Morning, everyone. I'm Paul Holden, Senior Financials Analyst at CIBC, and my pleasure to host the next presentation with EQB. From EQB, we have Anilisa Sainani, who's CFO. Anilisa, you joined EQB roughly a year ago now.
Almost exactly a year ago.
It must feel like more than a year because there's been a lot going on at EQB over the last year, right? You've obviously done the PC Financial transaction, announced it, closed it. Strategic transformation underway as well. There's been a few challenges in terms of credit losses over the last year. A lot of things going on in the last year.
I have to say, it's been a phenomenal first year working with an amazing team. Lemar, Head of Investor Relations, joined together with me. Our CEO joined exactly a year ago as well, although he had a previous time as CFO. It has been a transformative year, and we are even more excited for the year ahead.
Good. Gives us a lot to talk about.
Lots to talk about.
To talk about. The first thing I do want to talk about is the PC Financial transaction, because I would view it as a transformational transaction. I think this is a huge step forward for EQB, and I do want to drill down onto it, but maybe just high level open-ended question to start, why do you think it is a transformational acquisition? Why is this such a big deal for EQB?
We're so excited about the acquisition. We're excited to have welcomed 4 million total customers to EQB on Canada Day and the PC Financial team to our EQB team together on Canada Day as well. When I think about the transaction more broadly, this is a landmark transaction in Canadian banking. I think about the scale that we now have 4 million customers. That's a 5x increase from where we were a year ago. That means we have a bigger platform to give everyday banking solutions to Canadians. I think about the reach.
We have a significantly larger customer base, but we also, through being the exclusive financial partner with the PC Optimum loyalty program, there's an ecosystem of 18 million Canadians. That's roughly one out of every two adult Canadians that are now inside our ecosystem, and we have access to. It's not just that. It's Canadians today don't really know we're here. Our brand recognition is between 20% to 40%. We now leapfrog to being a household name. Post-acquisition, we will have presence in Pharmaprix and Shoppers Drug Mart and Loblaw and everything inside the banner, as well as all of Loblaw partner gas stations like Esso.
What that means is almost 5,000 physical brand touchpoints across the country s o we leapfrog from very few Canadians even know that we're here to being a household name. Then I think about diversification. A quarter ago, 85% of our revenue was housing-related income, spread-related income, and that significantly changes. In the first month alone, that's moved by 400, 500 basis points, and that means that we have more propensity, more resiliency, more stability through the earning cycle.
I'm really excited about that, and that doesn't even start to touch on the exclusive partnership of Canada's most beloved loyalty program, PC Optimum, where we're a points issuer, we're the exclusive financial partner. I'm totally with you. It's transformative. We have a lot of work to do ahead, but a lot of exciting times.
The transaction closed July 1st, so very recently. One of the things I was surprised on the Q3 conference call, it kind of asked us, okay, when can you start moving on all of this stuff? The answer is, "Well, we start moving day one." So executing very quickly. Talk about that. How have you been preparing and setting up for this and the ability to execute?
Yeah. I am surprised you are surprised, to be honest, b ut maybe that is the benefit of being on the inside. Look, we have been preparing for the transaction since the moment that I joined the bank. We announced in December. We set up an integration management office immediately. Our philosophy for day one, July 1st, was definitely do no harm. At the same time, we wanted to make sure we were clarity with communication with our customers. We wanted to make sure that they are seeing and experiencing EQB in a new way. From day one, we have really thought about what that looks like from the lens of a customer. We ran a series of pop-up EQB stores.
We have never had physical presence before. We now have 180 stores across the country where people can come in and talk to us and experience it. We did four pop-ups across the country. Big prize giveaways, and we saw that come through with really strong credit card customer acquisition in the first month. That has had a halo effect on our new insurance business as well, with record high insurance policies. We do not underwrite. We are a commission business, so we do not retain that insurance risk underneath. It has been really strong momentum from day one.
We will be really thoughtful going forward. We are not in a rush to kind of smash two customer groups together, but we will be really thoughtful about how customers continue to experience, how we continue to bring the products together. We are managing a whole bunch of KPIs on a weekly, or in some cases, even daily basis to make sure that we are getting it right and pivoting as we go.
When I think about some of the things you talked about in terms of the size of the customer base, 5x, you said. You talked about customer awareness of EQB or brand awareness is relatively low. Then I think about the Investor Day targets from the prior Investor Day and the deposit mix. I think, wow, the opportunity here really seems to me growing deposits.
Yeah.
PC Financial or PC Optimum customers. Talk about that opportunity. How we should think about potential size of it, how it could change mix, what would be the NIM?
Yeah, absolutely. If I start with NIM, we have been very focused on managing NIM with discipline over the last year, and that has meant very focused on the pricing side, but also on the funding stack. To exactly your point, and just as a starting point, pre-acquisition, we have moved roughly 27% of our total deposit stack, was the lowest cost retail direct deposits. At the end of Q3, that moved by a full 2%, so we are now at 29%. We feel like there is a lot of runway to grow. That acquisition funnel, there is still much more we know on the PC Financial credit card holders. We have a world-class deposit product, award-winning product, and we can offer that to them together with an embedded loyalty solution. That is really exciting.
Then more broadly, on just the overall funding cost, we have also introduced other sources of wholesale funding, like Eagle's Credit C ard Securitization Trust. That is very capital efficient. Another, although on the wholesale side, lower cost of funding mechanism for us. CIBC actually partnered with us, so thank you very much for that, but we did our first callable deposit note issuance earlier this week, and that came in at tight spreads. In fact, spreads lower than a comparable broker GIC for the same term. Thinking about all of those different elements, continue to make sure we are creating value through our shareholders from the top-line revenue side as we bring in all the customers and broaden our product shelf, but also from all of the nitty-gritty stuff underneath, managing our NIMs, managing our funding costs. Lots of potential.
One of the things you mentioned originally on the PC transaction, why it is transformational, is the change in revenue mix.
Right? Bringing a lot more fee income. I think about that from either sell side perspective or investor perspective. What is the real benefit of that? Why is it good to have more non-interest revenue?
Yeah. If you think about where we were as a bank a year ago when I joined, like I said, 85% of our income was housing-related lending and spread income. That served us as a bank really well. We have been a public company for 20 years. We have really strong TSRs. That has been great for us, but it also means in the one in 25-year event where you have a real estate market dip, you have a lot of sensitivity there. With the introduction of PC Financial, there is now a significantly different and diversified revenue stream. We have credit card income. Many of the credit card products have no fee, but there is the PC Insiders card. It is definitely value for fee, but we have credit card fee income, annual fee income from that card.
We have interchange revenue. Just to put it in context, spending on PC Financial credit cards is CAD 32 billion a year, so significant interchange revenue. Then we also have the insurance business. We have commissions on 90,000 insurance policies. All of that together, it means that we are less exposed to the housing market. When you do have this one in 25 year event, you have more resiliency, more stability, more opportunity for growth on the other side of your product shelf, and that just means that you have more longevity, more sustainability through an economic cycle. Really happy about that.
Okay. It's a big deal. It's transformational. We talked a lot about the potential upsides. We also should touch on potential risks, I think. It is important always. Integration's a big part of doing large transactions.
Yeah.
How do we think about the governance and risk controls you're operating with? To your earlier point, moving quick but not moving too fast.
Yeah, absolutely. It's really important. It's something we definitely have our eyes open to. There's a lot of execution involved. I think about technology. The technology integration isn't the most complex, but it's never simple either. The good news is that our technology stack is exactly the same technology stack as PC Financial, so it's not like we have to necessarily reprogram or rebuild one to the other. I don't want to take for granted there's still complexity in bringing the two together. We have world-class technologists who are working with us on that. The biggest thing in my mind is customer. This is a deal that's not motivated by cost synergies, although they are there, and we're well on track to realizing them, B ut this is all about the customer.
I think the biggest risk, not to say there's risk of us getting it wrong, but the biggest risk, the biggest thing we have our eyes open to, is how is the customer understanding what we're doing? How are they experiencing us? What is changing for them? What's not changing for them in a really thoughtful way? That's what we're not rushing into. We're being really thoughtful around how they experience our brand, how they experience products, how we make sure that we're staying close and communicating with them, how we're deepening our relationships with them.
This comes back to our integration management office, ultimately led by our new EVP of Personal Banking, Daniel Rethazy. He is amazing and brings a wealth of significant experience. You know him well, I'm sure. We're monitoring key KPIs like deposit stability, customer retention, service levels on a weekly, and in some cases daily, basis to make sure that we're getting it right. We're pivoting if we need to every step of the way.
Okay. Let's change gears a bit and talk about credit losses. You mentioned the one in 25 year type event in housing.
Yeah.
Feels like we're going through that one in 25, and hopefully it's one year, but-
Yeah.
...one in 25.
Hopefully the next cycle is a little longer than that.
Let's start with the single family residential mortgages.
Obviously, great track record. Very low losses over a long period of time. Losses are elevated relative to that history. By the way, losses are still relatively low if you look at compared to the Big Six. We do have to recognize that. Still an investor concern.
Yeah.
Elevated losses. Talk to us about what is going on there. How do we get comfort in terms of the go-forward view? How long could the elevated losses last long?
Yeah. I totally get it, and it is a good question. I know it weighs heavily on people's minds. We spend a lot of time talking about it as a management team. If I start with thinking about our housing market, like the housing book, residential real estate lending book, our average LTVs are 65%-70%. What that means is you need a significant decline in housing price before you actually have a credit loss. Not necessarily a formation, but before you have a credit loss. That is where the one in 25 year, we have not seen stress in the housing market the way that we are today, probably since even more than 25 years ago.
What gives us comfort as we look forward. Sorry, just against that backdrop, we have had the most aggressive rate tightening cycle, probably in equally the last 25 years, which ends a lot of pressure on housing affordability and just affordability in general for Canadians. All of those things coming together have kind of led us to this place where we are seeing credit losses at a level that are not inherent in our book, but are reflective of what a through the cycle looks like when you have a very extended cycle. When we think about going forward, what gives me comfort is early-stage delinquencies.
From a general trend line perspective, there is always a little bit of seasonality because they do flux with things like holiday spending, for example, but they are generally coming down. We think about concentration, the losses in the SFR, single-family residential commercial portfolio. They continue to be largely concentrated to specific vintages and specific neighborhoods and not seeing that spread further.
From a more general macro perspective, we are seeing some signs of stability that I expect will continue to probably be a little bit bumpy as we look ahead. It is not going to be a straight glide path, but there are signs of improvement. There are more houses selling. There is not the same level of housing price declines. In fact, housing prices seem to have stabilized. All of that together, can we call an inflection point? Maybe, hopefully, but it does give us a lot of comfort that as we look ahead into 2027, 2028, this is more of a cyclical factor than a systemic factor.
Okay. Let us talk about losses in the commercial book as well. Also elevated, and I think some of it is correlated.
Yeah.
Particularly on the commercial mortgages. I think the PCLs you took last quarter were on what you called seasoned, impaired properties, not necessarily new formations. Talk about how well-provisioned you are on those seasoned, impaired properties, why you are comfortable there won't be more impairments.
Yeah, definitely. I think, again, if we start with the commercial book, a commercial book is never going to have zero impairments. It is inherently lumpy. It is tied to the real estate market. All of our commercial lending is, for the most part, tied to residential, and real estate construction. Our commercial book is 85%+ insured, so it is actually a small slice of the book that is actually uninsured and where you see losses from. There is some inherent lumpiness in that book. Now, having said all of that, the number one thing that I look to for commercial is formations. If I think about the last couple of quarters, in Q2, we actually had lower quarter-over-quarter formations on an uninsured basis. In the third quarter, we had two-ish loans that were new formations.
Our level of formations is actually, it has come down substantially. We are very happy. That is a normal pace of formations. When we look inside the book, what we are actually seeing is slower resolution times, slower workout times. What that means is two things. Number one, that the actual ultimate realized price of a parcel of land or a construction property that is inside the impaired book has a lower market value as we go forward. Number two, carrying costs. On that first bucket, we have taken substantial steps, including last quarter, to make sure that we do not want to paper cut or haircut a little bit at a time.
We have taken a hard look at that book together with our new Chief Risk Officer, Puneesh Arora, who joined us from PC Financial, to make sure that we are really looking ahead at not just what are those property prices now, but where are the property prices going? What does the workout and the resolution timeline look like? We have substantially increased our provision levels, and that means that we are more resilient to weather the uncertainty as we go forward. Impossible to predict where things will land, but I expect that we will have smaller true-ups, whether it is to the upside or to the downside as we go forward.
The second bucket, which is the carrying costs. I am a technical accountant, spend a lot of time in technical accounting, and that is something that you cannot get in front of. Those are costs that you incur just every quarter. We will continue to have those until we get the resolutions and the workouts. We are making really good progress on resolutions and workouts. It is a slow process, but I expect that come 2027, we will have a spot where formations are slower than the workout times. What that means is that we will start to see our GILs come down pretty substantially. We saw a little bit of that in the third quarter, and I expect, again, maybe not like a linear glide path, but we will see that general trend as we go forward.
Okay. If we think about the PCL ratio through the cycle, it is going to look a little bit different now with the PC Financial transaction. Cards are just, they are a higher loss product. They are for everyone.
Secured.
It is going to change the PCL ratio a bit. Talk to me about how you think about that. Obviously, it should be priced into the card product. The ROEs actually on cards tend to be good. Talk about sort of the PCL sensitivity there. Any seasonality we should start thinking about from-
Yeah. All excellent points. Cards are different. They are unsecured, so they carry higher loss rates, obviously. Cards can be a little bit of the canary in the coal mine. You will not pay your credit card bill before you will not pay your car, before you will not pay your mortgage. You do tend to see higher loss rates in the card portfolio, b ut they also have a lot more earnings propensity. You have a lot more propensity and a fundamentally different earnings model to earn through that while somebody is carrying a balance, paying higher interest, right?
People use their credit cards more when they are stressed, so you are having more fee income. This comes back to our earlier point about the diversification of revenue. Spending a lot of time with Puneesh, as I mentioned, he is our new CRO. He has been at PC Financial for 15+ , almost 20 years. When we think about the credit card portfolio, there is a couple of really important points. Number one, it is a heavily weighted super prime portfolio. 70%+ of customers are super prime. So there is a lot of just inherent resiliency in that portfolio. Number two, through the cycle, loss rate on the credit card portfolio, roughly speaking, 4.5%-5%, so fairly low loss rates.
In any given quarter, you might actually see like a ± 30, 40-ish basis points around that, and that is because of the seasonality that you mentioned. People spend more on their credit cards around the winter holidays and around summer holidays and back to school. You see some leg effects of balances building, people moving, maybe people who were transactors moving into resolvers and then doing a little bit of a catch-up. It's a little bit more difficult. It's less stable month-to-month or quarter-to-quarter. You do see a little bit more volatility in there. But having said that, you have overall through the cycle, very resilient, kind of very within our risk appetite loss rate.
Okay. I'm going to take a pause for a second and give the audience a chance to put up their hand and ask any questions if anyone wants. That's quite. Yeah. Cool.
Hi. I have a quick question on the PC Financial deal. Maybe one year into the deal, what are maybe one or two KPIs that you see and you would think it's working out or something that you would think this is not working out?
Yeah, absolutely. We actually have a series of KPIs. Like I said, we monitor some of them monthly, some of them weekly, some of them daily. They go across a couple different quadrants. We think about execution, we think about value. So where are we in terms of our customer, in terms of our brand recognition, in terms of our customer retention, in terms of our deposit stability? We think about execution. Where are we on our synergies? We think about revenue synergies, capital synergies, because we have a new Eagle Trust and some capital optimization that we've done. Funding synergies is part of that too, as well as expense synergies. As CFO, that's a big KPI for me. How are we tracking on our execution and making sure that we're creating value for shareholders?
And just on that last point, I will drop in that our cost synergy target is CAD 30 million over the first few years following the deal. In the first month alone, we have wasted absolutely no time. Not all synergies are equal. Some are easier to realize than others. But in the first month of post-acquisition alone, we have hit 50% of that target already. We kind of have these four quadrants that we go through. We are monitoring, we are making sure we are talking internally as a management team, as an integration management office. We talk about it with our Board of Directors as well, and so really making sure that we are on top of everything to ensure that that integration goes fully smoothly.
Thanks for the question. Any more? We have got time for a couple more. No? We touched on the PC Financial and growth there. We have not really talked about growth from your, I do not know if you call it historical, but I do not want to call it legacy business because you are not really legacy, but your non-PC-
Yeah.
...space.
Real estate, residential commercial lending businesses.
Talking about the cycle, we have not been a great part of the cycle for growth either for a number of two or three years now. When do you think that turns? What needs to happen for that turn? Other than PC Financial, where are you trying to lean into growth today?
Yeah, absolutely. Well, I think this is the core of what EQB does. These are really important businesses to us. We are really excited about credit cards, so we talk about that a lot. But these are our core businesses, and they have got us today, being a company for more than 50 years and publicly listed for more than 20 years now. As we think about it, we have great products. We have that Alt-A mortgage product. We are the best at what we do there, and so we are continuing to think about it. It is a little bit market-driven. What we are focused on is while the market is smaller than what it used to be, there is less origination activity. We are focused on renewal, so staying close to our customers, and we are focused on market share.
We had our single largest gain in market share in Alt-A, Ontario last quarter. We are really proud of that. What that means right now is we have a bigger share of a smaller pie. As the market comes back, we have a bigger share of a bigger pie. We are making sure that the things that we can control, the execution that we can be doing as a management team, all of that is happening now so that we are really positioned to accelerate as the uncontrollable factors come back for us. We think about our reverse mortgage book as well. Really excited about that. It is a huge growing segment in Canada.
We have had very high growth rates. We expect that to continue as well. Then we think about our commercial book. Again, commercial loans can be lumpy. They can be larger in size, but staying really close to our clients, deepening relationships, close to our brokers. Again, making sure that as market activity returns to a more normalized level, that we are there for our clients through it all.
Okay. We're almost out of time, so I'll ask one more. Hopefully you'll be back next year. I think about the potential for next year. What kind of things should we be focused on? Or what would you like to come back and talk about next year?
Yeah. Okay.
In terms of successes and KPIs, and I think most importantly, sort of that move back to a mid-teen ROE.
Yeah. Okay. We'll come back next year. We'll celebrate a two-year anniversary, and we'll talk about what I hope we'll talk about three things. I think I'd like to talk about operating leverage. Market might be a little bit unpredictable now, but we have refocused, recommitted, and in large part delivered, but we will continue to do that neutral to positive operating leverage. That will come through top-line revenue growth, but it will also come from significant expense discipline. Make sure that our expenses move in line with our revenue. Number two, we'll talk about credit normalization. We don't feel like there's anything in our underwriting.
What we do want to do is make sure we're staying close with clients, helping through workouts, seeing the resolutions, and have the more normalized PCLs. Then number three, I hope we're talking about EQB being a household name next year. Moving from the 20% to 40% Canadians who know we're here. You cannot compete if people don't know you exist. We'll now have the brand recognition, the breadth and depth of the product shelf, omni-channel distribution channel, that only challenger bank in Canada, one of the only challenger banks in the world that will have an omni-channel, and all of that will start to get that flywheel in motion that just accelerates the path to ROE.
That's great. Perfect time to conclude. Thanks, Anilisa.
Yeah. No, thank you so much. It's great to be here. Nice to see you all.