Good morning, ladies and gentlemen. Welcome to EQB's earnings call for the first quarter of 2023, being held on Wednesday, May, the third, 2023. At this time, all your lines are in listen-only mode. Later, we will conduct a question-and-answer session for analysts, and instructions will be provided at that time on how to queue up. It is now my pleasure to turn the call over to Richard Gill, Vice President of Corporate Development and Investor Relations at EQB. Please go ahead, sir.
Thanks, Michelle. Good morning, everyone. Your hosts today are Andrew Moor, President and Chief Executive Officer, Chadwick Westlake, Chief Financial Officer, and Ron Tratch, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our webcast as well to review our accompanying quarterly investor presentation. The presentation includes on slide two, EQB's caution regarding forward-looking statements, as well as the use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted. It's now my pleasure to turn the call over to Andrew.
Thanks, Richard. Good morning, everyone. This was a milestone quarter for EQB. Our direct customer relationships surpassed half a million. We achieved more than CAD 100 million in quarterly earnings for the first time. Performance allows us to see how strong we've become as a bank. We marked our first quarter of results with Concentra, which is already proving to make Equitable an even better bank. We are particularly enthused by our engagements with credit union partners with whom we share a core customer service and challenger philosophy. EQ Bank was named Best Bank in Canada by Forbes on their annual ranking of World's Best Banks for the third straight year. You would expect me to attribute performance, including ROE of 16.9% to our differentiated value creation approach, long-term strategies, and award-winning digital capabilities, and I will.
These accomplishments are rooted in the hard work of our team across Canada in keeping customer service at the very forefront while very effectively managing risks and opportunities. Thank you all. Understandably, our business outlook remains positive, and I will speak to it shortly. Before that, I want to acknowledge the continued strain on some banks outside Canada over the past couple of months. We manage our risks well and have made additional disclosures in this quarter's MD&A to help investors understand why that statement is true. On credit, I want to offer additional context on our commercial real estate lending. With approximately $26 billion in loans under management, I am proud of our commercial loan portfolio and the team driving this diversified business. Here we prioritize lending against multi-family rental properties, including affordable housing, where demand is strong and resilient.
We're the largest securitizer of CMHC multi-unit mortgages in Canada. Over two-thirds of our commercial loans under management are insured by CMHC. On uninsured commercial loans, we require strong personal and corporate guarantees and restrict LTVs. With heightened focus on the risks in the office property market, you should also take comfort that less than 1% of total bank assets are loans to office properties. Of that small portfolio, the average LTV is 59%. Even more protection comes from our focus on vocational offices occupied by dentists, doctors, and other service providers. These offices are vital to the delivery of patient care and the generation of income for their tenants, who cannot displace physical space by working from home. Our exposure to hotels, shopping malls, and big box retail is negligible, not a lending priority, and far less than 1% of assets.
Commercial banking represents about half our earnings and is a proven business worthy of shareholder confidence. When it comes to liquidity management, we always operate prudently and well above regulatory guidelines, and even higher than bank peers from our review of their disclosures. Great execution of our multi-year strategy to diversify our sources of funding has added further strength and stability. You're aware of the growth of EQ Bank deposits. What you might not know is that we generally limit EQ Bank deposits to $200,000 per account. Our approach effectively reduces concentration exposure and runoff risks while giving customers confidence a large part of their money is protected by CDIC. We believe strongly in the importance of CDIC-insured deposits, and we've taken a public stand advocating for higher coverage limits.
I'm pleased to see others take up this cause in the past few weeks. 95% of our deposits are term or insured. I can assure you the positive trends in deposit growth and stability continue today, recognizing our quarter ended March 31st, and April continued to reflect strain on some banks locally. What I'm saying is, bring you up to date, you would see no deterioration on liquidity. Chadwick will add more context on liquidity and funding in his remarks. The last point I want to touch on is interest rate risk. This has been a deep well of troubles at some U.S. regional banks. Our advantage is derived from how our treasury team manages interest rate risk in the banking book in alignment with our low appetite for market risk.
We operate with a target duration of equity of approximately one year as a means of tightly controlling exposure to interest rate interest movements. Another way to look at it, we don't take a view on rates. We consider the sensitivity of changes in the economic value of equity to be the most important measure. Table 19 in our Q1 MD&A shows our sensitivity modeling to immediate and sustained interest rate increases and decreases. Here you will see that 100 basis point increase in interest rates, the EVE impact as a percentage of common shareholders equity would only be 1%. This demonstrates very well-managed interest rate exposure. Turning now to our perspective on the Canadian housing market. With the Bank of Canada holding its policy rates steady, we are already seeing signs of price stabilization and increased activity in the housing market.
We expect this to continue. In fact, there was very encouraging data from the Toronto Regional Real Estate Board just yesterday confirming this view. In Q1, uninsured single-family origination volumes were $1.1 billion, and the portfolio grew 1% over Q4 or 33% year-over-year to $19.2 billion, assisted by lower attrition, aligned with our expectations for the first half of 2023. Certainly, Alberta and British Columbia have been brighter spots in the national picture. We had an excellent quarter in multi-unit and continued to see stable growth within the conventional commercial. Insured multi-unit mortgages under management increased by $992 million to $17 billion. Although the on-balance sheet amounts was lower due to higher securitization under CMHC's programs and derecognition in the quarter. All in, we are holding to our overall commercial portfolio growth guidance.
For EQ Bank, it's particularly exciting to see breakthrough progress unfold in customer engagement with our EQ Bank Card now in the hands of more than 40,000 customers. It's already been used in over 115 countries. Our successful Quebec launch and the continued success of our Make Bank campaign. Hopefully, you've had the chance to see our marketing investments at work. Our Make Bank campaign brings to life just how fed up Canadians are with all the takes that happens in the world, from surge prices to bank fees, and shows how EQ Bank is here to help them make with no fees and high interest on everyday banking. It's really working. Millions of Canadians have seen it at key moments from the NHL playoffs to riding the streetcar to work.
We are building franchise value and phenomenal brand recognition, creating demand with great early payback. Forbes once again named EQ Bank Best Bank in Canada on its curated list of the world's best banks for the third year running, with customers ratings especially highly for digital service, driving home the point that we have something very special going on. We're consistently adding hundreds of new accounts every day, such that EQ Bank's customer account is now approaching 350,000. This growth in customer reach and public profile has been coupled with customer engagement at a record high of 51% and transactions increasing 54% year-over-year. Giving customers a physical EQ Bank to hold in their hands and wallets is reassuring. It provides tactile proof that we are real and substantial. This is helping us drive the effectiveness of our advertising.
We're also seeing more Canadians doing direct payroll deposits, another tangible sign of growing confidence and awareness that this is the very best digital bank in Canada. Next up is to launch our EQ Bank Mobile Wallet for the card, which we plan to have in customers' hands this summer. I'll profile the value of that development on our next call. I can assure you that when it comes to credit, liquidity, and interest rate management, we are as prudent as they come, and we have been for years. Exceeding CAD 100 million in quarterly earnings is a special milestone to me as I remember reporting earnings of CAD 8 million in Q1 of 2007, and as the newly appointed CEO, thinking that was pretty damn good.
What's even better is that the more we've grown, the more evident it is that the bank's approach to both managing risk and bringing new forms of value to our customers works. We plan to keep following this philosophy. Now, Chadwick.
Thanks, Andrew. We set out to make 2023 our best year yet. Q1 put us firmly on track. This quarter was another display of our return on equity value creation strategy in motion across all key earnings metrics. Before I get started, some items of note for Q1 disclosures. This quarter includes three months of results from Concentra versus two months in Q4 following our deal closing November 1st. Concentra's integration plan and synergies are on track, producing earnings accretion, I'd say ahead of early targets. There was a lot less noise in our numbers than in Q4 when we booked large one-time items as required under IFRS, particularly to account for credit loss provisions once we closed the acquisition.
Q1 adjustments included CAD 4.8 million related to integration costs, down from CAD 36 million in Q4, CAD 3.2 million in net fair value related amortization, and CAD 1.5 million for intangible asset amortization. Our integration spending is in line with guidance, the difference between reported and adjusted expenses will continue to narrow in the next couple of quarters. Effective for Q1, you will see a change in how we present our single-family mortgages. The term alternatives as a representation of our single-family lending does not appropriately capture the high quality of our book and borrowers, we have removed this reference. We focus on B20 lending to specific higher growth segments of customers frequently underserved by the largest banks by working with thousands of deeply valued mortgage broker partners across Canada. We invest more in underwriting and leveraging our many years of experience here.
The outcome is reflected in our margins and lowest credit losses among peers. You will see two categories in our disclosures go forward: single-family insured and single-family uninsured. These adjustments will be even more relevant when we become an ARB bank. I want to hit five key themes now before I move on to questions from our analysts. First, margin and revenue. Second, our funding profile. Third, credit risk management. Fourth, expense trending. Finally, some points on 2023 guidance. Jumping right in, our proven approach to pricing all lending with our ROE calculator continued tailwind from our funding diversification, plus many other treasury considerations generated solid sequential and year-over-year top-line growth.
Net interest margin expanded 5 basis points over Q4 with growing asset yields as you see in our MD&A, better than expected prepayment income and payback on our funding strategy, including the benefit of a lower deposit beta anchored in EQ Bank deposits. This margin expansion was ahead of expectations and also reflects strong momentum of our Concentra integration. As an outcome, net interest income increased 8% over Q4 45% year-over-year. Non-interest revenue increased 71% over Q4 to 11% of total EQB revenue for the quarter. The sequential increase in non-interest revenue has a couple key components. One, growth in fee-based revenue of 33%, reflecting the full benefit of a full three months contribution by Concentra.
Two, gains on sale and securitization income up 55% over last quarter with momentum we believe can be sustained in 2023 and reflects both volume and margin growth. We recorded a lower loss on strategic investments in the quarter sequentially, but the mark-to-market accounting loss of CAD 2.6 million compares to nearly CAD 16 million in gains in Q1 2022, which at that time reflected significant one-time mark-to-market benefits. Combining NII and NIR, total revenue increased 13% quarter-over-quarter and 40% year-over-year to a record CAD 265 million. Some points on funding. The diversification of our funding stack has expanded materially over the past several years across direct and wholesale options, combined with a maturing credit profile and rating. We can dial these funding stack levers based on availability and pricing.
We have de-risked the bank well without any single key funding source. We avoid interest rate misalignment with a matched funding focus and sticking to our duration target, as Andrea outlined. We're not only well covered from a liquidity perspective, but strategically, we are positioned to have more tailwind in our funding costs as we focus on additional diversification plus credit rating expansion. The most significant reminder is EQ Bank, which again is the anchor for our lower deposit beta. We continue to believe in the value of this franchise and why customers choose EQ Bank for much more than rate. This adds resilience to these stable and growing deposits that are primarily term and or CDIC insured.
Compared to last quarter, EQ Bank customers increased by another 9%, deposits by 2%, transactions 34%, and engagement up to a record 51% with an average of 2 products per customer. As a reminder, engagement includes active customers with more than one non-zero balance product and multiple transactions over the past 30 days. There's much more to launch that I'll speak to in coming quarters. You could likely expect to see us in the covered bond market in Europe in the near future to expand this low-cost source of wholesale funding with capacity that's expanded as an outcome of our growing assets, including Concentra. As a reminder, we're the only bank in Canada outside of the largest 6 banks with a European covered bond program. To credit risk. Q1 PCL was CAD 6.2 million.
CAD 1.5 million lower than Q4 and higher than the net P&L benefit of CAD 125,000 in Q1 2022, which at that time was a result of reversing provisions taken during the COVID-19 pandemic, our allowance for credit losses or ACL, net of cash reserves, increased 1 basis point over Q4 to 19 basis points. A positive for Q1 was a CAD 2.3 million PCL recovery from one commercial loan. Other changes in PCL reflect portfolio growth, shifts in macroeconomic forecasts that were more positive than anticipated, and a Stage 3 provision that was CAD 1.2 million higher than Q4. The increase in Stage 3 is not part of a trend we're seeing in delinquency. This mainly relates to a provision on a couple commercial loans.
The outcome of the ACL change was an increase of 5% to CAD 87 million over Q4 in total net ACL net of cash reserves. The change looks larger on a year-over-year basis because of the addition of Concentra Bank allowances in Q4. I mentioned on our last call that we were expecting to see an increase in impaired loans, and we did. Our gross impaired loans increased CAD 18.3 million or 13% quarter-over-quarter to CAD 156.9 million. We remain of the view that we will experience an uptick in impaired loans over the next couple quarters, which is natural at this point in the credit cycle. We do not expect these will result in losses because of the way we manage credit and recoveries.
It's important to also remember that for single family uninsured lending in the personal bank, the average Beacon score for new originations is about 732. The average LTV on the portfolio is 65%. We only conduct B20 lending, we continue to focus on lending in key urban areas with favorable population and economic growth trends, where job creation opportunities are significantly diversified. An outcome of this design is our loss rate remains at the lowest of all peers, which is a function of a deeply embedded risk management culture. EQB remains well reserved for credit losses. We always actively manage to our principle of lending to not lose money. Overall, our credit risk book remains in good shape despite the economic backdrop. To non-interest expenses, which increased 18% over Q4.
You can attribute a lot of this to Q4 only including 2 months of Concentra expenses. The benefits from Concentra synergies are flowing through, but we expect it will take a few more quarters to return to a more normalized EQB efficiency ratio versus our 45.4% in Q1. As a reminder, we're integrating a near 70% efficiency bank into the most efficient bank in Canada. That takes time per our integration plan, and this is great progress so far. Our efficiency ratio remains a secondary measure. Our focus will always be first and foremost, return on equity, the true financial performance North Star. In general, year-over-year comparisons are difficult due to the acquisition, particularly to frame operating leverage given we report consolidated results.
To help, I would expect more limited growth in FTE compared to past quarters, but with continued acceleration of EQ Bank, you will still see scaling in product market, marketing, and technology investments. This includes the Make Bank marketing investments, we're so pleased that Canadians are truly responding to the less take, more make message. Engagement is showing in the significant rise in daily customer growth so far in 2023. In closing, we reaffirm our 2023 guidance. When we report Q2 results, we will calibrate that guidance to account for a 10-month reporting period for 2023. This reporting year change will allow us to align with our Canadian bank peers, as we announced in February. Fiscal 2024 will start for us on November first, 2023.
This means we'll report Q2 in August, we will not report a third quarter, and there will be 1 four-month reporting cycle to close that 2023 to be reported in early December. This is a common approach in practice when companies change reporting years. We guided the more muted portfolio growth in the first half of the year, which translated, and we continue to have conviction in our targets for the second half of the year on a calendar basis. We expect stability in these margin levels for the rest of 2023. For PCLs, we expect trending similar to portfolio growth in coming quarters and stable trending in ACL as a % of lending assets, assuming no material additional changes in forward-looking indicators.
Our mature and leading challenger bank approach delivered all-time record earnings, and we will remain focused on executing for investors while making steps to close this remarkably large discount to fair value in our share price. Now we'd be pleased to take your questions. Michelle, if you can please open the line.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question will come from Meny Grauman at Scotiabank. Please go ahead.
Hi. Good morning. Wanted to start off by just asking about the margin and just isolate some dynamics there. Specifically wanted to understand what the impact of the full quarter of Concentra was on the margin, and also the impact of prepayment, if you're able to isolate both of those impacts.
Yeah. Thanks, Meny. Good morning. When we went into the integration, we knew we were bringing a lower margin bank, and we actually, as we looked at repricing and the overall funding costs, bringing them onto our stack, we've moved at a faster pace than expected. I'd say, you know, I'm not going to say that was 20%, 25%, 30% of it, but that certainly contributed to it. Prepayment income, you could say was CAD 2 million higher than expected. Overall that the lower deposit beta continued with EQ Bank. You add all those up, and you got to that expansion.
I think part of this is again, is the integration moving a little bit faster and some of the uptick in housing market activity, which is what you see also translating some of that prepayment increase. I don't know, Andrew, if you'd say anything else you're seeing.
I think it's always a bit complicated to pull the numbers at the top of the stack, Manny, to give you a good debrief, but those are the three kind of key variables that I think is driving things. Certainly, you know, the deposit beta is something that I'm particularly sort of proud of. I think that goes to this, you know, the fact that we're driving all kinds of value in EQ Bank is creating that opportunity for us.
Yeah.
Just to understand the dynamics better around Concentra specifically, was it still an overall drag? you're saying it was just the drag was just less than you expected and,
Yeah.
If you could explain, like you're basically able to reprice that book faster than you expected. Is that the right way to think about it?
I think that's right. Certainly one of the, yeah, certainly one of the bigger categories we've, our team's been quite successful in bringing the same kind of ROE discipline that we have applied in EQ Bank. I, you know, as you know, it always takes time to reprice the portfolios, but they were a bit more, I think, organized about it as we completed the acquisition, and therefore it, you know, it got traction a bit quicker than we were probably projecting to you all.
Andrew, you talked about deposit betas. Do you have any sense that, you know, over time that will change for the worse? you know, looks like definitely the Bank of Canada is on hold here. Could we be in a situation where, you know, asset pricing kind of levels off, but on the deposit side you will see upward pressure here on the margin?
I think, you know, you're seeing the big banks, you know, seeing the deposit beta not being quite as attractive as they would have hoped. Of course, our gap, you know, we have a pretty big gap between, you know, them and us, so I don't really see that. It will be an interesting question as to how fast some of our, you know, everyday bank accounts that pay really great rates of interest if, you know, when the Bank of Canada starts to ease rates, how fast we can move to sort of go with them. You know, I would expect that broadly speaking, we're going to sort of track the Bank of Canada downwards, in those accounts. I'm hopeful that that won't be an issue, but clearly the market dynamics can change.
You know, as I mentioned in my remarks, we are really seeing a lot of really great traction with the broader value of the EQ Bank, you know, platform. Great rates on US dollars, Canadian dollar exchange rates. Ability to move the money around the world being kind of more integrated part of your financial life. I'm hopeful that the value we're seeing there will allow us to be, you know, relatively good on deposit beta for our shareholders.
Thanks for that. Then just to follow up on Concentra. A few times you referenced sort of early positive signs and things moving faster than you expected. How do we understand that? Like, what is, was it just your initial estimates were overly conservative, but sort of on the ground, what is actually driving that? What's actually making that better than expected happen?
I think it's mostly on the cost side that I'm seeing that sort of, you know, I mean, I think we all know when we put two banks together, there's a lot of duplication. You can take those costs out. Don't forget this is by far the biggest acquisition we've ever made. We approached it with a sense of caution. It made sense even with a more cautious outlook. I think it's just, it's true that our teams and the Concentra team have done a job better than I might have expected. It's very hard to prejudge how an untested team in this kind of complexity of execution would do.
I think, you know, the reality is we've picked up some really great people through, you know, some great people who joined the team, is probably a better way to say it, through the acquisition. They've been incredibly constructive in making this all happen for us. Revealing where there are levels of value to pull, and then our own team have been really on top of all the detail. And there's so many moving parts. Meny, that's one of the challenges, sort of integrating that up into a message we can communicate to, more broadly at the top of the house is actually a bit of a challenge. What I can tell you is every detail is being dealt with and that's the net of all that is adding up to a great story.
Yeah, I think that's right. Even with the balance sheet, both sides of the balance sheet, even more resilient with growth than expected. Remember, it's even how you think of the accounting for when you do these acquisitions, right? When you think of fair value, amortization of loans and deposits and how the actual process works, that's been all more constructive than that all that shows through through margin as well. Manny.
Thanks.
Your next question will come from Mike Rizvanovic at KBW. Please go ahead.
Hey, morning. Just wanted to get some color on your outlook for commercial lending in the near term, different performance in different categories within that portfolio. Just with respect to where we are in the economic cycle, do you think you can still keep pushing ahead with some pretty decent growth? Are you seeing or are you expecting to do any sort of runoff with the Concentra assets that might impact what your near-term outlook might be?
There certainly is some modest runoff. I mean, just start with where you finished there. There's some modest runoff on Concentra assets as we're re-repositioning the book to, their book to things that are much more traditional to our, you know, our way of thinking. You know, that's pretty modest in the overall scheme of things, frankly. Yeah, we continue to see opportunity. You know, as we. You know, our commercial business, and we tried to really, you know, drive this home in the remarks, is really about multifamily housing. I mean, that's what drives it.
The ability to fund the construction of apartment buildings, whether CMHC insured or otherwise, people buying apartment buildings to turn them over, and, you know, improve the general, you know, structure and improve rents with that, is really an interesting business. You've seen, you know, rent increases in major Canadian cities, which are being expressed as obviously a concern on the one hand around affordability, but clearly opportunity for us to sort of support developers, you know, buying buildings, improving buildings, expanding buildings and so on. There's some really interesting data that CMHC is putting out that shows you the difference between the rent that people are paying on average and where new rents are in individual units.
When you think through the capacity of that to support the building of new buildings and improve existing infrastructure, which is really where we play, I'm pretty optimistic about how it looks.
Yeah, Andrew, thanks for that color. Chad, I just wanted to circle back on the margin real quick. Not to harp on it, but I think we were all expecting a little bit of a decline sequentially. Is it possible to just delineate between your underlying margin if you exclude Concentra? I would still imagine that you would have had, you know, the lower spread business impacting you in a negative way, at least to some degree in the quarter. Can you sort of delineate between just those two?
Yeah. The my couple short answers would be EQBX Concentra would have expanded, as we did expand either way. That trend was consistent. Prepayment income, and again, I give CAD 2 million attribution to that when you break that down by margin. Some of this as well is not only the resilience of the business, but what I mentioned to Manny as well, when you look at the actual acquisition accounting, there is certain considerations with fair value amortization of loans and deposits, and how you actually do some of the stuff on the balance sheet. There's some more positive tailwind there as well. There's the difficult part with margin, as you know, it's not as simple as people expect. It's not just the assets minus the deposits.
You got prepayment, again, as expected. I think you're seeing some of that as well when you even look at the media and see how some of the housing markets are upticking and people are actually looking again to refinance and actually take on new mortgages. You see some of that translate in prepayment. Then again, you have other variables that come in on the fair value side that come into net interest margin. Those are a couple of the ingredients, but I'd weigh to acquisition accounting, Concentra stability, prepayment, and then the core EQ business continuing to expand, supported by the lower EQ Bank, lower deposit beta as well. That's continuing to translate. Remember even that last rate hike, again, we held EQ Bank steady. We're not chasing campaigns.
That stability and consistency is translating all wrapped around our ROE calculator approach.
Got it. Got it. Just real quick, the CAD 2 million excess prepayments that you had in the quarter, are you expecting that to sort of linger in that elevated level going forward? Or do you think some of it comes back?
I wouldn't describe that as an elevated level, frankly, but the housing markets are really cooled through the back end of last year. You know, that dropped below. It was one of the surprises on the negative side.
That's right.
last year. I think it's really a case of getting back to more normal.
That's right.
I certainly, you know, generally, of course, you see more seasonal, you know, flows in this next couple of quarters. I would expect this to continue for a while.
That's right.
All right. Thanks for the insight.
Yeah, absolutely. It's micro, a little bit closer to normal. It's exactly as Andrew said.
All right. Thanks very much.
Your next question comes from Lemar Persaud at Cormark. Please go ahead.
Yeah, thanks. I'm gonna start off on margins. Just bolting on to the previous questions there. I think you answered most of what I'm about to ask, but I just wanna throw it back to you guys. What factors evolved more favorably than expected during the quarter? Was it limited to the impacts of prepayments and more positive evolution of Concentra, including some of those accounting adjustments you talked to, Chad, like? Were there any other factors that contributed to that 5 basis point sequential increase versus kind of the slight decline we were expecting into Q1? This is a sharply better result than we were expecting a few months ago. I'll throw it back into your court if there's anything else.
Yeah, no. I just repeat again, Lemar, I think as well, when you look at the yield tables in the MD&A, you'll see some of that positive movement as well in the asset yield. Good growth in that conventional lending, which again, we focus on. Some of that was as expected, a little bit better than expected. You see that even with some of our newer portfolios like consumer lending. Again, normalization of prepayment income, as Andrew and I just hit. Concentra stability and some of the repricing better than expected. They're including some of the resilience of that some of that lower source cost of funding as well than expected.
Then some of it as well, is how some of the fair value amortization of loans and deposits shows up through margin, and that will stay around for a while as well. That you can attribute to Concentra. Core business expansion plus some of these factors like prepayment normalization, amortization loan deposits, and then the strength of the yields, all coming in a little bit better than expected. It shows the fortitude in our execution, to be honest.
I think the only thing that I think we were being a little bit conservative on perhaps that might have led to the surprise as well is not increasing rates in EQ Bank as the bank moved.
Yeah.
We were being a bit conservative about that deposit beta. I think really where we've landed in that is, it's a great everyday rate for your operational accounts, you know, to be paid 2.5% on interest, and we provide all the functionality that you would otherwise get from a checking account. If you are leaving money in the account, you know, expect to leave money in the account for a longer period of time, you know, the move is into a term deposit, which is really easy to do off the, off the app. I think that's the trade. We are seeing certainly a bit of movement into term deposits within the EQ Bank platform, which I feel very comfortable with. You don't, you know, you lose a little bit of.
What you win is in funding stability, you potentially lose a little bit of margin there around that deposit beta. It's a subtle thing, and we're constantly tuning it.
Yeah.
Even when, you know, when the budgeting teams come to us to ask to sort of think about how to think about that, I think we probably built in a bit too much conservatism there historically.
Gotcha. Then, moving on to the gains on sale, probably for Chad. I think I heard you suggest that, you know, you can maintain some gains throughout 2023. Is that true? If so, at this CAD 14 million quarterly level, and then, you know, kind of what gives you the confidence in that? It does seem quite elevated to me, at least in Q1.
Yeah, absolutely, Lemar. We have an incredible team. Remember, we're the largest securitizer of multi-residential and insured lending in the country. We have great expertise in this. A couple of things you see is that the amount we did in volume was getting to the point of nearly equivalent to what we did an entire year in the past. With what's happening with originations in the market, we do think we can continue that. Some of the margin expansion is there. I think I would expect to see some consistency in the overall line in the next quarter. You know, probably through to the end of the year, then we'll revisit that guidance for 2024. This is a core expertise.
We call this core earnings too, right? We didn't. Strategic investments is stripped out, but those core gains on sale are part of our expertise.
Yeah, it has we've been on a structural, a sort of positive structural shift in this business over the last 18 months, where we set up Equitable Trust. We have a trust company subsidiary that's also a securitizer of multis, which has given us much more capacity using a kind of aggregator capability, an aggregator in the technology. The volumes will continue to be higher structurally compared to where they would've been 18 months ago. We, we do have the benefit through our other activities of creating a pipeline of future loans to go into this part of our business.
You know, the ability to help somebody build a building through a CMHC-insured construction loan, for example, and then take it through the securitization journey is really proving to be a valuable business and also gonna give us more comfort in the source of business going forward.
Gotcha. Last one for me. Just on the office exposures generally, and that's 59% LTV. How often do you guys revisit the valuations on that, on these office properties? How do you kind of manage the credit risk generally?
I mean, on the sort of revisiting price, or revisiting value in LTV, each property would be visited, revisited once a year on a kind of rolling cycle when it's coming up for annual review. It's not quite as easy to kind of capture the data as we would with single family, where we use HPI to update the entire portfolio recorder. You know, having said that, you know, obviously there's a fair conservation, you know, fair margin of conversation of safety at 59% LTV. You know, I would say there's not a lot of liquidity in the office market right now, so, you know, I think your sort of caution around that, or the words of caution I'm sort of hearing, you know, is entirely merited.
We, you know, we're very keen to sort of manage credit risk, carefully in these types of properties. You know, we think we can be, if need be, a good owner of real estate. We're people that would think about re-leasing space, getting NOI up, and then re-marketing on a sensible basis, as opposed to, I think other banks would take the view of sort of, re-market, you know, as is, where is, and get the best value and take an early loss. I don't think that is the approach. To be clear, I don't think we have any office properties under management right now, but that is the approach we would take.
As you mentioned, you know, it's less than 1% of our assets, and we feel pretty comfortable with it, especially when you look at the types of tenants in these buildings, most of it's, you know, multi-tenant, you know, dental practices, doctors practices, financial planners. Fairly diversified tenants that give us much more comfort than perhaps if we had large commercial tenants that could go, you know, could have financial stresses or business model challenges or maybe their people don't want to come to work, so they don't really want the space. We feel pretty good about the asset selection in that business.
As I mentioned, it's not a prevalent asset class, and you can see that in terms of what a very modest portfolio it is and within the original scheme of the bank.
Thanks. That's it from me, guys.
Thanks, Lemar.
Your next question comes from Etienne Ricard at BMO Capital Markets. Please go ahead.
Thank you, and good morning.
Good morning, Etienne.
On funding, could you please remind us of initiatives and assumptions supporting a pickup in deposit growth at EQ Bank in order to meet the guidance for 20%-30% growth in 2023?
Sure. You're just curious of the funding levers that change or there's some of what work is happening under EQ Bank to support that growth?
The assumptions around growth is what I had. I wonder if you could just reaffirm the question there.
Yeah. It's just the, more broadly, the initiatives and assumptions underpinning your guidance for 20% to 30% growth in deposits at EQ Bank.
Yeah. You know, the initiatives are very clear. As you know, we talked about we launched in Quebec, you know, around the beginning of the year. We also launched it in Quebec last year, so we did have no customers until December in Quebec. In January, we launched our EQ Card. Both of those are driving the improvement in the addressable market. We've been much more aggressively putting advertising collateral to market, which you've seen with our Make Bank campaign. We have actually been, you know, putting fairly significant advertising collateral to market around the Leafs', you know, first and second round playoffs. That's really getting some traction in terms of kind of average customer count increasing.
You know, I don't know if we reveal publicly how many customers and, we're expecting to add this year. Broadly speaking, every customer we pick up, you know, ends up with an average balance around CAD 20,000. As we add new customers, it's driving that deposit growth.
Understood. On the topic of banking stress in the United States, I recognize this is an evolving situation, and it's happening in a different jurisdiction. That being said, in Canada, how do you think about potential regulatory implications on risk weight, liquidity requirements and also insured limits at CDIC?
Yeah. I think it's very important for us to think about structural differences between the Canadian banking market and the U.S. banking market. In particular, there's been a flight of cash out of commercial banks of all types in the United States into money market funds, who then turn around and can post the money directly at the Federal Reserve. In Canada, essentially, if deposits leave one bank, they have to go to another bank. There isn't such a facility enabled. I think that makes the entire system structurally sounder. You know, I think that is a really important thing to think about.
The other thing for those of us that are banking geeks, I thought the Federal Reserve's report on SVB that came out last Friday is sort of a primer on how to not run a bank. I think there's unfortunately a few banks that are being run this way and, you know, they were set up to be very fragile. When you put stress on them, it's very difficult. I think if you read that report and you compare what we've been, you know, talking about around the resilience of our bank, you'll see that, you know, it's really distinctly different.
In particular, the interest rate shock and the way they're certainly very high limits and then also even breaching those limits is stunning and startling and shocking. We knew about these things coming out of the financial crisis. We should not have been. No bank should have been set up for this kind of failure. In terms of regulatory reform, I don't know. I think it'll. I hope we're thoughtful about it, because my own view is that supervisors and the regulations deal with a lot of these things. You just need to have good supervision and good management of banks. Why that failed in this case is disappointing, and I think. Before we reach for changes to the rules, we really need to understand that.
Frankly, OSFI does a great job around a lot of these things, including more recently putting out a draft guideline on culture in banks, which it seems to me is sort of potentially at the root of the problem. CDIC insurance, though, I do think I'm optimistic that we will increase the levels of CDIC insurance. Michael Mignardi, our general counsel, and I wrote pen to mode in The Globe and Mail right in the first week of the new year. Long, you know, long in advance of these challenges in the U.S., calling for higher CDIC insurance limits. We do know that CDIC is now, you know, looking at that.
I'm not saying, by the way, those two events are linked, but CDIC is considering its coverage limits, so I'm optimistic that over the next little while we'll see an increase in limits.
Thank you very much.
Thanks, Etienne.
Your next question comes from Geoffrey Kwan at RBC Capital Markets. Please go ahead.
Hi, good morning. Just wanted to go back to the multi-unit residential, your view in terms of being elevated. Is that a function of just, you know, higher market activity? Is that more new apartment construction versus sales of existing properties? Also too, is it also a function of taking market share? Because I know you talked about also having more capacity to be able to do more through aggregators and whatnot.
I think it's mostly, it's mostly that, frankly, the sort of structural improvement in capacity. In the past, it's not been the ability to get the loans or get the assets. It's really been the ability to find capacity to fund them that's been our binding constraint. By some of these moves, we've opened up the capacity within the system for ourselves to allow us to support our customers with higher volumes. Yes, I think, you know, there is good activity in the market because business that might have been done historically as conventional loans is moving more and more into the CMHC channels. The overall market's increasing. We're definitely increasing share within the market and becoming a much more relevant player than we ever have been.
Just, my other question is, you know, as we're heading through the spring housing season, and your comment of seeing some prices and we're seeing that in the market go up. Are you seeing anything from the competitive standpoint, whether or not in the prime or the alt-A space, on rates, and to the extent in certain parts, you know, players could probably play with amortization periods to try and drive new business?
Haven't really seen that, frankly. you know, the players are the same on amortization. I think for all of us in the prime market. Prime, by the way, is, you know, it's almost irrelevant to your thinking about Equitable as an investment vehicle. We have a good team there, and it's a nice business within our, you know, our framework, but it's not particularly relevant to driving the bottom line. You know, that's a thin margin business. I think it's been a challenge for all of us that participate in that space with the volatility in interest rates to actually be pricing properly and thinking about where margins need to be.
In general, I'd say the margins have widened a little bit, but I think it's really because we're all trying to make sure we don't, we don't get caught offside with a change in interest rates. The competitive dynamic in the, you know, a more traditional space of conventional single-family continues to be the same. You know, essentially, we have two or three significant players and I'm not seeing competitive behavior that seems strange. You know, the one thing, of course, that's, you know, overriding this and really doesn't influence us at all is some dialogue around a couple of the big banks at least having variable rate mortgages that come negative AM, and I know that's causing some concern in some circles. We don't have that.
We have, arms that reprice and are amortized, still maintain a positive, amortization profile. Yeah.
Great. Thank you.
Yeah.
Your next question comes from Stephen Boland at Raymond James. Please go ahead.
Thanks, guys. Andrew, you kind of just touched on what my question was gonna be in terms of what are you seeing in terms of renewals? Like, how are you dealing with your customer base, especially on the single-family, in terms of retaining those clients with the higher rates? You know, what's, you know, is there sticker shock still in place for some of your customers? I'm just trying to get a better sense of what that, what that retention and renewal looks like, that process.
Yes. I mean, the in terms of the renewal percentages, we're, you know, we're giving higher percentages than we ever have. That part's good. There's no doubt that there's sticker shock on part of our customers. I mean, frankly, I have a lot of empathy for them, so we have to work with them to kind of figure out how to, how to adjust to that sticker shock. You know, it, you know, unfortunately, it's generally just us putting the pricing increases through by the Bank of Canada and general rate increases through to them. Certainly we're not trying to take advantage of this. We're trying to help our customers. Obviously, we've got to, you know, price in the context of the market. That's how that's working.
I think the big takeaway from all of this when, you know, when I read commentary around mortgage stress and so on, is that the balance sheet of households are still remarkably strong in Canada. That covers up a lot of, you know... That's why these portfolios are holding up really well. Our customersThat, that are renewing with us despite the payment shock increases have resources way beyond just the, you know, current income. The incomes are going up too because of inflation. You know, we're seeing remarkable resilience here. That, that story about the balance sheet of Canadian consumers is one that doesn't enter enough, I think, into the mortgage, you know, stability dialogue. I think it's, I believe, is really important.
Okay. That's all I have. Thanks, guys.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one now. Your next question will come from Graham Ryding at TD Securities. Please go ahead.
Hi, good morning. Maybe a similar theme, but it does feel like OSFI is becoming a little more sensitive to liquidity and funding stress with some of their recent commentary. Are you expecting them to bring forward any changes on that front? Or similarly, are you making or expecting any proactive changes on your part towards holding more liquidity just given the market backdrop and the sensitivity right now?
I would certainly expect that OSFI is gonna be thinking more about liquidity. You know, every time there's always a lesson to learn from banking stresses, and clearly there's a lesson about what's happened in the U.S. that we need to think about. As I mentioned, I do think there are structural differences in Canada that make some of those lessons less relevant. We've always maintained strong liquidity. As I mentioned, I think many should be surprised that we, for example, that in EQ Bank we only take deposits of $200,000, for example. I haven't seen other banks kind of operating with that level of caution. You know, liquidity, holding more liquidity can be somewhat helpful.
Really the issue is the structural way you're set up to make sure you can continue to access liquidity. The work that Chadwick and his team have done on covered bonds, the strength of the EQ Bank franchise, as well as access to broker deposits, you know, really wide access to broker deposits across the country I think puts us in great stead. You know, quarter to quarter you'll see fluctuations in liquidity. A lot of that's based on the projections over the next 6, 12 months in terms of fundings. We, you know, our expected fundings of assets and that kind of thing. I, you know. In general, we're not thinking that we need to move our liquidity profile or risk appetite at all because we've always been conservative.
It's always been my super. You know, having been in this bank when we went through the financial crisis, being through the issues in 2017, it's always been a high, highly elevated kind of risk factor that we think about in man-managing and running this bank.
For us to measure that, should we be looking at your liquidity as a % of your assets or is that too blunt of a tool?
It's definitely too blunt. It's definitely. You know, unfortunately there are certain metrics that we shouldn't be revealing them. That would be helpful to you, but, we're not allowed to do that, or we think it's imprudent to. You know, we're not really allowed to do that. Looking at that is a useful way to talk about it, Graham. I think, you know, we can talk you through it as well beyond that. That's yeah. I mean, that is a way, but it doesn't really reflect some of the seasonality and other things that you might see us setting up for that could be explanations for why liquidity is moving.
We could always get more liquidity than we hold on the balance sheet. It's a question of judgment of how much do we think is appropriate given, you know, the way the business is shaping up.
Yeah. You're one side too, Graham. Remember, even when you look at the press release in the MD&A, we say we operate well in excess of 100% LCR. That's always a good test point for you versus where the D-SIB operate. We have some other liquidity measures that come out at least once a year, like we had in Q4. That liquidity measure you could expect is a haircut version of LCR, and that was over 300% in Q4 that you would have seen in February. To Andrew's point, some of the other disclosures of points around the insured aspect. There's a few good measures that we had in how we reframed it in this quarter's MD&A I think is worth checking out.
I mean, I always liken the bank to being like a sponge. If you actually go looking to squeeze liquidity out, there's a lot of liquidity there under the hood. That's a more, more complex, you know, argument than some of the, some of the blunter ratios of how much HQLA we've got around. Yeah.
Okay, great. If I could jump to just some of the commercial arrears and credit, just wondering if there's anything sizable in there that you would maybe call out or just some color on the nature of those arrears and your comfort around, you know, no potential losses on that or limited losses?
Ron, maybe you can-
Yeah.
I know you've done a deep dive in there.
Yeah. Thanks for the question, Graham. Like, the commercial. Again, you go back to the levels of impaired that we have. I mean, I do like to point out that we're basically just approaching pre-pandemic levels. I and the rest of the management team look at it as things have normalized. We're really operating with normal levels of impaired in that business. It's a number of accounts that you can count on less on one hand. We've got a very good view into all those, very good granularity. It all goes back to what was said earlier on the call with respect to origination LTVs, the ability to get in and understand these, and having a lot of cushion.
While you do see a nominal increase in impairs, you don't see a corresponding increase in provisions on those because the view to working through them is you'll see a similar result to what you've seen from our historical results in working through those.
Yeah. I just walked through. I asked the team to pull all office files over 10 minute backs and walk through them kind of one by one. Yeah, there's always things in every asset you have, but in general, feel real comfortable with it after doing that.
Okay, great. Maybe one more, if I could. Just construction loans, that seems like a higher risk area right now. It looks like you have CAD 2.7 billion in your portfolio, and it has been building. Is that you just, you know, honoring previous commitments as opposed to actively deploying capital there? Is that what we're seeing, and is there anything insured in there?
Yes. There's a lot of insured in that. That's, a lot of that is insured by CMHC.
Yeah. Of that CAD 2.7 billion, so over CAD 1 billion would be the CMHC insurer.
Right. Exactly. That's obviously that surely gets credit in full from generally very high, high-quality sponsors. You can knock CAD 1 billion off that before you sort of think about the number. You know, we agreed with you, and in terms of generally, that's an area that in an inflation environment seems a bit riskier. That's why we actually kind of dialed back on construction lending through much of last year. We are starting to see more opportunity now that we believe, you know, the inflationary pressures on construction costs. Well, still the inflationary pressure, but people can get more comfort on construction costs. Yeah. I think we're in pretty good shape on that construction lending. Generally, a lot of the time we're operating at relatively low LTVs on completed costs with other parties behind us as well.
Again, sort of double protected on the kind of LTV in the, in that business.
Are these multi-unit apartment buildings or what's the nature of these?
The vast majority will be multis and condos with pre-sales.
Okay. That's great for me. Thank you.
Thanks.
Your next question comes from Jaeme Gloyn at National Bank. Please go ahead.
Hi, Jaeme.
Yeah. Thanks. Good morning. just wanted to follow on that commercial loan growth theme. Conventional commercial loans look like they've declined quarter-over-quarter. Can you talk about what's driving that decline sequentially?
You know, I mean, nothing particularly, in terms of, you know, what drives that. You know, don't forget, in that business, they're larger lumpy loans, so you get a, you know, a few loans discharging and, you know, timing on funding new loans, you can end up with a bit of noise quarter to quarter. That's I think that's the only explanation we can really provide on that.
Yeah. Remember the whole book as well, we have the higher level derecognition as well in the quarter. That's always going to be part of the overall commercial trending, and that's where you see the off-balance sheet increase. We have about eleven and a half billion or so derecognized off the balance sheet now too.
Is it clear what Joe is saying there? If we have an insured multi that's insured by CMHC sitting on our balance sheet, and we rolled into a package and sold it to the Canada Housing Trust, that may or may not usually would get derecognized so that it then comes off the balance sheet. You really have to look at the total loans under management rather than the size of the balance sheet as well.
That's right.
Yeah. I was thinking more on the mortgages, like the conventional side. It sounds like there's nothing strategic there, just some lumpiness in that business rather than anything, where you're maybe more concerned about the conventional commercial loans or otherwise, something like that. Is that?
Yeah. Just wanted to mention when we stopped, putting out new commitments for commercial loans through construction loans much of last year, you know, that obviously we continued to fund into those, into the existing commitments. As some of those buildings got completed, they got discharged.
Yeah.
You start seeing some of that. I wouldn't expect that kind of erosion to prevail. We're busier now, and we are sort of more comfortable with some of these asset classes that we are feeling a bit concerned about in the middle of last year.
Okay. Understood. still in the commercial side and thinking about multi-units, do you have any initial thoughts or views on, you know, any potential impacts, if the federal government decides to fold in CMB funding? Are there any impacts on that, on that gain on sale line? I'm not thinking necessarily on liquidity for commercial loans, but more on that gain on sale line. Is there any potential knock-on effects from that?
We don't know, frankly. You know, that was a line item in the budget. For those of you not maybe not following all that detail in the budget, there was a proposal or some thinking around consolidating the issuance of Canada Housing Trust bonds into the general liabilities of the government of Canada, with the view that that might reduce overall funding costs. Not entirely clear to us, frankly, that outcome would even be achieved. There is some work going on at the Bank of Canada to think about that.
You know, presumably, the need and the, you know, the overall strategic desire of the government to continue to fund multi-family buildings in the face of a shortage of housing, you know, should continue to create a good program. You know, to date, we haven't heard much detail about that, but obviously we're very interested and engaged in how that might flow through and whether it might create some unintended consequences that we should be, you know, engaging with. I think it's way too early to say.
Okay. Understood. Last one from me is on the OpEx. It looks like OpEx this quarter increased, you know, more or quite a bit more than what just like an extra month of Concentra would have implied. Hoping you could outline what are some of those drivers that are resulting in that larger increase? Is there anything seasonality-wise, one-timey, like marketing coming off next quarter? Like, how should we think about, you know, this level of OpEx at CAD 120 million in a quarter over the next few quarters?
Yeah. I don't actually think it's that surprising, James. When you do the math in the Concentra, last quarter was a little bit probably where you're struggling is just the math last quarter versus what was reported and adjusted. 'Cause we only actually when we carve out those integration costs, it's more on a bulk basis versus the line-by-line items. You're probably just not seeing the line items with that level of detail. When you consider that, the noise of Q4, plus add Concentra and plus what I mentioned in terms of, you know, the launches of EQ Bank Card, the Make Bank campaign, those investments in our digital bank, that's what you're seeing translating. I actually think the 45% efficiency ratio. It's pretty solid given where we're at in the integration.
Notwithstanding, you know, 16.9% ROE would be the paramount focus. Some of those trends, I think that's the way to think about it for the quarter.
Okay. Understood. Thank you.
Thanks, James.
Mr. Moor, there are no further questions, so I will turn the conference back to you for any closing remarks.
Thank you, Michelle. As a reminder, we are hosting our annual meeting of shareholders virtually on May 17th. We encourage you to log on, participate, and vote. Details can be found in our proxy circular, including on our advisory vote for executive compensation. We included this vote as part of our board's ongoing commitment to good governance. I'm pleased that we've received support for our approach from the two most prominent proxy advisory firms. Speaking directly to our institutional owners, I remind you that we find great value in direct engagement and encourage you to reach out at any time, and not just during proxy season. During proxy season is a great time to do it. In closing, we look forward to reporting Q2 progress on August 1st. Thank you for participating. Have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you for participating and ask you to please disconnect your lines.