Good morning, ladies and gentlemen. I'd like to welcome shareholders and analysts to Equitable's Q2 2020 conference call and webcast. Later, we will conduct a Q&A with participating analysts on the call. Before we begin, I'd like to refer you to slide two of the presentation regarding the company's caution regarding forward-looking statements. This presentation and comments may contain forward-looking information, including statements regarding possible future business and growth prospects of the company. You are cautioned that forward-looking statements involve risks and uncertainties, including those introduced by the current global COVID-19 pandemic. Certain material factors or assumptions were applied in making these statements and could cause results or performance to differ from forecasts or projections expressed in these statements. Equitable does not undertake to update any forward-looking statements except in accordance with applicable securities laws.
This call is being recorded for replay purposes on 29th July 2020, at 8:30 A.M. Eastern. It's now my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Bank. Please proceed, Mr. Moor.
Thank you, Chris. Good morning, everyone, and welcome. Tim Wilson, Chief Financial Officer of the Bank, and Ron Tratch, Chief Risk Officer of the Bank, are also participating today. While Tim and I will deliver prepared remarks, Ron is available for Q&A. Since our last conference call, business conditions look a lot more encouraging, as we will discuss in detail this morning. Our earnings rebounded nicely, and we anticipate, with all the usual forward-looking caveats, earnings increasing sequentially in each of the next two quarters. We've seen ample liquidity in deposits, at rates historically attractive against benchmarks. The housing market has been resilient in the face of the broader economic backdrop, which will likely have a positive impact on realized losses. Our early efforts to transition our customers from a period of mortgage deferral back to their regular payments are showing very positive results.
Our actions have helped to increase our capital ratio, with the bank's 14% CET1 being right at the top of our target range, and changes in consumer behavior in response to the pandemic play to our strengths and capabilities in digital banking. None of this is to deny the real challenges ahead posed by the continuing uncertainty created by COVID-19, but I feel we are in a strong position to address these challenges and ultimately emerge in a stronger strategic position than prior to the pandemic. Our presentation this quarter will focus on changes and developments since our last call, including those that affect our view of the future. To start, adjusted Q2 earnings per share were 68% above the level we recorded in Q1, and ROE snapped back to 13.8%. Across all parts of the bank, employee productivity and efficiency remained industry-leading amongst Canada's Schedule I banks.
This underscores our team's resilience under extraordinary circumstances that, in the early days of the COVID lockdown, included an unprecedented volume of customer requests for assistance. Now that lockdown restrictions are easing, a small number of employees opted to return to Equitable offices earlier this month. And starting in September, we will begin to gradually migrate the rest of our team, assuming it's safe to do so. As we discussed last quarter, and along with other banks, we provided mortgage deferrals to help our customers through a period of temporary loss of income.
Equitable has been proactive in working with our customers to make the return to a more normal environment a slope rather than the cliff being talked about in some quarters. Deferrals peaked at 20% of total loan balances, amounting to CAD 5.6 billion. As of mid-July, those levels have dropped to 6% of total loans, or CAD 1.7 billion.
We provided a view on the expiry profile of the remaining deferrals in MD&A. The progressive reopening of the economy suggests that many of our customers will be able to stay current with their payments once their deferral period ends. We did not end Q2 with our usual lending growth mindset, but Equitable also did its part to keep the economy moving, as all of the bank's retail and commercial businesses continue to provide capital for household formation and business purposes. Understandably, overall growth decelerated in Q2 as a result of the COVID-induced market slowdown, temporary job loss impacting some potential borrowers' ability to participate in the market, and our tighter risk tolerances. Total loan principal was still up CAD 912 million, or 3% within the quarter, to a record CAD 27.6 billion. Tim will discuss credit quality metrics and allowances in his remarks.
But as a reminder, as is our practice, we adjusted our underwriting criteria in March in light of the uncertainty related to house prices and to protect the bank against what we saw as elevated risk. These actions include implementing a reduction in maximum LTVs. They were intended to uphold the quality of the bank's asset base, but, of course, had a bearing on loan and revenue growth. Looking at asset categories, our homegrown prime single-family business set a new origination record in Q2 at CAD 308 million, 26%, or CAD 64 million higher than the previous record set in Q3 2019. As a reminder, our prime business is fully insured against credit loss and spreads being wider than was typically the case over the last few years. As a result, we have chosen to be more constructive in this market.
Our challenger bank decumulation businesses also continue to build demand in their markets. Looking ahead, we believe loan balances for reverse mortgages in our CSV Line of Credit will grow, while loan balances in most of our established businesses will be relatively stable to the end of 2020. Alternative single-family is the exception. As a result of market conditions and our risk appetite I just described, originations will likely remain subdued. We currently expect the portfolio to contract slightly from Q2 to the end of the year. There are certainly some upsides to this view, but that's not our base case. Customers also count on us for the great digital banking services. In Q2, we achieved outstanding growth in EQ Bank account openings, powered by the appeal of banking on Canada's first born-in-the-mobile-age all-digital platform: our digital customer referral program, the innovations we continue to introduce, and our competitive interest rate.
Over the past year, new customer account openings increased 52%, and in the Q2, we saw even more dramatic growth as the openings were almost three times higher than the average over the past 12 months. Leading challenger banks around the world are seeing great growth in the current environment, and the result of Canada's Challenger Bank mirrors that global experience. In June, EQ Bank's deposits surpassed CAD 3 billion to finish the quarter at CAD 3.3 billion, 46% above last year as a result of these account openings and higher balances in existing accounts. Getting to the CAD 3 billion milestone this quickly is proof positive that we can deliver a better experience by enabling customers to bank on their terms. Canadians are more value conscious than ever and more open to embracing new systems of technology-enabled banking.
That's good for Equitable because our digital offerings provide both great value and a simple, elegant technology experience. By challenging the status quo of traditional banking practices, we're winning hearts and minds by combining the money-making capabilities of a high-interest savings account with the bill-paying options of a chequing account , all minus the service fees. Earlier this month, we introduced EQ Bank's joint savings account, allowing up to four account holders to share in these advantages. As you know, setting up a joint account is a painful process at most Canadian banks and usually requires a branch visit. Working from the premise that there needs to be a better way, the EQ team has done an outstanding job of creating a simple, intuitive, fast, and completely virtual sign-up process.
This is the kind of challenger-based innovation that makes banking better for Canadians, and I'm really enthused about this latest development, which I urge everyone to try. Canadians told us that the product they wanted most was joint accounts, and the response we've had so far suggests we've created something that is really capturing their attention. Digital banking is becoming more popular with Canadians of all ages, but recently we've noticed that the most significant new account opening growth is in the 18 to 25-year-old cohort. From a societal perspective, this is good, as young people are forming the savings habit and building a solid financial foundation. From our perspective, we like the idea of building customer relationships for life, from youth to retirement. Our EQ International Money Transfer Service is adding to the fast-growing uptake of our services.
I still feel we have not really delivered the message of how good this service is, but if you're looking to send money overseas, EQ has a fantastic way to do so. We also introduced an automated referral service on May 14th, and since then, over 4,000 customers have signed up through a recommendation by friends and family, about six times more than was typical for our manual referral program. The big picture is that one of the advantages that large incumbent banks have over Canada's Challenger Bank is the cost we have to incur to attract new customers. We are clearly seeing this acquisition cost drop, and this improves the relative economics of our bank going forward. Between EQ Bank, Equitable's extensive network of independent investment advisors and financial planners, and our strategic partnerships, we continue to attract all the deposit volumes we need to fund our growing business.
Retail and securitization funding markets have proven to be much more liquid and efficient than we had expected early in the crisis. Flows into those markets have been relatively uninterrupted and very cost-efficient, as GIC rates consistently decreased from mid-March onward at a much faster rate pace than relevant benchmarks. This makes funding very cost-comparative. The government's move to inject liquidity into the banking system early in the crisis further increased our level of comfort in the intervening months. Our instinctive response to the emergence of the crisis in March was to increase the size of our liquidity portfolio, and we took the additional step of insuring $687 million alternative single-family mortgages as soon as CMHC expanded its insurance eligibility criteria on March 20th. The insurance came into force in Q2 and created an equivalent amount of additional liquidity.
Tim will walk you through a cost-benefit analysis of this insurance in his remarks, with the bottom line being that it provides net funding costs and capital benefits through 2024, but it had a negative impact on earnings in the most recent quarter of $0.20 a share. This drag is expected to reduce to $0.09 in Q3 and $0.01 in Q4 before turning positive in subsequent quarters. We're protecting the bank and its depositors by maintaining a strong capital position. By quarter-end, positive earnings coupled with slower risk-weighted asset growth brought the bank's CET1 ratio to the top end of our target range of 14%, up 90 basis points year over year and 50 basis points from March. The insurance on $687 million of single-family assets contributed about 30 basis points to that increase.
This capital benefit is driven by the fact that the insurance eliminates the credit risk on these assets for Equitable, so they became 0% risk-weighted after being insured. Both our CET1 and total capital ratios are at the high end of the Canadian banking industry, and we expect them to increase from here. Planned dividend increases are on hold for now because of regulatory guidance from OSFI to the banking industry. Even so, our most recent dividend declaration was 12% above last year. Our low payout ratio, which was 12% in Q2, shows that we have room to maintain our dividend and still build capital organically. All in all, we do not foresee a reasonable scenario under which we will need to raise additional equity capital to support our existing businesses. Equitable was soundly capitalized coming into this pandemic and is even more so today.
Tim will now comment on quarterly financial results in more detail. Tim?
Thanks, Andrew, and good morning, everyone. As Andrew mentioned in his opening remarks, Equitable's earnings rebounded in Q2 compared to Q1. On an adjusted basis, net income grew 64%, and ROE improved to 13.8% from 8.4% in Q1. This is one of those quarters when reported earnings and ROE were actually higher than adjusted numbers, since the reported figures include CAD 4.4 million of net mark-to-market gains. And for greater clarity, both reported and adjusted results include the impact of loss provisions in every quarter. While earnings were up sequentially, they were down 10% from last year, which was our best Q2 on record. There were two primary reasons: the insurance premiums that Andrew mentioned and elevated PCLs.
If the economic outlook remains stable and borrowers behave as expected, PCLs should reduce in future quarters and cause earnings to increase from Q2 levels. Digging a little deeper into PCLs, in the Q2, we recorded CAD 8.8 million of credit loss provisions, with CAD 5.4 million of that relating to Stage 1 and Stage 2 loans. As a reminder, Stage 1 and Stage 2 provisions are expected future losses on performing loans. We model these expected losses based on our current book of business and macroeconomic forecasts. So, why were Stage 1 and Stage 2 provisions elevated in Q2? During the quarter, forecasts for several macroeconomic variables, including real GDP and unemployment, deteriorated, triggering a migration of CAD 3 billion of loans from Stage 1 to stage two. The migration happened because the risk of default on these loans increased, according to our model.
Because we based Stage 1 allowances on expected losses over the next 12 months and Stage 2 on the lifetime of the loans, this migration caused allowances to grow by CAD 13.3 million. As an offset, the loss we expect to incur on defaulted loans, otherwise known as the Loss Given Default, decreased for Stage 2 due to improved house price forecasts. Lower Loss Given Default caused a CAD 7.9 million decrease in allowances, with the net change being CAD 5.4 million. On slide 13 in our deck, we present PCLs and ACLs by business line. All of our businesses contributed to the elevated PCLs, but all were down significantly from Q1. The ACLs for each also increased and remain adequate in the view of our management team. We ensure that these allowances reflect a range of potential outcomes as required by IFRS 9.
We model different economic scenarios with forecasts provided by Moody's Analytics and use a weighted average of those scenarios to determine our allowance. On slide 13, we included the base case of our forecast at June 30th as compared to March 31st, and it shows a deterioration in four of five key variables. Only HPI improved. There is, of course, a high degree of uncertainty in forecasting, particularly right now, but we compared Moody's forecasts to those provided by a range of other economists, and the estimates we use appear to be in line but on the conservative side. If those forecasts do not change and the behavior of our borrowers is as modeled, our PCLs should decline in future quarters. On the other hand, if they deteriorate, our PCLs will be elevated, and if they improve, our PCLs will decline even further.
I will also highlight that since our PCL is based on a weighted average calculation across economic scenarios, we will have over-reserved by CAD 7.8 million if the economy simply follows our base case. Looking at impaired loans, they were CAD 23.1 million higher at March 31st, primarily as a result of a newly impaired and low LTV CAD 17 million commercial loan in Alberta. We do not expect any losses on that loan. Impaired balances also included a CAD 39 million loan on a commercial property in Vancouver that defaulted last year. In early Q3 of this year, the property was sold, and the proceeds were used to fully discharge the loan such that Equitable recovered all outstanding principal and accrued interest. This experience serves as a reminder of why we focus on lending against well-located, high-quality properties.
Actual losses and write-offs in Q2 amounted to CAD 4.2 million, or just six basis points of total loan assets. We've included both qualitative and quantitative information on our approach to lending and risk management in the MD&A, beginning on page 27, and we'd be happy to answer any questions you have on this call. Moving on, the change analysis slide in our deck quantifies the quarter one to quarter two impact of various drivers of our profitability.
One of those drivers was a decrease in total operating costs, which were down CAD 2.1 million from Q1 as we held the line in all expense categories. Our efficiency ratio followed suit. It was down to 39.2% from 43.4% in Q1, as lower non-interest expenses were assisted by higher fair value income. We remain focused on our long-term objectives and are pushing forward with the digitization of our bank and our service offerings.
In other words, even in this COVID environment, we will continue to invest in our strategic priorities. That said, look for expense levels in Q3 and Q4 to be roughly consistent with Q2. On NII, Q2 was up 4% year over year, driven by 11% growth in our average asset balances and despite a 12 basis point drop in our NIM. NIM was also down by 7 basis points sequentially. The decrease in NIM was largely the result of insuring CAD 687 million of alternative single-family mortgages in Q2 and occurred despite the higher spreads that we have been seeing on originations and renewals in both our commercial and single-family businesses, particularly since the middle of March. As Andrew mentioned, this insurance will provide funding costs and capital benefits to Equitable over the lives of the insured mortgages.
However, there was a mismatch in the timing of the costs and the benefits. The insurance premiums are amortized into income on an aggressive profile, that being over the remaining contractual term of the mortgages. The funding costs and capital benefits, on the other hand, are realized over the initial term and subsequent renewal periods. So, most of the premiums will be expensed in Q2 and Q3 of this year, while the substantial benefits are realized over a period of years. The net mismatch in Q2 was CAD 4.7 million and resulted in a 7 basis point drag on NIM. We've provided the expected net benefits by quarter on slide 16 of our deck. We anticipate that the net pre-tax costs will be in the range of CAD 2 million next quarter and will disappear almost entirely by Q4.
The economics will then reverse next year and be in the range of CAD 1 to CAD 1.5 million of additional pre-tax profit per quarter. We believe this is a good investment, even if it does weigh slightly on quarterly results this year. Further on NII, we had some dynamics with our CMHC floating rate securitization that contributed to lower NII in Q2, related to the timing of when the rates were set and also the fact that floating rate liabilities are priced off CDOR, while the loans are priced off prime, and those rates were disconnected for part of the quarter. And finally, we held the EQ Bank HISA rate at 2% for competitive reasons and to encourage balance growth while consumers were actively shifting to digital channels. This is an investment that continues to cost us some short-term NII but a substantial long-term franchise value.
There is an opportunity to reduce this rate. These dynamics with our floating rate assets should dissipate next quarter and help our earnings by at least $0.10. That's my report. Now back to Andrew for final comments. T
hanks, Tim. Equitable marks its 50th business anniversary in July. It was coincidentally named one of the best workplaces in Canada by Great Place to Work. Would it be nice to celebrate this occasion without pandemic disruptions, since the accomplishments by generations of Equitable employees deserve recognition and praise? We've devoted a slide in our deck to calling out just a few of our milestones over the past five decades.
From our humble trust company beginnings in Hamilton to our place as Canada's Challenger Bank today, we have made a difference to the lives of hundreds of thousands of Canadians, and we are grateful for the opportunity to serve them from coast to coast. Along the way, we have followed our own path, challenged the status quo, and in small but meaningful ways made banking better for Canadians. We've now made challenging a serial preoccupation, and unlike those early days, we've got a lot more muscle to put behind our efforts. I'm of the view that Equitable has what it takes to become an even more powerful force for good in our industry, and I'm really excited about our future plans for innovation and service in all parts of our bank. I think Canadians are ready for change.
We're seeing that with the adoption of EQ Bank services, growth in deposits through our fintech partnerships, and the emergence of our decumulation businesses. The way I think about this is that we are a catalyst for change in banking that creates value for Canadians from all walks of life. While we're taking all the necessary precautions to manage successfully through this health and economic crisis, we're not losing sight of the future. Digitization of our services will continue, as will our advocacy efforts in favor of open banking and our commitment to adding value to customers, shareholders, employees, and our broader community of partners. In closing, Equitable has adjusted well to new realities. With strong capital and liquidity positions, the bank is prepared for a range of downside scenarios, but also for economic recovery.
We expect earnings to grow from the improved levels of Q2, and we know that our award-winning digital capabilities, cloud infrastructure, and incredibly dedicated workforce will continue to give us the advantage we need to challenge and succeed. This concludes our prepared remarks. As a reminder, Ron Tratch, Chief Risk Officer of the bank, is here with Tim and I to answer your questions. And with that, Chris, please open the lines for Q&A.
Thank you. For analysts to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Stephen Boland of Raymond James. Your line is open.
Oh, good morning. I'm not usually the first one. Maybe you could just talk about the leasing portfolio and, I guess, the allowances. They still remain fairly high.
Again, is that driven by the macro modeling, or is there something specific in the portfolio or the age of the portfolio that makes the allowances remain so high compared to the other portfolios?
Steve, you're always first in our minds, so we appreciate you being first up this time. I think Ron has spent more time with that book, and I wonder if Ron can answer that question.
Yeah. So Steve, the allowances that we took were relatively similar quarter over quarter with the degradation of a few of the macro factors causing us to take incremental additional allowance. But no, the losses don't really relate to any idiosyncratic specific lease-level issues. They're mostly and primarily driven by the degradation and the macroeconomic factors.
Tim had commented that our loss given default was a net gain across the entire book, but in that business, HPI forecasts don't really benefit it, so it is primarily a function of the macroeconomic factors at the broader economy level.
Does the age of the portfolio, if the age of the portfolio, does that matter at all in terms of deciding that allowance? If you have more equity in the lease, your loan-to-value, theoretically, I guess, would be lower, right, if there is a cushion? So is that kind of relevant?
Yeah. So I mean, they are leases, but if you think of it in long terms in terms of effective amortization, yeah. So as a lease does get further into the term of the lease, the balances do come down fairly rapidly, obviously.
But quarter over quarter, we wouldn't see big changes in that effective duration of the book. So that wouldn't be what's driving big changes quarter over quarter. If you went over an extended period and weren't adding a considerable level of new leases, I think that could become a bigger factor, but not quarter over quarter with what our results are today.
Okay. And just my second question would be, just, Andrew, maybe on the strength of originations in the commercial book. I know there was some; you mentioned one secured loan for CAD 60 million. Maybe you could just talk about the environment right now, how competitive it is. Are the big banks circling or not, or the bigger banks? Maybe just spend maybe a minute on that.
Yeah. I think we're pretty optimistic about our commercial book. It seems like competition is less fierce.
The normal spreads seem to have increased a fair bit, and our team is extraordinarily well organized, so we're seeing some pretty good opportunities right now with better loan metrics than would be the case. I think we talked more about that at the last quarter, but we did change our lending appetite in the commercial area and made it more conservative in the face of economic uncertainty. But despite that, we're seeing good opportunities, so it feels like a good place to be, and similarly, in the multi-unit side of our business, we're pretty optimistic about where that's going currently.
Okay. Thanks very much, guys.
Thanks, Steve.
Your next question comes from Graham Ryding of TD Securities. Your line is open.
Hi. Good morning. You mentioned in your MD&A that your Alt-A volumes are down year over year.
Is there anything you can quantify there, and maybe is there any color in terms of your prime volumes that originated in-house versus third parties?
Sorry. I think we gave the number for our prime volumes originated in-house is actually about CAD 300 million. Tim, can you?
Yeah. Sorry. Graham, you cut out on part of your question. Did you say Alt-A volumes, and are you thinking about originations?
Yeah. Your originations. You just said they were down year over year. Is there anything you can quantify there to give us some context?
Yeah. I mean, I'd say this was really a function of the broad market activity levels with an additional effect because of the fact that we tightened our lending criteria, our underwriting thresholds a little bit.
But I think if you look at the broad market activity, I mean, in April, it was down, call it 60% year over year, depending on the market that you're operating in. So I think you could apply a similar number to originations for us through a good chunk of the quarter. Again, it was mostly market-driven, and the activity levels were down roughly in line with our underwriting and originations were down roughly in line with those activities.
Okay. That helps. And then you commented that your originations, you expect them to remain subdued. Again, is that because the market is smaller or not there right now, or are you deliberately pulling back and being more cautious in the Alt-A space?
No. I think we're definitely not deliberately pulling back. Our teams are really focused on trying to find the right kinds of deals.
It is sort of interesting. It does seem like it's day to day. As you know, we prepare these MD&As. I was on the underwriting floor yesterday, and we had a good day for submissions yesterday, for example, and the kind of qualitative commentary was that the quality of the deals were quite a bit better than what we had seen a month or two ago. So because when we went through this interruption of income caused by the lockdown, we still saw some decent volumes coming in, but many of the transactions didn't make sense because there'd been a breakage of income. And I'm sort of hopeful that that might reverse over the next few weeks, but it all remains to be seen.
And I think, as you know, we like to try and be relatively conservative in providing our forward-looking projections, so I think certainly this is a fairly conservative view of the world.
Okay. Fair enough. And then just one more, if I could. When I look at your allowance for credit losses, they're sort of sitting roughly three times higher than your 2019 averages for your retail and your equipment portfolios, but your commercial book, the allowances are roughly 1.4 times higher. So I'm just wondering, is there any color on why your commercial allowances have not increased as much as those other two areas on a relative basis?
I think, Ron, if you can address that.
I think the best way to address that is if you look at the—or when we look at the actual losses that we realize in commercial, because it is a book that is largely contained of a relatively fewer number of large accounts, and we really have very few losses. In the normal course, out of, call it, an abundance of caution, we do hold a greater percentage of reserves than we would see in the normal course in commercial, much more than the two basis point average that our book would lose in any given year. As a result, coming into the COVID pandemic situation, while we have increased the level of reserves for commercial, we've always kept a much bigger buffer to realize losses, just in case there were a few idiosyncratic ones that we couldn't forecast before.
So it's not so much, I wouldn't view it as we have not increased because we think the book is dramatically different. It's just that in good times, we do hold more for commercial, and so we balance that out somewhat in the current environment.
And just to build on that for a second, Graham, there are really historically two major components to the commercial allowance. One was the purely model component, and the other is the buffer or the overlay that Ron was talking about. When you fast forward to a year like 2020, that model component is responsive to changes in the economic climate and borrower behaviors. The buffer portion actually doesn't move with those macroeconomic changes. So because that portion was held relatively steady, you don't see that same three-times increase that you see in our other portfolios.
Got it. Okay.
So on a relative basis, you have a bigger buffer in your commercial than you do on your retail?
Exactly.
Okay. That's it for me. Thank you.
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Cihan Tuncay of Stifel. Your line is open.
Well, hi guys. Good morning. Just wondering on the CMHC insurance that you purchased, was that the maximum amount of mortgages that qualified under their revised terms, or could there potentially be any more pooled mortgages going into that kind of product in future quarters?
Essentially, it's the maximum amount that was available to us that we wouldn't think that's going to be much more available.
There may be smaller amounts, but by and large, we felt this was ample for us and kind of close to the amount that made sense on a sort of economic trade-off basis. It could be more expensive to get different types of loans. I'm sure these were the ones that made sense from a kind of NPV perspective.
Okay. Thanks for the color there, Andrew. And just on the reduction in non-interest expenses, I'm trying to get a sense of whether or not how much of that was really just pushed out to next year, or are these kind of lasting cost cuts that you've taken? And with that, I know a lot of the investment was in the digital infrastructure.
Will some of those cost reductions that you're taking in IT have any impact on your own internally generated origination volume in the future, just from an IT infrastructure perspective?
No. The way we sort of thought about the world is that some of our projects, and I think we talked perhaps a little more about this in the last conference call, so we were planning to be in the covered bond market this year, and we were planning to advance our AIRB program quite aggressively. Both of those programs, because of the impact of COVID and kind of the dynamics around those, were sort of pushed off a bit. So that's one of the areas where we didn't invest as much as we would have came into the year thinking. But on the other hand, we're seeing lots of opportunity around digitization, and so we're continuing to invest fully in digitization.
I wouldn't say we're at a higher level than we expected to run, but we certainly haven't dialed that back very much. So our costs shouldn't affect long-term origination volumes at all, but those two programs will get deferred until later.
Okay. And just one more quick question. Tim, in your comments, you alluded to the fact that with the growth you're seeing in EQ Bank deposits, you're still maintaining a competitive interest rate. At what point do you think that you will get enough momentum behind deposit growth in that product to start seeing declines in deposit costs?
I think we're getting sort of close to that point, frankly. Certainly something that will be an active conversation with Mahima and behind us.
The way we think about this, roughly speaking, and there's a bit of art on the science, but roughly speaking, we think there's about CAD 1,000 NPV value in a new customer. So you can see just holding that rate for a little period is a good acquisition kind of cost. We would have perhaps spent CAD 300,000-CAD 400,000 more on interest in, say, June than we would have expected that we could have done if we'd dropped rates to more market-competitive rates. But then in contrast, we added an extra CAD 9 million of NPV from having that broader customer base. So that appeared to be a pretty good investment in that period. We think as the summer is here now, probably people are less focused on banking, more focused on being outside. The value of those incremental accounts that you pick up is starting to reduce.
And as we're increasing our product set as well, that's also leading to kind of good inflow of customers. So those are some of the things we're considering, is how if we reduce rates, how much does that slow down customer acquisition? What does that mean on a kind of NPV view of the world, franchise value of the world? Clearly, one of the nice things about the EQ Bank franchise is we've now built it. As we get into certain scales, as we add new innovations, they're being spread across a wider customer base, which is just making us more and more productive. So that gives us an exciting opportunity. Every time we think about new initiatives, you divide those by a larger customer base, and they suddenly start to make sense.
So I think you'll see some really interesting things coming on the product side over the next year or so.
Thanks for that, Andrew. Those were all my questions. Thanks.
Your next question comes from Jamie Gloin of National Bank Financial. Your line is open. Yeah.
Thank you. Good morning. I just want to spend some time digging into the payment deferrals. So first off, the significant decline that you've reported here since the peak levels to where we are today, can you just describe what's driving that decline? Is it just a roll-off and these borrowers are continuing or now paying their mortgages? Is there any—was there any other reason why it would decline so fast? I think they're trying to, as we expressed in the prepared remarks, turn what some describe as a cliff into a slope.
When we first gave deferrals, we had a lot of calls coming in on the retail book, which is where most of it sits. We were generally giving one, two, or three-month deferrals. Clearly, we're sort of past the point now of those three-month deferrals. We're just starting to get past that point. Our general feeling is that many of our customers called looking for a deferral just out of an abundance of caution in an uncertain economic scenario. Many of those have rolled off. It's clear, I think, that if there are people in financial trouble, that they'll start to emerge now. Ron's team has done a lot of work in this area. Ron, whether you can give some other color there, I believe that the analysis you've done supports the view that our credit reserving is pretty damn good as well.
Yeah. What I could add there, Jamie, is, well, Andrew's referenced that it is early with respect to what we call expired deferrals, as they are now no longer under a contractual deferral. The early results, and we use that term again in terms of the number transitioning back to regular payment, has been extremely encouraging. There is still a significant portion to go, obviously. So we don't want to push too far ahead in looking forward. But the research that Andrew's referencing that my team has done is we try to reference everything, not just in the context of these deferrals, but also going back and triangulating back to what we have set aside in Stage 1 and Stage 2 expected credit loss.
Given how encouraging the early results are, all indications are that we are very, very well reserved from an ECL perspective, barring any major shift in economic forecasts, etc., etc. It actually gives us a lot of comfort going forward when you triangulate these COVID deferrals, the actual experience, and then what we have forecasted going forward.
Okay. Great. It sounds like the expired deferrals are now current and not on some other form of forbearance measure. In terms of those that are active, have you dug into the characteristics of those borrowers? Are they still active because of, are they passing a certain criteria that you're looking at in terms of income impairment or job loss? Or is the threshold to qualify for a deferral still fairly loose?
A good portion of them are deferrals that are still under the original deferral request that came in originally. The balance of another good portion would be deferrals that are under their subsequent deferral request. The individual characteristics obviously boils down to the individual loans. The experience with those is, as we come to that second deferral, we do get additional information. We make sure that the information that is there to support that subsequent deferral. We don't expect them to perform any differently than the ones that have transitioned to expired. If there were issues when it came to a request for subsequent deferral, we would have moved it to a normal proceeding through our typical impaired loan and enforcement process.
So there isn't any reason for us to believe at this stage that that remaining balance should perform any differently than what we've seen with the expired deferrals.
What we're trying to do here is we're trying to create a bit of attention to get these loans coming back into a normal payment cadence, which we think would be constructive for our customers, while at the same time recognizing there's going to be people still on temporary employment, job loss. But in a certain other things, even in the commercial side, CERB are providing some called CECRA, I think it's called, are providing some relief to borrowers. The government programs are still being helpful there to allow people to migrate back to regular payment.
Yeah. So you actually raised another point that I wanted to just clarify. In terms of the CERB, it's obviously been very beneficial to borrowers.
Do you have any sense as to the uptake in the CERB from your underlying borrowers and how that is impacting the payment deferral numbers?
I certainly don't have, I mean, here in general, stories, and it's a complicated picture out there, right? Because you often might have two people in a partnership. One person is on CERB, and the other one's working when both were working. So you're seeing that kind of scenario out there, or perhaps even multi-generational families living in one household where you've got some CERB income. So it's a bit of a complicated story to understand at this point. We certainly can't put any, we hear that qualitatively, but we can't put any quantitative numbers around that.
Okay. And just lastly on this topic, you mentioned that there was a good chunk that were extended, I guess, their payment deferral time was extended.
Can you share the percentage of the portfolio that would have received an extension? And how do you think about extensions generally? Is this something where you can roll a two-month deferral three times and stay on side here, or is it sort of one deferral and that's it?
So the overall percentage that is in a second or third request is actually quite low given the grand scheme of the entirety of the roughly in the retail book, the $5 billion roughly that we showed as our peak level. The actual portion that has gone on for subsequent request is actually quite low. It's a good portion of the $1.4 billion of the remaining ones, but on balance, it's quite low. The approach that we've taken is simply when some institutions in the industry offered six months right out of the gate, we chose to offer three.
We could have chosen to offer six, and today virtually have no line of sight into payment history or performance, and we would still be in a holding pattern waiting to see. We elected to do things differently from a management perspective. We've seen very good results with a lot of those transitioning, but we've always been prepared to work with our customers if, for example, they needed another month to two months or even three months, depending on the customer's individual circumstance and working that through with them to make sure that we were offering them the maximum that we could under the industry allowed six months to work with them on an individual basis. I can paint the picture in broad strokes.
We've really tailored it to the individual and asking some pointed questions at the time those deferrals come up and if it's supported for one, two, or three months up to what the industry is allowing.
Yeah. It's coming a very manageable process in terms of being able to have good dialogue with our customers about what their individual situation is at this point. I think CMHC actually came out with some good kind of flow charts. Well, I don't have so much flow charts, but decisions around how you would treat individual loans. And it may well be that the industry evolves over the next two to three months to things like making interest-only payments rather than a full deferral and that kind of thing. But we have not made any of those moves yet, to be clear.
Generally speaking today, if there's somebody that's been on deferral and is coming back asking for a second one, which, as Ron mentioned, has actually been a reasonably small proportion of our loans coming off deferral, we're generally having a conversation with them if it makes sense, giving a one-month deferral, and still keeping that nice tension where we're helping them kind of get through the next month or two, but understanding that we need to actually figure out how to get back onto a regular payment mode.
Okay. Great. That's really great color on that topic. Thank you. Shifting to the outlook somewhat, I think Andrew, you sort of mentioned that just recently you've seen some good application volumes and the quality of those applications. Can you just talk about the environment today? Obviously, the housing market looks pretty strong.
We're having a delayed spring market here. Is that something you're also seeing in terms of the application volumes? And if you can just focus those comments more on the alternative book as opposed to the prime book.
Yeah. Well, I'll start by saying that despite what you're requesting here, clearly we're seeing a lot of demand in the prime book, and that's indicative of that strong housing market, as you say. And I think sort of as our commentary set out, we're seeing less demand in that Alt book, so we haven't seen that get to that level of strength yet. I don't know whether there's some delay between that and the housing market, but clearly there's a good cadence of business there, but it's not what I would have expected yet. But our teams are out there trying to beat the bushes to find the business.
So we'll see how that goes. But clearly we have a strong franchise. We're the leader in this marketplace, so we'll find the business if it's there. But so far, we've seen less demand in that Alt book .
Okay. And can you refresh for me the new Canadian segment of the portfolio? I just want to get a sense as to if immigration and the closing of borders, what kind of an impact that could have on acquiring new customers as they enter Canada.
Yeah. I mean, the way we think about that is about 40% of our Alt originations are new Canadians, so relatively recent immigration history. What I would say is when we talk about new Canadians, when does a new Canadian become an established Canadian? And I think really we're talking about people that have arrived in Canada the last five years or so.
There's a fairly significant backlog there of people that didn't typically come moving to the country and then buy a house right away. They would be moving in, establishing some kind of credit and job track record and tenure, and it might be two to three years before they're actually buying a house. We would consider that to be still kind of a newcomer to Canada type book. The immediate softening of immigration probably won't have that much impact on the business. There are some nice things to think about, particularly the challenger banks. They're nice things, but the situation in Hong Kong, where over 300,000 Canadians might choose to exercise the rights to their passport to come to Canada, for example, might, we're hearing anecdotally, is causing some sort of upward demand for housing, and that's certainly a market that we play in quite successfully.
So, but to your point, for long term, immigration clearly will be down significantly this year, but it doesn't have an impact in the short term, but over the next three to four years, maybe.
Okay. Great. Thank you. And last one, and maybe this is more for Tim, just want to get a sense as to how the net interest margin in the alternative single-family space is looking here in recent months as we're seeing lower GIC rates. Likely, you'll lower the EQ Bank rates eventually. How is the asset side of the equation performing recently given, let's say, less volumes on the alternative single-family side that you've just described? Are you seeing increased competition driving those asset yields significantly lower that could impair margins, or does it look like it's going to hold fairly steady?
Yeah. I mean, we actually use the ROE calculator we described before.
I think we basically take that. What's a slice of that marginal loan, and so our spreads when using that methodology are actually pretty attractive now above the level they would have been at six months ago, so no problem on the NIM side.
Okay. That's great. Thank you very much.
Your next question comes from Geoff Kwan of RBC Capital Markets. Your line is open.
Hi. Just had one question. Just going back on the deferral side, when you're getting the requests for extensions, I think you kind of mentioned you're getting a little bit more information on the income side. Are you actually getting kind of more formalized income verification of some sort of impairment, or are you doing just some sort of declaration?
Then the other part of my question on that is, are you doing these assessments differently for your prime customers relative to your Alt-A customers?
Yeah. It's more of a conversation, Geoff, about what is the situation rather than going back as we would in a mortgage origination looking for source documents. Certainly, with the challenges around COVID, one of the challenges has been kind of getting to HR departments and getting proof of income in any event. It's more about a conversation about the situation with the customer, maybe looking at bank statements as a source document, but not going back on the same level as we would for an original transaction. Yes, we are taking a position that's more aligned with the larger banks on the prime side. We'd be more relaxed about providing deferrals on the prime side of the business.
Okay.
Thank you.
Again, if you would like to ask a question, press star, then one on your telephone keypad. Your next question comes from Cihan Tuncay of Stifel. Your line is open.
Hi, sorry. I just had a follow-up question on the NIM, but it looks like that's been answered already, so thanks.
There are no further questions at this time. I will now return the call to Mr. Andrew Moor for closing comments.
Thanks, Chris. We'll look forward to reporting Q3 and early November. In the meantime, please enjoy the rest of your summer and goodbye for now.
This concludes today's conference call. Thank you for your participation. You may now disconnect.