Earnings Call: Q1 2018

May 11, 2018

Good morning, ladies and gentlemen. I'd like to welcome shareholders and analysts to Equitable's first quarter 2018 conference call and webcast. Later, we will conduct a Q&A with participating analysts on the call. Before we begin, and on behalf of our speakers today, I will refer webcast viewers to slide 2 of the presentation, and our callers to the following information, which contains the company's caution regarding forward-looking statements. We remind you that certain forward-looking statements will be made today, including statements regarding possible future business and growth prospects of the company. You are cautioned that forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Certain material factors or assumptions were applied in making these forward-looking statements, and many factors could cause actual results or performance to differ materially from those conclusions, forecasts, or projections expressed by such forward-looking statements. Equitable does not undertake to update any forward-looking statements made by itself or on its behalf, except in accordance with applicable securities laws. Additional information on items of note, the company's reported results and factors and assumptions related to forward-looking statements are available in Equitable's Q1 2018 MD&A and earnings news release. This call is being recorded for replay purposes on May 11, 2018. It is now my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Bank. Please proceed, Mr. Moor. Thank you, Dan. Good morning, everyone, and welcome. I'm joined by Tim Wilson, Senior Vice President and Chief Financial Officer of the bank. Equitable produced solid first quarter performance, increased the dividend for the second time this year, and continued to expand its role as Canada's challenger bank with the introduction of new deposit and lending services. In our single-family business, we did experience some headwinds in the market as consumers and lenders began to adjust to new B20 guidelines. During today's call, we will update you on our strategic progress and our outlook, but we will start with a recap of the quarter's results, beginning with asset growth. At quarter end, mortgages under management stood at an all-time record of CAD 23.8 billion, up 9% year-over-year and 2% from December 31, 2017, on growth in our single-family, commercial lending, and securitization financing portfolios. As mortgage assets are the source of most of the bank's earnings, this is a positive performance and reflective of Equitable's diversified lending platform, provides us with the opportunity to allocate capital to different business lines so that we can achieve the best returns for our shareholders. We did exactly that in Q1. We began to deploy more capital to commercial lending businesses in light of slowing conditions in single family. Looking at the components of portfolio growth, single family mortgage principal was up 16% from a year ago and 2% from Q4. While our single-family book continued to grow in the quarter, new originations slowed on a year-over-year basis. We had expected slowing as a result of changes to OSFI's B20 guidelines. I think it's probably fair to say that we did not adapt to these changes as well as we might have done, but made the appropriate adjustments and expect originations to climb by around 40%-45% in Q2 from these lower levels in Q1. Having said that, the period of market adjustments to B20 are still playing out. With the visibility that we do have, we continue to believe that our single-family portfolio will grow 4%-6% this year, in line with prior guidance. Helping single-family portfolio growth was higher mortgage retention. As you may recall, our hypothesis going into the new B20 era was that mortgage retention would be higher than in the past, and our teams are working hard to serve our customers to ensure that this continues to be the case. This was certainly true in the first quarter as we saw our retention rates increase. During the quarter, we also introduced new digital technology that allows single-family borrowers to view their account status in real time. This should add another reason for customers to stay with our bank. Given opportunity levels in single family, we chose to begin allocating more capital to commercial lending business and with good results. Origination volumes were a quarterly record as the bank funded high-quality opportunities generated from our large and expanding network of customers and business partners. Compared to the first quarter last year when we funded one particularly large commercial loan, this year's originations were broad-based by asset type, loan size, and partner. As a result, commercial mortgage principal was up 4% or CAD 122 million year over year, and up 6% or CAD 180 million in the quarter alone. As you know, Equitable has been a commercial lender for its entire existence, and so this growth seems very natural to us. We certainly like our prospects in this market. Commercial lending has a different risk-return profile than single family, but one with which we are very comfortable as we continue to grow this part of the bank. Securitization financing mortgages under management increased by about CAD 640 million or 6% year over year, and this performance reflected higher multifamily volumes. Multi-unit residential originations grew as we continue to take good advantage of an increase in the bank's Canada Mortgage Bond capacity. This portfolio provides a solid and reliable stream of activity and earnings. While growing assets, the bank had another consecutive quarter of great credit performance, reflecting the high quality of the mortgage portfolio and our success with workout activities. Once again, Equitable's provision for credit losses as a percentage of its total loans was in the low single-digit basis points, just as it's been for more than five years now. In the first quarter, our PCL was two basis points, unchanged from a year ago and up one basis point from Q4 2017. Looking at credit metrics, there was a little noise this quarter because of the bank's adoption of IFRS 9 on January 1, 2018. That noise reflects our historically conservative allowance calculation methodology and reinforces the fact that the book is solid and that the bank is well reserved. You will note that ECLs under IFRS 9 were CAD 8.5 million less than general provisions that we'd reserved under IAS 39. Even with this change, our allowance still sits at 13 basis points of mortgage principal and covers 92% of our impaired loans. That compares well to our 10-year average loss rate of 4 basis points. The impact of the IFRS 9 implementation is to increase book value per share by CAD 0.42. Compared to Q1 last year, impaired loans decreased in both dollar terms and as a percentage of the total portfolio. The majority of the decrease was in alternative single family, and almost two-thirds of it was related to Alberta and Saskatchewan, with the remainder due to the discharge of two large commercial loans that were impaired at the end of Q1 2017. These factors were partly offset by the addition of CAD 4.6 million of insured mortgages that were between 90 and 365 days past due. This amount moved to the impaired loan category in Q1 as a result of the adoption of IFRS 9, and the prior accounting treatment did not recognize them as impaired. We do not anticipate any losses on this group of loans. Looking forward, Equitable continues to benefit from rigorous and effective risk management practices. As a result, we expect our arrears, and rates, and credit loss provisions to be low for the remainder of 2018, assuming that Canadian economic conditions stay within the range of broad market expectations. We take comfort from the fact that we lend in a very prudent risk-aware manner, and this should allow us to effectively manage through any downturn in market conditions. In particular, Equitable's low LTVs on uninsured mortgages are designed to protect the bank in the event of a softening in the economic environment. Our savings business has also performed well in the quarter. Total deposits increased 19% year over year to CAD 11.9 billion, just above the growth rate of our core lending portfolio. Deposits also grew by CAD 856 million or just over 8% since December 31st. Equitable continues to attract a diverse stream of deposits, both through EQ Bank and from our broker partners. EQ Bank deposits grew 42% or CAD 515 million year over year to CAD 1.7 billion as its customer base surpassed 50,000 people. A part of our deposit growth came from the launch of EQ Bank GICs. As you may recall, we upgraded the platform late last year to offer GICs as a complement to the EQ Savings Plus Account. After introducing the product in March, with very little marketing, EQ attracted GIC volumes that were above our own expectations. EQ Bank GICs are easily purchased through our digital banking app, a convenience advantage over traditional bank offerings, and feature attractive interest rates over varying terms. This offering is the latest manifestation of Equitable's challenger bank status in that it leverages our position as a regulated institution and trusted store of value, as well as our technology infrastructure that was built to expand to accommodate new and better ways of serving customers. We certainly believe the EQ Bank platform, combined with our low-cost business model, gives us competitive edge in responding to the needs of Canadian savers. It would be interesting recently to see investment journalists promote the merits of GICs more frequently. For individual investors, the yield tick up on a GIC compared to the equivalent risk of a mutual fund that owns Government of Canada bonds is material. As interest rates generally tick up, we are seeing stronger fund flows through the GIC boards. Just last weekend, we added to the functionality within the EQ Bank platform for GICs. You should expect to see us broadcasting that message in print through out-of-home advertising, in digital media, and on television. Overall, we have created a strong digital platform, and we plan to continue adding innovative features and functionality this year to expand EQ Bank's position as a leading provider of banking services in Canada. Offering GICs also improves our liquidity risk profile by extending the average term by deposits. Growth in EQ Bank deposits were complemented in the quarter by a 23% or CAD 1.7 billion year-over-year increase in broker GICs placed by deposit agents, investment dealers, and financial planners on behalf of Canadian savers. Based on these numbers, the evidence suggests the funding market has normalized after last spring's disruptions. Looking at the bottom line, diluted EPS was $2.34, down 8% from the first quarter of 2017 as a result of costs related to the secured funding backstop facility that we added in Q2 of last year. Without those costs, the bank's first quarter earnings would have been at record levels. In spite of the compression caused by the presence of the backstop, ROE for the quarter was 14.5%, which is in line with the broader Canadian banking industry, and a good performance when compared to both small and large banks around the world, and reflective of Equitable's ability to allocate capital effectively. On their strong earnings performance, book value per common share was up 16% year-over-year and 4% during the quarter itself. As you saw from last evening's earnings release, the board opted to increase the common share dividend to $0.27 per quarter, a 17% increase in dividends over the dividends declared in May of 2017 and 4% above the dividend declared in February, which was the last time we raised the rate. This latest increase reflects the board's belief that the bank's capital position is more than sufficient to support future asset growth and to reward shareholders for their confidence in Equitable with the continuing patterns of a steady increase in dividends, and our goal of increasing them by more than 10% a year over the longer term. Even while increasing our dividend, we finished the first quarter with a CET1 ratio of 14.7%, far above the minimum regulatory requirements. I'll have more to say about our capital position in my closing comments. Now I'll turn the call over to Tim for his report. Thanks, Andrew, and good morning, everyone. As you heard, first quarter earnings and ROE were solid but below last year, even though we achieved strong growth in mortgage assets and continued to benefit from a very efficient non-branch business model. The reason results were held back is, as Andrew had mentioned, the cost associated with the liquidity measures taken in Q2 of last year. In the first quarter, those actions, net of associated funding cost benefits, reduced EPS by $0.27 per share and compressed ROE by 1.6 percentage points. There were no such costs incurred in Q1 of last year. Compared to the fourth quarter, the cost of the funding backstop dissipated by $0.05 per share. Even so, earnings were lower on a sequential basis by $0.02 due to a variety of factors, including lower prepayment income, declining Maple revenue, increased compensation costs, and a slightly higher PCL. Looking forward, the liquidity actions, mainly the secured backstop facility, will cost us a little more than CAD 5 million per quarter for the remainder of 2018. Over the course of the next year and prior to the termination of the current backstop in June 2019, we will review the bank's need for any future backstop facility. The goal will be to maintain a high level of prudence in our liquidity model, but hopefully at a reduced cost. What is a highlight of our financial results is that even with these liquidity event costs, our Q1 net interest income was an all-time quarterly record of CAD 81.3 million, up 4% from a year ago. Solid 9% growth in average asset balances was offset by an eight-basis point year-over-year decline in NIM. That decrease in total NIM was driven by core lending. Securitization financing NIM was flat. NIM in core lending was 24 basis points lower than a year ago for a few reasons, all of which are detailed in our MD&A. The most significant factor, again, was the cost of our liquidity actions, which accounted for 24 basis points of the year-over-year decline. Lower prepayment income also had a four-basis point unfavorable impact. These factors were partially offset by a seven-basis point increase from higher spreads within both our single-family and our commercial lending portfolios. Those spreads widened mainly due to the pricing changes introduced in May of last year. We do not expect that same trend to continue, as spreads on new business have moderated in single family. For 2018, our outlook for net interest income is for more growth, at year-over-year rates in the 8%-10% range as assets grow at approximately that same rate. Our current thinking on NIM is that total NIM will be in the range of 1.55%-1.6% in each of the remaining quarters of the year. Although we may see some quarterly fluctuation due to mortgage prepayment income and other factors such as seasonal variations in our liquidity holdings. You can review the assumptions made in arriving at this outlook in our MD&A. Growth in our existing businesses, as well as investments in our challenger bank strategy, led to a year-over-year increase in non-interest expenses of 13% in Q1. 7% growth in FTE and other factors that caused compensation and benefit costs to increase were the major drivers this quarter. As well, we spent more on the EQ Bank platform. Regulatory, legal, and professional fees also increased, mainly because of an increase in CDIC's standard premium rates as well as higher deposit balances and overall business growth. Despite cost growth, Equitable's productive workforce and our branchless business model produced an efficiency ratio of 37.7%. This performance is consistent with the expectations that we've set for 2018. For the remainder of the year, we plan to continue investing in the bank's franchise, adding more features and functionality to the EQ Bank platform, and reinforcing our high level of customer service. With that, non-interest expenses should increase at year-over-year rates slightly higher than the growth rate of our overall business. Of course, if actual growth in our lending markets is different than anticipated, we will manage our expense levels accordingly so that Equitable remains one of Canada's most efficient banks. Now, back to Andrew. Thanks, Tim. Our key financial and operating metrics point to the strength of our diversified business and the credit quality of our assets. We believe that our strategy of serving Canadians as the country's challenger bank is proving itself out. I'm hoping you will have a chance to attend our annual meeting of shareholders next Tuesday, as I plan to use that opportunity to talk more about our take on the future evolution of the banking industry and where our positioning may take Equitable in the future. In terms of growth initiatives, I talked about PATH Home Plan on our last call. Since then, we've had a positive reception to this reverse mortgage product as we embarked on the time-consuming, but vitally important process of building the awareness and describe the merits of our approach that will ultimately fuel growth in assets. Now that we've actually launched the product, we are climbing a steep learning curve as the reality of the market tests the assumptions that we made in putting together our business plan. I certainly have more confidence in the future of this business than I did at the time of the launch in January. There are a few exciting new challenger bank opportunities to deploy capital at high ROEs like this, and we do expect mortgages under management to grow 6%-8% in 2018. The prospect for slower single-family asset growth may continue to leave the bank with excess capital. If this happens, we will evaluate the options for adjusting our equity base in response. We'll determine the best course of action once the longer-term impact of regulatory changes on our markets becomes clearer, and the prospects for our growth initiatives and the impact on capital becomes better understood. Whatever we choose to do, that choice will be informed by a thorough evaluation of all organic and inorganic growth avenues open to us. So you can be confident that it will be in the best interest of all shareholders because our board and management team measure ourselves on being good custodians of our owners' capital. Also on the agenda this year, as Tim said, is reviewing the future place of a backstop facility, if any. In the meantime, as Canada's Challenger Bank, we remain squarely focused on making banking better for Canadians across all of our business lines. On the funding front, I'm pleased to note that we launched a deposit account in partnership with Wealthsimple in the first quarter. Wealthsimple is a Canadian fintech and Canada's leading robo-advisor that selects appropriate portfolios for its clients based on their objective risk tolerance. Wealthsimple selected Equitable because of our like-minded approach and strong technology foundation. I do believe that Wealthsimple is a great example of how elegant fintech solutions can bring value to people's lives, and our team admires the execution that they have brought to the table and how this translates into customer experience beyond the core idea. This collaboration is consistent with our strategy to partner with fintech leaders to provide value to Canadian savers, further diversifies our funding sources, and underscores our ability to embrace the changes that are likely coming to the Canadian banking industry with the advent of open banking that was announced in the budget presented by the Minister of Finance earlier this year. To summarize, first quarter asset growth and profitability were solid. Our board increased the common share dividend for the second time this year. We continue to solidify our position as Canada's challenger bank in the marketplace with the launch of EQ Bank GICs and the PATH Home Plan. While some significant uncertainty remains, we believe that mortgages under management and balance sheet assets will continue to grow in 2018, providing the fuel for good earnings performance. That concludes our prepared remarks, and now we would like to invite your questions. Dan, can you please open the lines to our analysts that have questions? Certainly. Ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question, simply press star followed by the number 1 on your telephone keypad. Your first question comes from the line of Nik Priebe with BMO Capital. Please go ahead. Oh, hi. Good morning, everyone. Good morning. Recognize that it's still very early days on this front, but I was wondering if you could give us just a little color on the early rollouts of the PATH Home product. Andrew, I know you kind of alluded to it in your comment, but just whether you've seen decent uptake on that product or what feedback you're hearing. Anything on that front would be helpful. Yeah, we've closed, let's say, a handful of loans. We've had quite a large number of applications. I think we've realized we missed on a couple of elements of the product that we're currently making some adjustments to make it fit the market a little bit better. I'm feeling really good about it. Our team's done a bang-up job in getting across the country. Just a reminder that we're only in British Columbia, Alberta, and Ontario as we speak, so we're certainly gearing up to go into other provinces. I spent actually a fair bit. Since we launched, we had a chance to talk to reverse mortgage companies around the world, and it's a really interesting product. If you're looking for more flavor on how these markets are evolving in other parts of the world, I recommend you look at Heartland Bank in Australia and New Zealand and the work that both Legal & General and Aviva have been doing in the U.K. market where they've been growing this asset class quite fast. Okay. Yeah, that's helpful color. Thanks. Would we see any volumes from that lending activity reflected in the total for the core single-family origination going forward? Going forward, we would likely put those volumes in with the core single-family business. That's right, Nick. Okay. Then just one last one for me. You did make mention in your commentary that you made a few adjustments to pricing structure in the core single-family segment that should help capture some incremental market share there in the second quarter. Have you done work to look at what the NIM impact of that might be on the broader portfolio? Just based on guidance, it looks like there isn't really a material change expected relative to the first quarter. I think that's a fair conclusion, Tim. Yeah, I think that is right, Nick. We have modeled out the current pricing environment just over the course of the past few weeks, and we are maintaining our NIM guidance. While we do see a little bit of competitive pressure in the alternative single-family originations, we are getting some offsets in other places. So for example, I think we are sharpening our pricing on renewals of single-family mortgages given that environment, which is providing a bit of an offset going forward. Probably expect our liquidity portfolio to be slightly below its seasonal high at the end of March. Then we are going to see more of an asset mix shift towards commercial, which as you are aware, is a higher spread business. So when you flush all those through our models, we are maintaining the guidance that is in the MD&A. Okay. No, that is really helpful. Thanks, guys. Your next question comes from the line of Marco Giurleo with CIBC. Please go ahead. Morning, guys. Morning, Marco. My first question is for Andrew. On your opening remarks, when you mentioned that you did not adapt to B20 changes as fast or as well as you would've liked to, what did you mean by that? Could you elaborate? Yeah. It's a little hard for me to describe it, so I'll try and give you some sort of color rather than be quantitative about it. But as you know, we're a bank that's very concerned about being on the right side of regulatory risk. So we manage regulatory risk like credit risk very tightly. So I think towards the back end of last year, the changes coming out of B20 or B20 modifications were quite significant. And we were very serious about approaching those and putting them through our teams and making sure that all our procedures and so on adapted so that we could be squeaky clean with the regulators come January. But our business is one of hustle, and one where you've got to be on the phone early enough to the brokers. I think we probably took our eye a little bit off the ball of that side of our business. It is hard to have priorities on two or three things all at the same time. I think, to be fair to our teams, they did a great job in adapting to a fair bit of regulatory change. I think we did just lose a bit of edge in the marketplace, and were less focused on that for a period of time, probably the November, December period. Combine that with perhaps being a little bit off the market on price, seeing one of our major competitors wanting to build market share at the expense of margin, I think just left us a little blunter in the marketplace in kind of December through to mid-February. Our teams are the best in the industry, frankly, in terms of hustling and figuring out how to turn that situation around. Everybody is right on their game now. Not only are we able to comply with B20, we have got a team that is engaged in the market, talking to our customers and understanding it. I am pretty comfortable it was a temporary thing, but it was something that we experienced and went through. All right. That is a good segue into my next question. You mentioned pricing and competition. Can you talk a bit about the level of competition you are seeing in the market both on the residential and commercial side? Can you tie that into the firm's discipline on pricing loans and ROE? Yeah. I will start with commercial because I do not think it is partly because there is less happening there in terms of any sort of change in competition. As you probably are aware, all of our originators have on the desktop an ROE calculator that attributes capital to the loans they are making and allows us to sort of drive a profit bottom line. We have hurdles that they try to meet. Sometimes it is a bit more of an art than a science, but there is a lot of quantitative analysis around that. I would say that Darren and his team in commercial have done a good job in actually improving the ROEs on that metric over the last six, nine, 12 months, so the spreads look very good. In that business, one of the challenges is some loans are a little riskier than others, and they demand a higher price. Pricing for risk is really critical, and our team is very experienced in that. In the single-family space, it has been a bit more of a concern that we have got perhaps one of the larger players in the market wanting to build market share at the expense of margin. We are not obviously about to give away our franchise just because somebody wants to build a bit of market share for a period of time. We have chosen to be fairly strategic in a few spots in the market where we want to give competitive offerings, and we do not think it is going to have a longer-term impact on margins. But the next few quarters might be not what we would really we may not be pricing where we would really desire or believe logically the market should be priced. I think we are not seeing quite the same discipline out of one of the major players that we would have typically seen over the years. All right, great. If I could just sneak one last one in on capital. Capital position was strong this quarter, and your book value grew 4% sequentially. Given where the stock is trading, how are you thinking about an NCIB right now? Well, I think we talked on the last call about thinking about it. We have advanced our thinking on what it would take to do it. We are also updating our asset projections to make sure that whatever we do, we continue to be able to face the opportunity in the market. I think probably by the time we get to the August call, we will have more meaningful to say about that. I do not know that we look particularly at where the stock price is trading at any point in time. It is more so much about making sure that we are funded efficiently so that our shareholders are getting appropriate returns on the capital they entrust to us. Certainly thinking through that. Great. Thanks, guys. Your next question comes from the line of Geoff Kwan with RBC Capital Markets. Please go ahead. Hi. Good morning. Just following up the questions on the competition in the non-prime space. Is it just really Home that's been the competitive friction, or has it been other players like Optimum, some of the other smaller players, or is it maybe the banks that have been coming down are willing to do more in that space than they have before? I think to the last point, if anything, I would say is that the banks are, in general, the big banks are upgrading their credit criteria. I'd say that the views of some of the banks is their stock's not doing well because they've been seen to be exposed to Canadian mortgages. It's not always true, but I think that as a broad picture, that's probably the case. I would say that at the end of the day, the pricing umbrella is set by us and Home. We're the two players in the market. Frankly, there are other players, obviously, that are significant, but my sense is that Optimum's running a nice, good business and would sort of take the price that the market would offer. There are a couple of smaller guys around, but I don't think they really drive the price at all. Okay. Within that context, though, historically in the industry, Home Capital would have been bigger than Equitable, and arguably they were the ones that kind of set the pricing, and you guys would try to maybe compete more on service to get that business. Given what happened last year, you guys are much closer in size, and if your growth rates kind of, let's say, move reasonably in tandem, do you think about what that means from a pricing dynamic that you do not have a clear leader that may be the one that arguably kind of sets the price? Does that create a little bit more volatility around where the originations go as well as the NIM yields? I think that is to be determined. Certainly, we are trying to show more responsibility in the industry around price, and I think as I mentioned, we felt we had to adjust our thinking a little bit on that. I would say it is more fine-tuning on thinking, but clearly, we believe that to run sustainable, well-capitalized banks that produce the right returns and reward shareholders and appropriately price risks, it is extremely important to price with discipline. That is the DNA that we work with, and we will continue to sort of work with that DNA. I cannot believe that anybody that does not take that sort of view will thrive long term. We just need to be careful about that and think about how we play our cards in that regard. Okay. Just one last question I had is on the reverse mortgage product. The other competitor in the market has been doing this for decades and arguably has a big kind of database or experience on the consumer behavior patterns. How should we think about how you guys are kind of rolling out the strategy? Obviously, you are just starting here, but would it be fair to maybe describe it as being maybe erring on the side of conservatism on the underwriting side until you get a little bit more of the experience in terms of how these borrowers are? Is there something that you did before the launch that you were able to get more comfort, more information around how potential borrowers in Canada behave with respect to this type of product? I think if you line up our underwriting grids with the other competitor in the marketplace, you will see that we are actually operating in a more conservative manner than them. So we are working within their risk umbrella. So I am pretty comfortable that we are not taking risks that we should not be. We spend a lot of time working on that. When you think about dynamics in other markets, you can look at sort of LTVs. The way this product is underwritten is primarily around the age of the borrower or borrowers, the quality of the real estate, and then a loan-to-value assessment against that. So, the metrics that apply in other markets probably should be similar to what apply in Canada. The math is relatively complicated, but the underlying dynamics are pretty similar. We are actually lending at relatively low LTVs, and we feel pretty comfortable we have got the risk pretty well bounded down. Okay, thank you. Your next question comes from the line of Jaeme Gloyn with National Bank Financial. Please go ahead. Yeah, thank you, and good morning. Morning, Jaeme. First question is just going back to the Q1 experience and the conversation around implementing B20 versus price competitiveness. Can you allocate a weight to both of those? Was it 50/50, or would you say price was the biggest driver of market share being ceded? It's really hard for me to know that, Jaeme. That's why I tried to give you color rather than trying to be quantitative, frankly. I think even within Equitable, we might have different views on that. It's really hard to be quantitative on it. Certainly I do feel that we were pretty focused on what it took to adapt to B20, and that was whether it's 50/50 or 40/60 or whatever, I know that was a considerable distraction. The need to actually upgrade our systems to calculate the new stress test GDS, TDSs, the need to make sure no second mortgages we're putting in place behind are something. Those are a couple of the highlight ones, but there are a number of other pieces in that document that needed a fair bit of thinking through. Our leadership team in single family was definitely fully engaged on it and on a fairly short timeline, frankly, from the time they said, "These are the final rules" to, "You got to have these things in place by December the 1st." It was a heavy lift for the team to make it happen. As I say, I think it's very hard for us to kind of really quantify it, but I think they did a great job in keeping on the right side of the rules, which is job one in a bank. I'm not providing any criticism to our team. I think our team did the right thing. Probably others maybe done a better job of keeping fully engaged with the market while going through that journey. Okay. You made a comment also just in terms of the relative competitiveness about the underwriting criterion, perhaps that maybe competitors are underwriting perhaps a lower quality book. Can you describe maybe some specifics of what you're seeing in terms of that credit scorecard where Equitable is relative to competitors and how much of a driver is that to mortgage growth in recent periods? It's not clear that I made any relative. Sorry, I can't recall making any relative credit statements. I'm not aware that I'm making any relative issues there, to be honest. Okay. Maybe we'll follow up on that after. Just getting still on pricing. I asked this to a competitor as well. I'm curious to know, what is the net interest spread of new mortgages being underwritten today versus mortgages that would be rolling off of the portfolio? Is that something that you have at hand and you'd be able to disclose? Yes, we do have it in hand, James, but it's not something we disclose publicly. I think we just point you to the movements in the aggregate NIM in our portfolio. What I would say is, broadly speaking, within the commercial and single-family portfolios, the NIM on what we're adding today is roughly equivalent to the NIM of the mortgages that are rolling off the book. Okay. I am sorry if I missed this, if this was already discussed in the commentary, but what are the offsets if we are looking at net interest spreads today versus net interest spreads a year ago? It is significantly lower just looking on the surface. So what are some of the offsets that would support a stable NIM in that environment on specifically just the mortgage itself? Well, the huge change in NIM is just the cost of the backstop facility that gets amortized through that line. If you are looking at market available pricing data for single family and market available GIC data, that is probably what you are seeing agreed in more recent months. But again, what I would say is that the market data you have is not necessarily reflective of what is happening on the inside, point one. Point two, what you are not seeing is retention. As we mentioned, B20 makes our book generally a little bit stickier and offers the opportunity for us to price more selectively so we can make up some of the margin that we are losing in originations in the retention. Then broadly speaking, with our core lending book, we also get the benefit this year of a mix shift towards the higher spread commercial business. Okay, fair enough. So shifting gears then just in terms of the capital deployment through the remainder of the year. We have had dividend hikes here in each of the last three quarters. How are you, I guess, measuring dividend hikes versus NCIB or an SIB? Is it something that you would consider perhaps normalizing that payout ratio with other Canadian financial institutions? Are you able to provide any initial insights based on some of your conversations? Yeah. I think what you're asking is highly relevant to our thinking. Generally, as Canada's challenger bank and thinking about new opportunities are going to open up. While we may over the next few months have a lower growth profile than we've had over the last decade, which has been very consistently CAGRs in the high teens, that may well resume as we find other opportunities. We don't want to lock ourselves into a position where we're in a very high payout ratio business where we're unable to take advantage of organic opportunities. I think that leads us to the logic that at least over the next two to three years, to the extent that we're returning additional amounts of capital, probably be through an NCIB or some other mechanism that allows us just to make deliberate decisions to move capital ratios if they're overly high, down to a level more appropriate. In terms of the regular dividend, I think we've been quite consistent over the last few years saying that we want to grow it by the double digit rate year-over-year. The decision to, or the plan to raise the dividend by a penny in this quarter was probably something I could have told you two years ago. This is not something that we've really changed any dramatic view or really reflects underlying operating performance. It's more around our commitment to make sure that investors that stay with us do see the benefit of dividend growth. As you mentioned, we're probably one of the lowest payout ratio banks in Canada, and we have lots of opportunity to continue to grow the dividend. Okay, fair enough. Last one for me, just around the reverse mortgage business. There were some favorable comments let's say from the CEO of CMHC. Do you have any sense or feeling or indication that that might allow you to pursue more aggressive growth in that channel given a favorable regulatory position? I think it's encouraging to see that public policymakers at the highest levels are thinking about reverse mortgages and putting them in a favorable context. I don't know that we would then suddenly translate that into faster growth. As we mentioned as we launched, the first thing is to make sure that there are a number of issues around this product, one of which there is a risk that it could be sold in a way that we wouldn't feel comfortable with. I think that's one of the things I'm encouraged about over the first few months, frankly, is we've seen the process we put in place to make sure that these are being used in the right use cases is actually panning out as far as I'm concerned. So, we'll wait and see on that. But it is encouraging. I think there is a really strong public purpose behind these types of mortgages. With an aging population, we've got lots of equity locked up in their homes, maybe not the same cash flow from pensions that they might have expected, but wanting to continue to live in their homes and their communities as they age, this product makes a lot of sense. So I'm encouraged by it. I think it probably has got tailwinds behind it for a number of reasons. But I don't think we're about to change our guidance on how fast it might grow. Okay, thank you. Your next question comes from the line of Graham Ryding with TD Securities. Please go ahead. Good morning. Morning, Graham. Just to follow up on that, have you provided any guidance as to what you think a reasonable target is for growing your reverse mortgage book this year, next year? No, we haven't yet. I think once we get a better beat into a couple of quarters in, we'll start to do that. Okay. I would promote this as kind of like this is a year to wait and see, and I wouldn't expect to get CAD 50 million this year in assets. Beyond that, it'll start to grow faster, yeah. Okay, fair enough. You're talking about market conditions, competition, B20 slowing the growth of your single-family business. Looking to sort of adjust your use of capital, if that's the case. Is there any appetite on your part, just given the market that we're in, we're highly indebted Canadians, rising rate environment. There seems to be some volatility in the GTA market, that's a key market for you, of just deliberately reigning in growth and being a little bit more stingy with how you're underwriting or the credit that you're willing to lend to. Is there any appetite to operate like that going forward? I think we're pretty comfortable with the credit metrics. As you know, always over the years, we adjust various loan to values, different things to reflect where we see the risk. I think we've always been prudent. We've never been that expansive either, and I don't know that we. Expansive or stingy, we just think that we're prudent. We face the market consistently, and I expect that we'll continue to do that. Okay. The allowance for credit loss, the reduction under IFRS 9, can you just walk us through that? Is that basically a reflection that you were fairly conservative under your previous provisioning, your pre-IFRS 9, and that's what caused the allowance to be released? I think that is absolutely right, Graham. I think as we develop more sophisticated risk models for our journey towards AIRB and for the implementation of IFRS 9, we always believe our models were conservative, but the extensive and more sophisticated modeling we have done for those programs confirmed it. If you looked at our allowances relative to our uninsured book prior to the implementation, they were running north of 30 basis points as compared to our average 10-year loss rate of four basis points, which again, reinforces the notion that we have been very conservative and hence the reduction in our allowances on January 1. By the way, this has been a major effort, a major lift from our team to actually do these models. It is many thousands of hours of analysis. We are pretty comfortable we have got it right. Got it. Shifting to the GTA market has seen some price declines over the last year. Is that factored in when we look at your overall loan to value on your portfolio, not on your originations, but on your overall portfolio. Has that price decline been factored in there? Does that get captured by an HPI index or whatnot? Yes, it has. The LTVs that we disclose reflect the most recent HPI numbers. Got it. My last question, the Wealthsimple partnership, is this a savings account on the Wealthsimple platform, or is this GICs as well? What sort of funding cost? How does that look relative to your other existing channels? Yeah, it is the savings account that is controlled by the underlying investor. So it is a corporate relationship, but it is underlying investor that makes the decision, the underlying individual user. The funding costs are higher than broker GICs but lower than our EQ Bank platform, so somewhere sort of halfway between those two. So we see these as kind of relationship accounts. These are relationship accounts. Okay, got it. This will be an on-demand savings account. It is an on-demand piece at this point. Got it. That's it for me. Thank you. Great. Thank you. Your next question comes from the line of Stephen Boland with GMP Securities. Please go ahead. Thanks. I just want to make sure I understand the guidance for Q2, and maybe you've answered this indirectly, but on the single family, you've guided to 40% increase quarter-over-quarter, or roughly, I think that's the number. Again, is that due to higher retention from your existing book, or is that factoring in a big wash of new business that's coming in? That's all new originations. That stat doesn't relate to retentions or renewals. That's simply new customers coming through the front door. Again, from what you said, winning that business back is just from pricing, or is it just from service or a combination? It's from a more proactive stance to the market, I would say. As I tried to describe earlier on, Okay we were very focused on making the changes to accommodate B20, and now our teams are much more active in placing the market. That origination performance, Steve, combined with the improvements we've seen in our customer retention, have led us to increase our view on portfolio growth for single family to the 4%-6% range, which is up a couple of percentage points from last quarter. Okay. Second question, just on the credit facility. I know it's a year away. Do you envision being able to get rid of that facility in total? Or do you believe that you're always going to have to have, maybe not CAD 2 billion, but CAD 1 billion or CAD 0.5 billion standby facility just with the change of the landscape with the view on demand deposits? Well, I have a view. My view is that we would stand alone without a standby line. But this is very much something where I want to take the feedback from the board, other people, other market participants' view, the views of, frankly, the people that provide the standby facility. I think in general, we should take the view that banks stand alone through their funding mechanisms and shouldn't be sitting there. I take the view the banks should be standing alone there with their other funding mechanisms and wouldn't have standby drawable credit facilities. But the experience of last year, certainly, we need to consider that before we make that decision, and that's going to be the decision we make over the next 12 months or so. Okay. Andrew, when you say that, how do you balance having It seems to me that you're in your, the words and also in the MD&A, that you believe that there is some excess capital. How do you talk about getting rid of a facility and balancing that with carrying excess capital? Are the two separate or do you look at them together? I really think of them as separate. Capital is your CET1 to fund your credit losses and other things. It's the capital you hold in reserve. You hope you never need it, but it's sitting there to provide that lifeboat in the event of a severe economic downturn. Funding is supported by the backstop facility, your ability to access deposits is essentially being funded by it, is what supports the backstop. I think as we advance our ability to gather deposits, then the need for the backstop becomes less evident. Okay. Thanks very much, guys. Thanks, Steve. Your next question comes from the line of Phil Hardie with Scotiabank. Please go ahead. Hey, good morning. Morning, Phil. Just one quick question. Most of my questions have been answered. But just looking at the shifting landscape with the impact in volumes and retention rates, can you just talk about maybe what the implications are on the broker side of the business and whether that's changing concentration of that broker business or impacts the volume incentives and commission structures? Yeah, I haven't seen much in the way of change there, frankly. We have the same programs that we had last year, and I think that broadly speaking, they pay the same. So, our programs are to provide more compensation for those brokers that are more loyal to us and provide us with more volumes. It's called the Crystalline program. It's been in place for a number of years, and works. We're always tinkering with it a little bit, but it's essentially the same program as we always had. Okay. Similar concentrations with the similar players and same volume incentive on loyalties? That's right. Okay. Great. That's it. Thank you. Again, if you'd like to ask a question today, that's star followed by the number one on your telephone keypad. Your next question comes from the line of Jaeme Gloyn with National Bank Financial. Please go ahead. Asked and answered. Thank you. Thanks, Jaeme. We have no further questions in the queue at this time. I would like to turn the call back over to Andrew Moor for closing remarks. Well, to conclude, we look forward to delivering our next quarterly report in August. We look forward to seeing you at the annual shareholders meeting next Tuesday, May 15th, at EQ Bank Tower in Midtown Toronto, starting at 10:00 A.M. Eastern. Thank you for listening. Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.