Earnings Call: Q4 2017

Mar 1, 2018

Good afternoon, ladies and gentlemen. I would like to welcome shareholders and analysts to Equitable's fourth quarter 2017 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 Q4 2017 MD&A and Q4 2017 earnings news release. This call is being recorded for replay purposes on March 1, 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, Sharon, and good afternoon, everybody, and welcome. I am joined by Tim Wilson, Chief Financial Officer of the bank. During today's call, we will provide our thoughts on 2018 and our expectations for continued growth in earnings. We begin with a recap of Equitable's record annual results and strong fourth quarter finish. Being able to describe 2017 performance as record or best ever is, in my view, remarkable considering market disruption last spring. Had you asked me in April if we would restore upward momentum in quarterly earnings this quickly or achieve record annual earnings, I would have said probably not, given the cost of the funding backstop facility and what appeared then to be the advent of prolonged funding market volatility. Equitable rose to the occasion, and with the steady hand of our board, great work by our employees, and the support of many business partners, the bank delivered for customers and shareholders while working to advance our position as Canada's challenger bank. With the record results we reported last night, Equitable's strong fundamentals, and our constructive outlook on 2018, we certainly feel optimistic about our future. For the past year, three developments stand out. First, the bank's conservative and responsive governance, combined with its institutional reputation for integrity, allowed us to maintain the full confidence of depositors and their advisors. In a strong show of trust, and even with a dip in late April, Canadians increased their savings in the bank by 14% during 2017, as deposits reached a record CAD 11 billion. Moreover, deposit growth was diversified as our various funding channels, and most importantly, EQ Bank attracted more business. EQ Bank, the most recent manifestation of our position as Canada's challenger bank, ended the year with deposits of CAD 1.6 billion, 53% higher than a year ago. EQ just celebrated its second anniversary, and with rapid deposit and customer growth, as well as ongoing innovations, continues to demonstrate why it was ranked one of the world's top digital bank platforms by Financial IT Magazine in 2017. Not to be missed is 14% growth in brokered term deposits, which reflects the vitality of the bank's relationships with deposit agents, investment dealers, and financial planners who recommend Equitable. High-quality asset growth and the way it was achieved is the year's second highlight. As you know, we tapped the brakes on lending activity in the spring, particularly in commercial, so that we could operate within our expected funding capacity. Even so, the bank set a new annual record for single-family originations and produced good results in commercial to drive mortgages under management up 11% to over CAD 23 billion. This growth was earned on service delivery, which is the heart and soul of this bank and a clear competitive differentiator. We look forward to adding to the quality of the customer and broker experience through a technology investment that I will talk about, along with our new equity release product later in the call. The broad support we received from all of the bank stakeholders and the banking community as a whole, and what that support meant for our financial performance, is the year's third highlight. When I say stakeholders, I'm certainly referring to mortgage brokers whose much valued and permanent presence at the front end of our business was once again a driving force in the bank's success. Engaging with the channels we do exclusively on the mortgage side makes us a better, more competitive business, and that certainly was the case in 2017. I'd like to think Equitable contributed to the success of our mortgage broker partners last year because I know they contributed to ours. As for the broader banking community, I must express my gratitude to the Big Six for rallying around Equitable last spring to quickly make the funding backstop facility available to us and on agreeable terms. They're competitors, but at the end of the day, we are members of the same fraternity, and last spring's developments proved without doubt that they have our back. Together with the support and confidence of our customers, Equitable created considerable value for our shareholders in 2017, even while incurring CAD 1.11 per share in costs to successfully navigate funding market events. Net income of CAD 160.6 million was up 16% from 2016, a rate that was well in line with our 10-year average annual growth of 18%. EPS was also at record levels, 11% above the prior year. As a reminder, the difference in net income and EPS growth rates primarily reflects the equity we issued in December 2016. You've heard me say that when it comes to value creation, ROE is our true north, and that we not only strive for high returns, we seek consistency in those returns. As for consistency, since our IPO 14 years ago, the bank has earned ROE between 15.5% and 19.9%. Even with the headwinds of 2017, Equitable remained a remarkably reliable value creator. While managing our cost is important for ROE, in our business model, it is absolutely critical to allocate and price capital properly for the risk we are bearing, and this discipline is embedded deeply in our DNA. Book value per share, a reflection of our earnings and our decision to retain the vast majority of them, grew 17% in 2017 for a 10-year average annual growth rate of 24%. Value creation was also made manifest in the 13% year-over-year increase in the bank's common share dividends in 2017. As you saw from last night's press release, we started 2018 with another increase, the fourth in just over a year and the 15th in the past decade. These consistent increases were recognized when we were added to the S&P/TSX Canadian Dividend Aristocrats Index in January. While growing dividends provides another great reason to be an owner, the best reason is that we continue to deploy the bulk of our earnings back into the bank, where they build our capital base and earn strong returns on it. As a final comment on 2017, I would say Equitable displayed a unique flair for being both disciplined and entrepreneurial, two characteristics that you should very much expect of Canada's challenger bank in the future. Now to fourth quarter performance. Net income was CAD 40.4 million. EPS was CAD 2.36, and ROE was 14.9%. While all measures were down from a year ago due to the cost of the liquidity measures, we did restore an upward trajectory in our earnings. Q4 EPS outpaced Q3 by 7% as assets continue to grow and the cost associated with liquidity measures taken earlier in the year declined. Tim will discuss these factors in more detail in his remarks. Total Q4 originations of CAD 1.7 billion were 23% lower on a year-over-year basis, which is reflective of recent competitive dynamics and regulatory changes that impacted our lower margin prime single-family business. Fourth quarter alternative single-family originations were CAD 850 million, 9% lower than last year. As you may recall, origination volumes in Q4 last year were driven by both share gains in the broker channel and by growth in the overall alternative market. In Q4 of 2017, single family also had strong share gains, but our sense is that the market itself shrank. Even so, single family alternative mortgage principal reached CAD 9.3 billion, up 19% from a year ago, with positive implications for earnings in 2018. Commercial lending originations were CAD 359 million in the fourth quarter, 5% lower than a year ago. Commercial lending mortgage principal grew 4% year over year to CAD 2.9 billion, mainly as a result of pulling in our horns in the second quarter. Based on the size and quality of the commercial pipeline and our intent to deploy more capital against the business, we do expect commercial originations and the portfolio to grow at higher rates in 2018. Prime single family fourth quarter originations were lower at CAD 71 million, reflecting regulatory changes in late 2016 and intense competition in the ensuing period. As a result of these factors, total prime originations for the year were CAD 470 million compared to CAD 2.1 billion a year ago. Prime mortgages under management was CAD 3.9 billion, the same as a year ago as we continue to see low attrition rates, which is reflective of the fact that the portfolio is still relatively young. As the portfolio matures, we expect attrition will gradually increase, but because margins are thin, there will not be a significant impact on the bank's overall profitability. Multi-unit residential originations were 76% higher in the fourth quarter and 44% higher for the full year as we took advantage of an increase in the bank's Canada Mortgage Bond capacity. The CAD 7.1 billion portfolio provides a solid and reliable stream of activity and earnings. While growing assets, we had another year of great credit performance. Once again, Equitable's net realized credit losses as a percentage of total loans were in the low single digits for the fourth consecutive year. Moving to credit risk, you will note the net impaired mortgage assets of CAD 22.5 million were down CAD 2.1 million from Q3 and CAD 14.3 million from a year ago. Most of the year-over-year improvement was in the alternative single family, and almost half of that was in Alberta. Equitable did a good job of protecting itself during the period of low oil prices, and recent economic data points to give us more confidence about the outlook for Alberta. The impaired mortgage position was also improved by discharge of two commercial loans in Q4. Net impaired mortgage assets represent just 0.12% of our total mortgage book at the end of Q4, down from 0.21% a year ago. This rate is lower than we would expect in the best of circumstances, and it would be unsurprising if the impaired loan balances grew over the next few years. Even while increasing our dividend at 14.8%, we have a strong CET1 ratio that provides a solid foundation for the bank's future growth. In fact, we are, in my view, carrying slightly more CET1 than I would like. During 2018, we will work to ensure that its use is being optimized for the benefit of the shareholders. Maintaining appropriate capital levels for banks is always a judgment, and our target levels might change over time. My view is that running with a CET1 ratio of around 13.5%, plus or minus a half point or so, is the right place for Equitable to be. I will return with thoughts on 2018, but first, Tim will provide his report. Thanks, Andrew, and good afternoon, everyone. Since Andrew provided a strategic review of the bank's annual performance, I will focus on the fourth quarter and a couple of the key drivers of our results. As you heard, fourth quarter earnings were above Q3 levels as a result of growth in our mortgage assets, as well as declining costs associated with the liquidity measures taken in Q2. In the third quarter, those costs were CAD 9.5 million; in the fourth quarter, they were CAD 7.1 million. On an EPS basis, our liquidity protection actions cost Equitable CAD 0.32 in Q4, a decrease of CAD 0.10 compared to CAD 0.42 in Q3. As the table in our slide deck shows, upfront and standby fees associated with the CAD 2 billion backstop facility were CAD 0.24 per share in Q4, which is the quarterly run rate we expect through Q2 2019, and amortized premiums for insuring CAD 892 million of residential mortgages, net of the associated funding benefits, were CAD 0.08 per share. Looking forward, the backstop funding facility will cost us a little more than CAD 5 million per quarter in 2018 and will be a 16-basis-point drag on NIM. As a partial offset, the Maple deal is CAD 0.08 per share accretive to Q4 earnings and CAD 0.41 accretive to 2017 results. We expect this contribution to decline in 2018, but to still be in the range of CAD 0.04 to CAD 0.06 on an after-tax per share basis each quarter. Looking at Q4 net interest income, it was an all-time quarterly record of CAD 79.7 million, up 2% from a year ago as 10% growth in average asset balances more than offset an 11-basis-point year-over-year NIM decline. The decrease in total NIM was driven by core lending as securitization financing was flat. NIM in core lending was 31 basis points lower than a year ago for a few reasons, the most significant being the cost of our liquidity actions, which accounted for 22 basis points of the year-over-year decline. Funding mix had an unfavorable impact on NIM. Although the late October redemption of our Series 10 Debentures created a slight offset in the quarter and will save us about CAD 1.5 million in annual interest going forward. Partially offsetting these factors was a 10-basis-point increase from higher spreads within both our single-family and our commercial lending portfolios. Those spreads widened mainly due to pricing changes that we introduced last May. For 2018, our outlook for net interest income is for more growth at year-over-year rates in the 8%-10% range due to continued growth of our assets. NIM will likely be under Q4 levels by a few basis points as funding costs rise and spreads on originations return to more normal levels. But NIMs will also be slightly up when compared to the full year 2017 picture and still at healthy levels overall. Our expectation on NIM has shifted slightly downwards from last quarter for two reasons. One, we expect securitization assets to now grow more quickly, which is a positive to earnings, but which dilutes the weighted average NIM. And two, our core lending expectations are down very marginally due to funding costs. 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 support of our challenger bank vision, led to year-over-year increases in non-interest expenses of 11% for the full year 2017, and also 11% for Q4. Pretty much the same drivers of expense growth were present in both annual and quarterly periods, including an increase in marketing expenses to promote EQ Bank, higher costs associated with FTE growth, and increases in regulatory, legal, and professional fees. Despite cost growth, our 36.8% efficiency ratio for 2017 was lower by a full percentage point than in 2016 as revenues grew more quickly than our expense base. In other words, costs were controlled well in the context of a growing business. For 2018, we expect total non-interest expenses to increase at year-over-year rates slightly higher than the growth rate of the overall business as we continue to invest in building our franchise, in customer service, and in our digital capabilities. As a result, we expect our efficiency ratio will be in the high 30% range, and that Equitable will remain Canada's most efficient Schedule I bank. As you saw from our press release, we continue to advance our AIRB initiative. While we will likely experience capital relief from recently announced provisions to the standardized approach for assessing risk, that will take effect in 2022. The bank remains committed to operationalizing AIRB by the end of 2020. Now back to Andrew. Thanks, Tim. Our key financial and operating metrics point to continued strength in the bank's fundamentals and the credit quality of our assets. As outlined in our MD&A, we expect to deliver value to shareholders into 2018 with continued growth in earnings, though that growth will be somewhat moderated by the cost of funding backstop facility. As a result, we expect ROE to be solid but below our long-term average of 17% or so. Thinking about our markets, we spent a fair amount of time on our last call talking about the potential effect of the new B-20 regulations. Although the changes came into force on January 1st, we still do not understand the full ramifications. It will take time to see how consumers and competitors react and to quantify the impact. Our expectation is that the size of the market addressed by banks, including Equitable, will shrink and the non-prudentially regulated sector will expand. Even so, we believe our alternative single-family portfolio will grow in 2018 because the renewals are unaffected by the B-20 changes and because the volume of originations would still be high relative to the size of the existing portfolio. If you want to dig deeper into this, please refer to our Q3 MD&A for an illustration of these dynamics. While we cannot control the market, we can control our reactions to it, which is to say that we will make a concerted effort to capture our share of the single-family opportunity by focusing on quality business and giving our customers and partners in the mortgage broker channel a great customer service experience. The foundation of service is having the best attitude and the right level of skill, and Equitable's team has both. As Canada's challenger bank, we also know the value of technology and have recently launched new digital functionality within single family to enhance our service offering. More specifically, we are now rolling out a 24/7 self-service technology platform that provides our residential customers with a new level of convenience. Customers are now able to log on through our website to monitor their accounts and conduct some transactions. A big step forward for us. That same technology will also be used by our internal teams to improve the efficiency and the quality of the service that they provide. Another part of the bank's strategy for managing through a slower single-family growth environment is to deploy capital into other businesses, including commercial. We have substantial commercial lending and servicing experience that we intend to harness to capture more business. We will also deploy capital into new businesses, and we will begin building Equitable's market penetration in the equity release or reverse mortgage space with our PATH Home Plan. As you know, we unveiled this product in major urban centers in Ontario, British Columbia and Alberta in January and are now rolling it out with our mortgage broker partners who have exclusive access to bring it to customers. This is an exciting development for the bank. Before creating our offering, we analyzed the equity release market thoroughly and chose to act for a few reasons. First, we estimate the current addressable market is approximately CAD 12 billion, while current outstandings are only CAD 2.7 billion. That is a significant opportunity, and because many Canadians will hit the demographic sweet spot over the next decade to benefit from PATH Home Plan, there is likely to be sustained growth as more Canadians unlock home equity to fund their retirement without downsizing, paying tax, or incurring monthly charges. Second, the competitive environment in the equity release space is relatively favorable, meaning it fits neatly within our desire to enter markets that are underserved and in which we can add value for consumers. Other than Equitable, there is only one other competitor in Canada, a different market structure that we see in other countries that have many competitors. Third, the PATH Home Plan complements our core lending business, capitalizing on our existing core competencies in underwriting and risk management, presents us with another option to engage with our mortgage broker partners, and should generate attractive returns for shareholders over the long run while further diversifying our book. On the flip side, the product presents some new types of risks for us. We feel we are well equipped to manage them. We are pleased with market receptivity to date, and from what I am hearing, mortgage brokers like the fact that PATH adds to their growth opportunities and is backed by an institution that they trust. Over time, our Challenger Bank game plan is to add more differentiated products like these to our range of services. Equitable has recently made great progress in building its standing as Canada's Challenger Bank with the EQ Bank and now PATH. Since we are the Canadian Challenger Bank, it is probably appropriate that we use Gretzky's aphorism, that we want to be where the puck is going and not where it has been as a guiding principle. Clearly, the banking world is being shaped by the forces of a digital economy, and EQ Bank is in a great position to provide our customers in that world. As the population is becoming increasingly older, the PATH product fits into this changing demographic cohort, which many of us find ourselves in, unfortunately. As soon as next week, EQ Bank will launch GICs to complement our Savings Plus product. We have created a strong digital platform and added many innovative features and functionality to it over the past two years. We believe EQ Bank is in a great place to expand its position as a leading provider of banking services in Canada. To summarize, we have an ambitious agenda for 2018 that we will attack in a disciplined yet entrepreneurial fashion. We have entered the year with a strong capital position, high-quality assets, well-diversified funding sources, an efficient challenger bank business model, and a clear-eyed view of the risks and opportunities ahead. We acknowledge, though, that there is little certainty in the market, so we will need to remain nimble and adapt to any changes in our environment, and I am sure there will be many. As always, we will do our best to turn our many advantages into more performance for shareholders and customers. That concludes our prepared remarks, and I would like to invite your questions. Sharon, can you please open the line to our analysts that have questions? If you would like to ask a question at this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question comes from Marco Guglielmo from CIBC. Your line is open. Good afternoon. Marco, your line is open. My first question is on B-20. Two months into the new rule changes, can you tell us what impacts that you're seeing as a result of the new rules? More specifically, as it pertains to your loan growth guidance for 2018, which was left unchanged last quarter. Should we take this to mean that based on the first two months' impact, your outlook on volumes has not changed, and that you're confident in achieving the guidance that was set forth? I'd say our outlook hasn't changed, and obviously we ran the numbers. Having said that, Marco, I think the outlook is still a little early to be confident about that. I would say two months of data doesn't yet demonstrate that the outlook we provided at the end of last quarter is indeed accurate. What we've seen, I think, is the credit unions stepping into the market in many provinces where they're not governed by the new B-20. I think that they will quickly fill their demand for loans, so that another dynamic could come to play as the spring market gets busier where they're not actually able to handle the capacity thrown at them. I think different institutions move at different times. The way that OSFI rolled out B-20 was to ask us to apply the new standards relatively quickly. I think we were probably a little quicker than perhaps one or two of our competitors in December in applying the new stress tests, and yet you could close them in January and February effectively, or even today if you qualified in December. There are loans still closing today under the old stress test. It's a bit of a noisy picture from a data perspective. Our overall guidance of increasing the asset size by about 4% by the end of this year remains unchanged given all those factors. I would say it continues to be unusually uncertain, and I think we'll have a much better view at the end of this current quarter. All right. Just on some of the possible offsets. You mentioned in the past that there's potential for an influx of prime clients into the Alt-A channel as a result of B-20. Have you seen any of that thus far? I've seen little evidence of that at this point. I think what we have seen, and it's more in news reports and so on, is some changes in policy amongst the D-SIBs that I would expect may cause some loans to flow out. I can't say that I've seen enough to be confident in that position at all. I think there was a little bit in the prime side of the business. My sense was there was a little bit of pull-through with loans getting approved in December to be approved under the old rules. Again, I'm not sure they're yet showing up at the levels you'd expect in February. I don't think we're really completely working under the new rules yet. All right. My next question pertains to your capital position. With CET1 at 14.8%, you mentioned a 13.5% target, so that's about 130 basis points of excess capital. What do you see as your capital deployment priorities in the near term? Are you thinking more organic investments or perhaps an NCIB or maybe even acquisitions? I think any of those three could be possibilities over time. I wouldn't expect to go back to the board with any proposals around NCIB over the next six months or so. If we're not seeing the organic growth and once we get more certainty around the impact of B-20, then that's certainly something that could be considered. What we're talking about, by the way, in real dollars, we're talking about CAD 90 million in real dollars of potentially over our target of 13 and a half. So it's a reasonably meaningful amount of money in the scheme of the bank's overall position. As I mentioned as well, as part of our challenger bank agenda, there are certain lines of business we're looking to get into, and it's not impossible that an acquisition could be part of that picture, although we've got nothing that's definitive enough to be putting on the table and saying it will happen for sure. Do you care to elaborate on what type of businesses you would be interested in getting into? No, not at this point, but generally, secured lending businesses and diversifying that platform are the various areas we are looking at, for sure. Excellent. Well, thank you for your time. Thanks, Marco. Your next question comes from Graham Ryding from TD Securities. Your line is open. Maybe I could just start with EQ Bank. I was going to ask you about this, but just timeline and ideas around transitioning EQ Bank, the digital platform, into some revenue-generating opportunities. What sort of timeline is realistic for anything that you're thinking about? I sort of already see it as a revenue-generating opportunity. Unfortunately, the way a bank works, it needs two sides to the balance sheet, the liability side and the asset side. It certainly gives much more stability on the liability and funding side. I think from a perspective of when you could see this as being a lending platform, I think we're probably pushing it out as far as 2021. There's a lot to do in terms of turning it into a really capable savings bank that's going to be generally attractive to everybody. We don't yet offer joint accounts. We don't offer registered accounts in the platform. These are obvious things we need to do. As I mentioned in my remarks, we're launching GICs early next week. We also have another evolution of the GIC offering that will be coming later in the year so that the team is extremely busy delivering new functionality. In fact, we're delivering new functionality to platform about once every two weeks right now. So it's really on a good cadence of delivery. But our focus is really making this an extraordinarily good kind of savings platform in a digital way that's really quite differentiated. Okay, great. Talking about sort of an uncertain outlook next year, I totally appreciate that your guidance is going to potentially be revised if you see things evolve. But can you give us some idea of what sort of range you're thinking now that what could be possible next year in terms of your Alt-A single-family business? Could we potentially see volumes down over 25% next year? Or what do you think is sort of a reasonable range? That would seem extremely negative to me. Again, as you say, it's uncertain. But I would be very surprised if we saw something like that. We're sort of thinking things down, but single digits to sort of low double digits is a likely outcome. That's helpful. And then my last question- I put a caveat around that. I think we'll have much more to say about that at the end of the Q1 results, because I think there's a lot of assumptions around that. Sure. That's fair. My last question would just be competition in the market, both on the deposit side and the mortgage side. How are you feeling about given B-20 and a potentially softening market, we've got rising rates, and your ability to pass that through into higher mortgage rates. How are you feeling about that dynamic? Well, I feel reasonably good about it. It's obviously the history has been that the markets behave pretty rationally as the cost of funding goes up, then the participants in the market raise the rates to reflect those rates going up. As you're well aware, there's one major competitor that is in a bit of a rebuild mode right now. So how that affects us over the next 6 months may be a little more challenging, although presumably once we've got to a more stable position, the pricing reflects where capital should be allocated and the right kind of pricing for that. On the deposit side, frankly, things have been very good for the last few months. If you actually think about not so much the base rate on the GICs, but if you think about it as a spread over swaps or over governments, which is really the right way to think about it in terms of the spread over the rates market itself. Spread's been pretty tight. So I would say that our treasurer would say, I think that funding has been cheaper over the last 6 weeks than normal, and it's still cheap-ish, and plenty of liquidity available in the deposit market. That's it for me. Thank you. Thanks, Graham. Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Jaeme Gloyn from National Bank Financial. Your line is open. Yes. Hi, good afternoon. Hi, Jaeme. My first question, Andrew, in your prepared remarks, you commented that a CET1 ratio of 13.5%, plus or minus 5% is the right place to be. My question is more around the total capital target levels and their impact on the CET1 level or target CET1 level. I ask this because of two things. One, the recent debenture redemption and decision to not refinance, at least at this time. I would estimate that's reduced total capital by about 80 to 100 basis points. The second point, the current level of the total capital ratio at 16.3% is at the lowest point in the last two years. So how does that impact where CET1 ratio is and should be? Is that a restrictive factor on how much actual excess capital you have today? I would certainly say it's not a binding constraint. With the model that we have, we definitely put CET1 as a much more important indicator of capital. It's the purest form of loss-absorbing capital than total capital. I think the reason why we took the debentures out was exactly that. We don't see total capital as being such an important ratio for us anymore. I wouldn't have said that five years ago, but the way regulations have changed over the years and the build up in our CET1 is we really think about CET1 as the most important capital ratio. Again, don't forget that that's equity. That's common Tier 1 equity with goodwill stripped out of it, everything that you could. So it's really real loss-absorbing capital, and it's something that depositors should take huge comfort in having that as a good, strong ratio. Tim, do you want to add some comments on that because you're more engaged with the whole capital? Yeah. I'd say that's exactly right. Our focus is on CET1. To the extent we need additional capital, or to the extent we focus on other ratios, we'd also look at the leverage ratio. So our unadjusted assets relative to our Tier 1 capital. We think about managing that in two respects. One, through preferred share issuance, if we needed to beef up that ratio at all. Or more likely, through some sort of asset derecognition transaction as we've executed in the past. Andrew's right. Our focus is much less on Tier 2 capital than it was in the past. I think, the general comment that I made about the degree to which we've got excess common equity is true under pretty much any circumstance. That's right. Would it require us to raise other forms of cheaper capital to distribute that capital out? Maybe, but I think it's a pretty good indication of how we think about things. Right. Okay. We should see total capital move in line with CET1 capital, going forward, is the conclusion there. Yes. That's right. Yep. We would be comfortable bringing total capital down, for sure. Yep. Okay. Thank you. Second question is just around, I think it was a comment in response to one of the questions around Q4 in adopting B-20 type underwriting standards early in December, and that was part of the rationale for part of the reason why single-family uninsured mortgages were down 9% in this quarter, year over year. I am just wondering, what is the rationale to adopt that early, especially given some of the concerns around, is it too harsh on a mortgage rate stress test? There is obviously some comments that were against or negative with respect to the B-20. Why adopt them early and take that hit today when it is just a month's worth of originations? Just to be clear, I was not saying it impacted Q4. I was not saying that it impacted Q4 as originations. It would have impacted the originations we have seen in January and February because the loans that we would have stressed under the new rules would have closed in this current year. The point is really we are just meeting the. Just marching to the beat of the regulator's drum. The regulator said you had to be in by December 31st, but if you were capable of putting it in before then, the expectation was that you would. Frankly, it was a fairly short timeline, as you are aware, and there were some system fixes that needed to get done. Once we had those system fixes in place, clearly our approach is to meet regulatory expectations. It was not as though you get to choose when you put it in place. You do the right thing against a principles-based regulator who gives you those principles to work within, and then you follow. Okay. Just to be clear then, your comment was more that your sense of timing around Equitable's adoption versus other players in the alternative space would have been a little bit more rapid. Is that a fair characterization of what you are saying? Does that also mean that we should see maybe a little bit more of an impact on Equitable in Q1 than other lenders? Yeah. I don't know if that's I'm not setting that expectation, for sure. But I think in terms of the complexity of trying to understand from what happened in January and February of this year, there are a number of factors, and that's just one of them to sort of throw in the pile, and we'll never really be able to figure out what it really meant. I think, as I said, there's a bunch of things. How much capacity does the credit union system have? And a number of variables that we'll need to consider, which we'll be able to look back at in June or August and have more confidence about what happened. But I still think the data is pretty sparse for the January, February period. Right. Okay. Thank you. Once again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Stephen Boland from GMP Securities. Your line is open. Thanks. Andrew, I guess Steve, you've got very exotic in your name. I got very worldly in the last 20 minutes. Good. I guess I sort of belabor this point on the B-20, but I guess, can you give some granularity about, I understand what you did in December and maybe in November in terms of your commitments, but in terms of what you're seeing in January and February, I know the data is young, but are you seeing the renewal rates that you thought you would see out of the customers that you would see? Or are those customers still leaving? Are you still getting the application levels that you would've had that you expected under your guidance? Is it possible to get a little more granularity on that? Yeah. Certainly renewal rates are up year-over-year, which is what we expected. Again, early days, but sort of confident around that. Application volumes have been very strong in the last couple of weeks. I have to caveat that with that is our brokers sending us deals that we won't ultimately end up closing. I'm just being a bit cautious because some of the math may change in terms of the look-to-book ratio. That is the amount that we actually write compared to the volumes that we see coming through the front end. The deals that you're not closing on, is that based on the stress test, or is that based on other factors? Or is it a combination? Well, the stress test is only one thing. Don't forget that we had prohibitions on second mortgages taking us over 85% LTV. There are other variables around non-conforming loans where property values have been rising recently. I'd say the stress test is the big one, and it appears to me, so if forced to make a judgment on it right now, it appears to me that the brokers are quite knowledgeable about the new stress test, and that this shouldn't impact look-to-book in the sense that they know what they're submitting and know whether it's going to fit our rules. So I'm feeling pretty good about it, but I'll certainly feel more comfortable six weeks or a couple of months from now when we'll actually have seen those applications that are coming in this week turning into closed transactions. Okay. The second question, and maybe this again, going a little bit longer term, that you mentioned in your remarks, asset growth that you expect to still rise slightly this year under single digits. Originations may be down, and part of that is because your roll-off or the book is pretty young or immature, whatever terminology you want to use. But I guess we're at a point in 2019, 2020, I guess at some point that may reverse and your assets start declining. Notwithstanding a capital decline in your ratios, what is your long-term or medium-term ROE goal here? Is 17 achievable anymore under these new rules? Or is 15 to 14 to 13 more realistic for the next several years until this gets sorted out? I think the ROE is not driven by growth, right? Those two things are disconnected. As I mentioned, you have to think about how much capital you're deploying in the business over time. But I think if we price loans properly, even if we're pricing slightly fewer of them, those ROEs should be achievable. The question is, can you continue to grow the EPS and keep those ROEs moving in lockstep over that period? Up until over the last few years, we've been retaining the vast bulk of our earnings, reinvesting in the business, and getting 17% ROE on that incremental capital that we've reinvested. We're not going to turn around and retain the same amount of capital and then put it in to invest in loans that have got a lower ROE return. So that's the discipline we have to have as a management team. We have been certainly preparing for the time that the Alt-A market would not grow at the same speed as it has over the last few years. Do not forget, last year, we grew the portfolio, the single-family alternative portfolio by almost 20%. It has been a strong driver of growth, but things like the equity release product and so on provide other avenues to growth over time, and that is what we continue to explore while remaining somewhat optimistic, frankly, that the alternative market will be a good market that can be a big driver of value for shareholders over the next few years. Okay. Thanks, Adrian. Thanks, Steve. Once again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from Jaeme Gloyn from National Bank Financial. Your line is open. Yeah, thank you. Just one quick follow-up on the competitive side of the conversation. Graham's question, I think, was around deposits, but I was just wondering if you can give us a little bit more color around what you're seeing on the asset side, so in particular with single-family mortgages, and maybe a quick comment about commercial mortgages as well, what you're seeing on the competitive side for gross mortgage rates that you're able to obtain in both of those businesses today versus let's say, your average over the last several quarters. We haven't really been changing our rates in the single-family side, so the spreads have narrowed a little bit with the slightly increased funding costs. But the spreads were unusually high for the last six months, six to eight months, I would say. So I think our spreads are actually still slightly wider than they were at this time last year in the single-family business on new originations. So it feels like a pretty decent kind of competitive framework. The commercial business is very busy, and the rates that we're able to get them at the market rates that we're getting there look pretty attractive to us. Slightly wider than we would have seen, again, this time last year. So a nice way to deploy shareholders' capital. Okay. Thank you. Thanks, Jaeme. At this time, we have no further questions. I will turn the call over to Mr. Moor. Well, thanks, Sharon. To conclude, we look forward to delivering our next quarterly report in May and to seeing you at our annual shareholders' meeting, which will be held on the 15th of May at Equitable Bank Tower in Midtown Toronto. Thank you for attending our call this afternoon. This concludes today's conference call. You may now disconnect.