Okay. We'll start off with the next session, please, and before we begin, I've been asked to tell you that Chadwick Westlake's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections, or conclusions in these statements. Listeners can find additional details in the public filings of EQB Inc., so with that, Chadwick, welcome to the conference. Thanks for coming.
Thanks for having me, Darko.
So all day long, we've been going and asking very direct questions about performance and ROE and all sorts of stuff. So I just want to dive right away into a few things with respect to your bank. And I want to, I think, start with sort of growth expectations and, in particular, revenue growth. So as I sort of absorbed your guidance in the last conference call, essentially, you were expecting loans under management to grow about 10%, sorry, in high single digits. Last year in 2025, you had 10%, but revenue was actually slightly down. So maybe we can talk a little bit about the expectation for revenue growth in 2026. And to put a finer point on it, I think you're expecting flat to slightly positive operating leverage with low single-digit expense growth, which sort of says mid-single-digit revenue growth.
So we've got high loans under management growth, mid-single revenue growth. Am I reading that right? And where do you see potential? Most importantly, where do you see the potential for revenue growth in 2026?
Yeah, I see how you do that, Darko. Yeah, you ask a question, then you look to see if I'm going to give you a yes or a no. First, thanks for having me. I really appreciate RBC hosting us today. Happy New Year to everyone. This is an exciting time for EQB. I do want to share that. I'm about four months into the job, and we're starting truly a new era for Canada's challenger bank. And we're focusing the company on doing a few big things really well. We're reigniting our core franchise, which is going to come back to where we're going on the revenue growth. We're going to complete the full potential of the challenger bank. That includes with the recently announced PC Financial acquisition that I'll happily speak more about too. It's just incredibly exciting. And then we're going to optimize the capabilities of EQB.
That includes returning to efficiency as a competitive advantage and returning to our 15% plus ROE North Star. So I say that as well as in terms of the strategic priorities and our excitement for where we're at and having closed the book on 2025 and the biggest year of change yet for EQB. So what will be one of the most exciting years yet for EQB? And when you think of some of your questions, there's a couple of aspects. ROE is going to remain paramount, ROE and that earnings growth. And one of the governors we're applying to the business that we're getting to through the restructuring charge and through the acquisition and some of the focus of the company is getting back to operating leverage as a paramount priority. Because we were very negative in our operating leverage last year, and it was not acceptable.
And we've now rectified that, and you'll start to see that in Q1. So expenses more taking their cue from revenue growth. And we're going to get back to obviously growing the core franchise really well, but we're going to do it with a focus on back to 15% plus ROE, efficiency more in that competitive advantage range, which is south of 50%. And some of that's what you're seeing in the guidance. So we give that guidance or the outlook, I should say, of 12%-15% EPS growth and then getting back to ROE, which we set around 12% plus for 2026 and then growing from there. So what you can expect for revenue growth, you're right, we thought high single digit, low double digit for loans under management.
And you're going to see that in different ways where we're still growing well in the CMHC insured multi, which is a big part of our business. So that's part of the commercial business, which is about CAD 42 billion of the CAD 74 billion that we have in loans under management. Reverse mortgages, we expect to continue to grow really well, and that's a great yielding business. And we pull back a little bit more on things like single-family insured, but the single-family uninsured, we do expect to pick up more momentum and more growth, especially for the second half of the year. But you're going to start to see some of those expense benefits start to play out early in the year. So at the end of the day, we're going to use our high capital really well.
We're going to focus it, and we're going to drive back to the ROE and the efficiency and that EPS growth that you should start to see translate this year really effectively.
Is that mostly then an NII story or a fee? How should I think of that? You're growing these different buckets.
Sure. Yeah, that story will change when we close the deal. But for this year, we'd expect consistency in our net interest margin. So you saw that around 2.01% for Q4, and we'd expect some consistency there. I know there was a little bit of volatility last year, and we stabilized that. And that comes down to how we manage our funding costs, but also the asset classes where we're growing. Some of the loans under management, though, a big part of that is the insured multis, and that shows up more in the non-interest revenue, which we expect would continue. And that's always going to depend on the five or 10 years or where that's going in the spread. But overall, we'd expect even if revenue was flat, we're going to manage our expenses to the point where they're not going to exceed revenue.
So you're going to get back to that flat to positive operating leverage is really important because we can control our expenses, and we will. And then when you layer on what we expect to be a better credit picture in 2026 as well, you get back to that higher earnings growth.
That's a great segue into the next question. So what about the expectations for, I mean, we didn't quite get a PCL guide from you?
We tried.
You tried.
I tried.
How should we think about improvement? Yes. How significant a component of the 12%-15% EPS growth can credit be?
The first important point is going to be the expenses. That's played. You're going to start to see that benefit in Q1. You have not seen that benefit yet. We've communicated that would be about CAD 45 million improvement in expenses. You're going to see that in 2026 done. The credit side, what you can imagine in our first, in my first few months in the job and our new leadership team is we went through loan by loan, Darko. That was an important opportunity becoming CEO and to have an extraordinary new CFO to work with, Annalisa, and our CRO, Marlene, and the whole leadership team that's here. I wanted to go through loan by loan to really understand the picture and ensure we had conviction that we had the most conservative, thoughtful posture possible on the credit reserves and our ACL ratio.
You're always under accounting for it. IFRS 9 is IFRS 9, so you can only take the reserving that you can. But we wanted to take the most conservative posture possible. We really understand each loan by loan, and we're confident that we exited 2025 from a position of strength and that we're well reserved for not expecting the position to improve dramatically in 2026, but we're well positioned for even a more recessionary environment in 2026. With that said, I'd expect the PCL ratio to be improved in 2026 over 2025 and improving sequentially through the year. That includes both in single-family and commercial.
Equipment finance? Maybe you can just touch on that real quick.
Yeah, equipment financing, I've been examining the business pretty carefully. I'd say we've improved the business in terms of the risk posture on it, where in the past, closer to 60% of the business was long-haul trucking and lower quality, I would say, that you price for. We've migrated the business significantly to more where maybe 25% or so is long-haul, and a much more significant component now is prime, so that should reflect in the credit side where in 2024, equipment financing was about 80% of our PCL. Last year was around a third, and we'd expect that to continue to improve, but it is higher credit losses than our other books, but we'll continue to examine all the businesses, but the overall position on the business has improved from a stability perspective.
Is it still a business that you think can achieve the ROE objectives, or is it still too early to tell?
Over time, I believe it can. But the question is, do I believe that is a challenger bank business? We're going to be one of the most distinct and one of the only omnichannel challenger banks in the world. And that's already set. That will be done by the end of this year. So does the equipment financing business match that or not? And what I'm not as big of a fan of is the volatility in that credit profile. It's going to be a little bit more cyclical than we might like. And I'd like things to be a little bit more stable and predictable as a growth bank, but I'd like the credit patterns to be a little bit more consistent.
Okay. And then just to finish up on credit quality, I think the way we think about the mortgage business is typically, you said you went loan by loan almost.
Yes.
And so I guess the cohort that you had talked about in the fourth quarter was like a GTA suburbs 2022 sort of vintage. You've gone through it. I don't know if you can maybe talk to this, but what are the early signs for further delinquency or other formations in this book? And how should we think about possibly top-up? Because as you said, there's a little bit of accounting sort of holding you back from, so could we expect something like that in the first quarter or two?
So in Q4, if you look at where we entered Q4 and we exited Q4, our coverage ratio expanded 10-15 basis points. We did expand that. We built in performing. Two-thirds of that build would have been more macro-driven and then some on the changes in significant credit risk. So we built for that to my expectation would be an improvement in Q1 over Q4. And what we have not seen, and you always have to say, yeah, because none of us can predict this market, and we've already seen that starting the new year, anything can change, but we have not identified anything systemic in our portfolio. I think one thing that is true about EQB is that we have lowest PCL ratio. We trend with the lowest PCL ratio of all bank peers. And we've always been a strong lender in single-family and commercial.
And what popped up last year was some losses in single-family, which is more unique for EQB. So I think that's what threw people off. And you have losses in 50-60 loans out of, say, 63,000 just in that portfolio. I think that just caused people to focus. But we haven't seen it out of that pattern of 50-60 that remained the same out of Q4 as you resolve some. And it has to be unique where in those properties, you had price declines of, say, 30%-35%, and you had some borrower stress, which can happen in these markets. So do we see that happening outside of where we are in those markets in those 2022 vintages? I don't think we've seen that play out, but we have prepared for a more stressed environment in the reserve that we've taken.
Okay. Earlier, you're rather emphatic about the expense control and that we should see it right away. So what is the efficiency? What is your efficiency aim to run the bank at a through the cycle kind of? And maybe this is difficult to say now because you're about to embark on a fairly large change, and we'll get to the acquisition, I promise everybody. But maybe first, where do you think you can, where do you want to really run the efficiency ratio of this bank?
The first thing I'd say, expenses increased 12% last year. Revenue was minus 10, completely unacceptable. I'd say that right out of the gates, we acknowledge that and we fix that. What I'd expect is consistent, flat to positive operating leverage. I'll keep bringing it back to that because it's going to come to the operating leverage and the ROE. What I would say is some people have looked at, including me, say, okay, what was your efficiency ratio even 10 years ago? The hard part about that is EQB has changed dramatically in that time in a very good way. We acquired Concentra Bank in 2022 at a 70% efficiency ratio. We brought that to our level in the 40s. We acquired ACM, our asset management company. That has a higher efficiency ratio, but it's great for ROE.
My belief in general outside of PCF is our efficiency ratio should start with a four, and we closed the quarter at 54% or so, so you'd expect to see that improve, and you'll start to see the benefit of that in Q1, and that's why we had set an expectation, an outlook back to high 40s, around 50 by late next year, but you'll start to see momentum towards that already this year, and then the rest just depends on the revenue environment, right? We're planning for a more conservative revenue growth environment in the interim, but it would have a four handle outside of, say, a business like PCF having an efficiency more in the 55% or so range, but you can improve that as well over time.
Yeah. So let's talk about that. I mean, so you announced the deal. We grabbed what information was available from the regulatory site. We slammed it together with your model. And so it's not perfect. There's going to be mistakes in my model because I don't even know if there's any adjustments I should be making. So how should I think about the combined efficiency ratio and what opportunities do you see there at PCF on the cost side?
Yeah. Even when you take a step back, there is no deal like this to be done in Canada. We couldn't be more excited about the PC transaction and our new partners at Loblaw and George Weston. This is the deal that will literally make us one of the most unique challenger banks in the world. It will make us omnichannel for the first time as well. There's huge wins in that. This deal is about scale, capability, and value. In scale, we're going to go from nearly 800,000 customers to about 3.5 million customers. We're going to have a real complete direct franchise for the first time with that. There's a massive multiplier on distribution capabilities and branding. Where in my shoes, I was asking the question of how do we become relevant to Canadians when 80% or 90% don't even know we're here?
That's been a challenge because how do you achieve that without having to spend 10, 20 times the amount we're spending on marketing now to get to where people are? Because it's very important for me that we are where customers are. So this deal puts us where they are. Now we will be linked to the PC Optimum program, which is the most successful, largest loyalty program in Canada with 17.5 million members. We'll be omnichannel with an EQB bank brand in their 2,500 stores. We'll operate 180 device pavilions. We will be all over Canada, where seven to eight million people visit per week. So it's all for the scale of how do you become relevant and economically build household awareness. We will be a household name when this completes. And then you think of the capabilities. We're adding the product.
You've heard us talk about for years, Darko, that we want to add a payment and credit solution. Nine out of 10 of our EQ customers said, "If you have that, we'll do more business with you." This completes that for a capability perspective with one of the biggest credit card portfolios in Canada. That's 80% prime, super prime. It's a very large one. It's actually just, we're right in line with the Big Five with this credit card portfolio and a very high-quality credit card portfolio. Loblaw would say a couple million of their best customers become our customers. You get that capability, plus you're getting the loyalty program and also talent. We're adding hundreds of amazing employees with very shared culture and values and purpose and mission. That capability is important. We're already on the same core banking platform.
We're already both on Microsoft Azure, so there's real synergy. Even our Chief Technology Officer was there. She helped build their technology stack and the Optimum program, so there's real alignment in the capability. And you can't just go build this. You can't build it, and then lastly, it's about value, so this creates tremendous shareholder value, customer value, competition for Canada. This is right on point. I think even right down to the rating agency aspect in terms of the shift in our business mix, the revenue diversification, this completely transforms what we are in a very good way, so it's about those three aspects at the end of the day for the deal, and there was no deal like this. This was a marriage in the making. There was no process. They wanted to work with us, and we wanted to work with them.
And so, just thinking about then, we'll move this beyond just efficiency, which is, let's think about all of these opportunities. So, 17.5 million members.
PC Optimum, yeah.
PC Optimum. And you have free opportunity there to convert them to your customers. I can envision a number of things. Maybe you put PC Optimum points on a deposit product. You've got a license, I think, to issue PC Optimum points, right? So how should we think about the cross-sell opportunity and how aggressively do you pursue it, mindful of risks and so on?
Yeah. There would be two things. So when we published our model and you said you were piecing together the data, and I know it's not easy because it's just the OSFI data. It needed to refer to standalone financials. And we gave a bit of a glimpse of that in our investor presentation. But I'd say we shared conservative synergy assumptions of about CAD 30 million in cost savings, which is about 7%. Even with that and some very rudimentary capital efficiency, we believe this hurdle is at 15% plus ROE. That's as much as we conveyed in an exceptional value-creating deal. Imagine on top of that, more capital efficiency, more funding capability. These customers have shown an interest and a propensity to open a day-to-day account. And you see that with PC Financial having launched a day-to-day offering in 2024.
And in a short period of time, without even trying that hard, I think they would say, added CAD 800 million in deposits and a few hundred thousand deposit customers. So there is a propensity. There's an interest in doing more. And so that we believe we can use to grow EQ Bank, finally, that core deposit franchise really well. And that would be funding efficiency and savings. And then you have actual cross-sell from there. So could we offer an EQ mortgage to a PC customer? Absolutely. Could there be a reverse mortgage brochure in a device center? Could there be a wealth offering integrated in? Now EQ customers get these credit cards. They can get the home and auto insurance coverage that comes with the business as well where we don't take the P&C risk. There's synergy on both sides. That is going to be upside potential in the acquisition.
But what we wanted to show is with kind of rudimentary combination, this deal hurdles and makes a ton of sense in an extraordinary way for us. So there is upside in cross-sell and wins for both sides. And the beauty for a PC customer, which many of you may be, is you're not going to lose anything. You're only going to gain. What's there will continue, and you'll get more product and offering from us as a challenger bank. And same with the EQ. You're getting all the products and services that you were missing today. It all comes together as one united challenger.
You mentioned in the discussion there that you're picking up pavilions, ATMs, things you've never had before.
That's right.
So how should we think about that? And is that something that you would grow or expand? How should we think about that?
I'm excited about it. I'd never believed as a challenger we should have branches per se. I think physical interaction can be of value. It's about branding, being present where customers are, but also an opportunity to have physical human interaction on site. We're able to operate pavilions at a very economical price in existing stores where people are. You don't have to go to a branch on the corner of X and X. Go to where your family needs you to go to get groceries or you could go in a variety of things across their stores. You might be in for various reasons. There you could have an advice center where you can come in and talk about a card, get some advice, maybe pick up a draft. Yes, you could use an EQ ATM.
So it's the right amount of physical, sort of advice light, kind of branch light without taking on significant operating costs or without expanding our efficiency ratio, really. So you have to step back and reimagine what the operating model capability is, combining these two. And I think we're going to stay focused on Canada, but Canadians are also creatures of comfort. And sometimes you want to know something is tangible. And I think some physical presence can actually make something more tangible if you see it there. And then you're also reminded of, hey, maybe I should ask a question or maybe I should check out that product. So it's there, and it's visible. And I think that can matter to people. And today, for a PC, about, call it half of sales might come from physical, and then half might come through digital.
So these are digitally inclined customers as well. But it's great to have the presence in the stores.
But no early plans to expand anything.
There could be, but I'd say it's truly to share what the full potential is, and there's a lot of assessment to the local neighborhood demographics and where is the growth potential, where's the growth propensity, but I'd say there's definitely significant build possibility for customers through those sites.
You mentioned that you're picking up an auto insurance distribution business. I mean, it was never something that I thought. Is this just an ancillary feature, or is this a business that you think you could also grow and expand?
I think we can grow. We don't have to take the P&C risk, so again, very key, so we have another company we're partnering with, but home and auto, when it's part of the package and it's there, and it was part of us becoming the exclusive financial partner. I think when you start to link the whole thing together, it's a very nice add-on that from a shareholder, it's great for ROE. It's more of a referral-based business, and it matters to Canadians. We're not trying to create the new number one insurance company, but it was more to be part of that complete offering that was there, and they've grown the business very well, already over 65,000 customers, over 90,000 policies, and it's still early in the day, so it's a great opportunity to expand ROE over time.
So you became the CEO and relatively quick out of the gate to do the PC deal. And then you mentioned wealth just a bit ago. You might be able to. So should we start to prepare ourselves for another potential move? Or how aggressively are you trying to charge down the wealth business and entering and providing a wealth offering? Is it possible that you're even thinking about doing this organically or in-house?
A couple of things. The PC deal, it's an important part of our strategy. So as I said, for years, we thought we need payments and wealth. And this was the most distinct deal we could do in this country. Again, we're very excited about our new partners. And I remember they're going to join our board as well, a couple of board seats, and take a significant interest in us. And one thing we all share is that wealth matters to Canadians, and there's significant intergenerational transfer of wealth coming up. And where we have today in both of our platforms is a gap where we now will have, even if you think of the EQ Bank app, we'll have all the everyday solutions you need: RSPs, TFSAs, U.S. dollar account payments. You can even originate a mortgage through our Nesto partnership. Now you have the cards.
PC Optimum will be integrated into our app, but what you don't have is a further yield offering that could even be a great EQ passive investment offering for Canadians integrated into the experience right now, so that's more likely a buy and partner versus build, but there will be product and distribution opportunities to complete this focused direct franchise, and we wanted to move on this transaction, which expands and changes our universe and also the partners we might work with significantly, and it's important to Canadians, so you could expect to see it, but first priority is close this deal and integrate it very well, but you can imagine in parallel, we've been thinking about this for a while, so there are options to add this in, and it's right on strategy for us.
Okay. Shifting gears a little bit to capital. So you had mentioned the potential of managing your CET1 down over time. I mean, you ended at 13.3. You just announced an NCIB. So maybe you can just give a little bit of a highlight on that recent press release that we saw.
The NCIB?
Yeah, the NCIB, and your thoughts were around that.
Yeah, absolutely. We're very well capitalized. We're at a great position at a bank, but we need to put the capital to work, so our belief now is a couple of things. We're always going to invest organically, so making sure we're putting the money, the capital to work through loan growth and through the core franchise, and we generate a lot of capital every single quarter, so the first priority is to put the capital to work there. We have a pretty steady dividend, and we'll probably migrate to more of a payout ratio target over time versus just dividend increase, but we believe in putting that money back into the business to grow, and buybacks is one aspect that you see now, and that's where you're going with that announcement, where it's also not a coincidence that we did a restructuring. We did the biggest transaction ever.
We've also bought back more shares in the past four months than we have in our combined history because our stock is significantly undervalued, and we're going to put our capital to work, so the NCIB, that takes us to our highest level of daily volume capability yet, and we also entered for the first time an ASPP, so an automatic share purchase program, so we'll buy even through blackouts. That's how significantly we believe our shares are undervalued, and we will continue to buy back our stock and put that capital to work. Now, as we have hundreds of millions in excess capital, we're putting it to work. You might see more inorganic in the future, but for now, organic, dividends and buybacks, and then we'll see about more inorganic as well as we progress, but you can see that migrate down because they're very important.
I think a bank should have a total capital ratio above 15%-15.5% or so. We're there. We have some Tier 1 and Tier 2. So we can continue to put that CET1, Tier 1, CET1 to work.
Okay. I'm going to sort of quickly shift, see if there's anything from the audience here in terms of questions. Okay. So first question. Was the Challenger Bank culture attractive for Loblaw? What was it about EQB that attracted Loblaw versus doing this with one of the large banks?
Yeah, absolutely. The challenger bank culture is extremely, extremely compelling to Loblaw and to Galen Weston and Richard Dufresne, the whole team. The attempt to build with PC Financial was to be a challenger bank. It is a challenger bank. And they view that very shared cultural sentiment with us. So they exclusively wanted to work with us, with EQB. There was no process. As they assessed what's the future for PC, they saw us building something very similar, and they wanted to really team up the companies that way. So shared culture, shared focus. And what I would say on the large bank is they want to have significant influence and be partners. And they had a while ago a partnership with CIBC that ended back in 2017. That was a very successful partnership. They generated tens of billions in mortgages and deposits.
And it's for other reasons that it went in different directions. But in a large bank, they weren't necessarily going to get two board seats and be able to buy up to 25% of the company. So with us, they could have an influence. We can focus on their millions of most valuable customers and vice versa. And we can build one distinct challenger bank. So it's about what's possible for Canada, for competition and Canadians. Where we're very, very similar is our focus on this country. We're exclusively focused on Canada. We're exclusively focused on building better lives for Canadians. Completely, sincerely. That's why I came back and took this job. I care deeply about this country and Canadians. And they feel the same way. So this is about the mission in Canada and their ability to influence and work with us.
And they don't think in a quarter or a year. They think in decades. So we're in this to really build something very different. So we haven't yet unpacked the full potential of what you'll see in this. And you'll see that more when we have an investor day later this year. Probably calibrate it more to when the deal closes so we can share even more robustness about it. But we couldn't be more excited about what's to come on this.
Okay. I think I was going to ask another one, but I think we're running out of time here. The timer is running down. So I'm going to throw it back to you for the key takeaways that you want to leave with investors today.
Sure. Well, I'd say 2025 was a difficult year for us, a year of change. We haven't had a CEO change in over 18 years. But what is the same is our focus on being a challenger bank and being one of the most distinct challenger banks in the world, but exclusively focused on Canada. We're in a great position in our capital. We're in a great position, we believe now on the credit side. We've managed our expenses to a very appropriate level. And we're focused on a few big things. We're focusing the company on a few big things. And we're going to reignite our core, making sure we're winning where we should be winning. We're going to take the challenger bank to its full potential. And that has included completing the product shelf with payments and wealth.
Now you're going to see that dramatically transformed in such an exciting way with PC Financial and our new partners. We're going to continue to optimize the capabilities of EQB to ensure our efficiency is a competitive advantage. We're returning to that 15% plus ROE threshold, Northstar. This is the start of a new era with just, it couldn't be more excited leadership team, with a board that's even been refreshed and very excited. You saw us also announce a new nomination for a new board chair, Mike Pedersen, that we're very, very excited about. It's a time of change and excitement. What you've known to love and believe about EQB will be consistent, but the future is looking brighter than ever. It feels like we're just getting started. I couldn't be more excited and grateful and privileged to be in this position.
We really appreciate all the support. And I hope you'll be signing up for an EQ account soon. You have PC Optimum. It's only going to get better. It's just the start for Canada's challenger bank. So we're very excited and grateful.
Okay. With that, we'll close the session and the conference. Chadwick, thank you very much.
Thanks very much, everyone.