority and we think we've got a good position on the facts. We don't necessarily know what other people's facts are. This will come to fruition over the next year or two.
How does it work? Are you, I mean, it's probably not friendly terms might not be the right way to phrase it. With some of the other lenders, I mean, that have the same call on the same asset, I'm assuming that's how it might work. Are you negotiating with them and saying, "Hey, look, let's each eat this much and call it a day" kind of thing?
We haven't got to that stage yet. We're collecting on the leases that we believe are ours. We end up with the cash ending up in our accounts. There'll be some sort of reckoning to be had with the other banks over time. We know, for example, we've got some banks with claims on a particular asset or would appear to have claims on the particular asset, but they actually don't believe they have a claim. It's quite a confused situation.
As far as any other, I guess, the mortgage impairments, which is I don't get scared or whatever when I see impairments in the mortgage book because that's the nature of your lending is you have a really good handle on the security. The LTVs are low. Are there any challenges at the moment as far as resolution processes taking longer than normal, or?
Yeah, the courts are backed up. I mean, business is more of that business. The courts get backed up and slowed down, particularly in provinces like Alberta where there's a longer you have to go through the court, whereas in Ontario, it's a bit easier and faster to go through. Even in Ontario, we've seen things backed up. Generally, when real estate markets are more liquid, you're going to see fewer impairments. In most cases, it's our customer, our borrower that solves the problem for themselves. They may be an impaired mortgage from our perspective. They've still got equity in the home, and they're going to do what they can to preserve the value in the home by marketing it.
By the time we show up looking for them too, we're thinking about sort of foreclosing on the house or whatever, they may already have on contract for sale. That would be the typical scenario. In a slower real estate market over the last couple of years, that's why you see the impairments forming. There just hasn't been liquidity in the real estate to allow that process to sort of naturally unfold.
Gotcha. On the capital, you touched upon it in your opening remarks. Your current capital situation is not what it is going to look like in the future. I guess, amongst other things, you paid off some holdco debt just to clear that out of the way to clean up the balance sheet a bit. Going forward, you said you want to end up with a 12% CET1 ratio and $400 million to offset that decline, $400 million of non-CET1 capital in your stack. I get that process, but A, how long do you expect that journey to take? Two, that decline in CET1 capital, where is that going to be allocated?
I mean, so it'd be actually.
Loan growth, I guess?
Yeah, it could go to loan growth. If we see good organic growth and opportunity in the marketplace and a strong economy, that would be where we would choose to deploy it first. Certainly thinking about where we can take the business. There are a couple of key businesses we've brought in. One is credit cards, and the other is wealth, the largest bank in the country with no offers in either of those two spaces. It is a place we could deploy capital. Of course, there is the opportunity to return money to shareholders through NCIBs or SIBs or whatever. We are not a management team that believes in holding onto capital unnecessarily. You have to allocate capital efficiently.
Just to be clear, although we might talk about sort of moving CET1 down to 12%, it may look slightly below where the SIBs are operating. Let's not forget that we're running on a standardized basis. If you actually translated that back to an AIRB approach, you'd end up closer to a 20% CET1 ratio, 18% CET1, maybe at 12%. We actually are an extremely well-capitalized bank at the CET1 level, even at 12% when you're comparing apples to apples. We are moving on. We are continuing to be on the AIRB journey. We are a believer that longer term, we want to be on these advanced approaches to managing our credit risk the way that the large banks are.
We have been at it for seven years, and we think we should be in a position to have our full application in place in a couple of years' time. That would see a transition into a more efficient capital structure.
You mentioned the buybacks. It's never really been a big part of the capital management strategy for very valid reasons. In the, let's say, five-year time horizon, you could be running at a lower core to one ratio. Still perfectly fine. I'm not suggesting otherwise. Generating capital internally while delivering organic growth and buying back stock. Could you give the?
Certainly that's possible. I mean, I think we still believe.
What's the scale of?
Yeah. We are still a believer that growing organically is the way to go, and finding new ways to deploy our capital into lending verticals is where we should be deploying our capital. To some extent, the more surplus capital we have for stock buybacks is, to some extent, an expression of the lack of imagination that management is having to find new markets. Our message every day is to go in and find ways to be deploying capital organically in the business. That is why we have been able to grow over the years. That is why our total shareholder return, I think, is still the top of any bank in Canada over the last decade or so because we have been able to find this organic way to deploy capital into our loan book and into other value-creating ideas for our shareholders.
That will continue to be what drives us every day. We come in with this mission to drive change in Canadian banking to improve people's lives. We are the agent of change to improve the productivity of the banking system. I think thereby kind of serve a useful national purpose to kind of sort of echo on what Stéfane said on the story about manufacturing. I would also believe that our banking system needs less regulation, more efficient deployment of capital so that we can be doing useful things for our fellow citizens. That is really how we're thinking about it. If we aren't able to grow our assets at that speed, and clearly it's all driven by risk as well, we don't go looking for asset growth without really thinking about these credit-worthy loans.
To the extent we can't do that, then clearly returning capital to shareholders that we generate, we generate a lot of capital every year. Should we return to shareholders in the form of dividend or stock buyback is a question that we'll have to solve for.
All right. That is a wrap for the day. You might have another few meetings. I do not, so I am out of here.
Thanks so much, Gabriel. Thank you.