Earnings Call: Q4 2016

Feb 17, 2017

Good morning, ladies and gentlemen. I'd like to welcome shareholders and analysts to Equitable's fourth quarter 2016 conference call. Later, we will conduct a Q&A with participating analysts. We would like to remind you that certain forward-looking statements may be made on this call, including statements regarding possible future business and growth prospects. You are cautioned that such forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Many factors could cause actual results or performance to be different from those 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. This call is being recorded for replay purposes. It's now my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Bank. Please go ahead, Mr. Moor. Thank you, Ashley, and good morning, everyone, and welcome to our call. I'm joined by Tim Wilson, Chief Financial Officer of the bank. During today's call, we'll provide our thoughts on 2017 and the way forward. We'll begin with a recap of Equitable's record annual results and strong fourth quarter finish to the year. As a reminder, our slide deck at eqbank.ca that accompanies our remarks is a valuable reference tool that I encourage you to review as part of your analysis, with the MD&A being the definitive source of information. 2016 was a transformative year for Equitable. Four highlights stand out. First, we continue to differentiate the bank on superior service delivery in our lending businesses. While maintaining our rigorous underwriting and risk management standards, we built our reputation with mortgage brokers across the country and gained market share. Mortgages under management were up 26% to CAD 21 billion on record single-family originations, and the best showing in our commercial business in five years. Second, we introduced our EQ Bank digital platform, positioning Equitable to innovatively answer the needs of a cashless society. Some of our customers tell us that they already consider EQ Canada's leading digital bank based on value, features, and functionality. That means a lot to us, as does the fact in just over 11 months, EQ has become an important funding channel. The EQ Bank Savings Plus account attracted CAD 1.1 billion of deposits, adding 27,000 new customers to Equitable. Having just launched some new digital bank features, we look to build on our initial success as we'll discuss later in the call. Third, we retained our entrepreneurial culture even as we became a bigger organization with more expertise. This is illustrated in a number of ways, but perhaps the best is our October deal to secure an interest of CAD 3 billion of outstanding NHA MBS pools originally issued by Maple Bank. This transaction demonstrated the bank's ability to quickly draw on our finance, capital markets, legal, compliance, mortgage underwriting, and risk assessment resources to thoroughly evaluate, bid, execute, and close a complicated transaction that added CAD 0.07 to EPS in 2016 and will continue to be accretive through 2020. Fourth, we remained a performance leader amongst Canada's banks on all key value creation metrics. Even though we invested significantly to develop our digital platform and our prime business at a cost of CAD 0.82 per share, we grew net income 10% to a record CAD 138 million, delivered ROE of 16.9%, and funded two more common share dividend increases. These results attest to the competitiveness of Equitable's business model, attention to every detail that makes for a successful customer experience, and the consistency of our value creation process. By consistency, we're proud to note that Equitable's average ROE of 17.8% over the past five years has far outpaced the average of Canada's Big Six banks of 15.6% over the same period. The bank's ROE has been between 16.5% and 18.7% over the last 10 years. Equitable's EPS has grown every year for the past decade, and by 17% compounded annually over the past five years. Equitable's book value has grown every year for the past decade, and by 17% compounded annually over the past five years. Equitable's common share dividend has risen 11 times in seven years, including twice in 2016 and once already in 2017, as you will note from last night's press release. While delivering these financial results, we've been bearing the heavy expense of new initiatives and brand-building activities that surely build the value of the bank's franchise for the longer term. Inclusive of common share dividend payments, our five-year total shareholder return was 160% compared to the S&P/TSX Capped Financials Index return of 101%. We hear a lot about change coming in the banking industry, and I think these very positive outcomes demonstrate that Equitable, as a pure branchless and increasingly digital bank, is clearly well-positioned to grow as change comes to the industry, and Equitable's focus on service delivery without bricks-and-mortar branches becomes a clearer advantage. We're using technology to rethink how Canadians want to bank, and with our Savings Plus account, redefining the role of the everyday bank account and eliminating the artificial distinction between checking and savings accounts to give Canadians a single all-digital solution to pay bills, transfer money, and grow their savings faster. As those of you who attended our recent Investor Day know, our digital vision is just starting to unfold. Over the next few years, by building on our competence in digital banking, continue to broaden our services in the mortgage broker community, and investing with the fintech community, we are intent on cementing our leadership position as Canada's challenger bank. The Equitable team has done a remarkable job this past year in bringing the bank another step closer to realizing our vision of leadership while generating consistently great results for shareholders, savers, borrowers, and our partners. My sincere thanks to all Equitable employees for their dedication, outstanding productivity, and enthusiasm in embracing change and doing the hard work required to execute on an ambitious plan, and excellence in day-to-day service. Now let's look at the financial performance. In the fourth quarter, Equitable finished strongly with net income of CAD 41.7 million, up 33% from the fourth quarter of 2015, and diluted EPS of CAD 2.56. Both earnings metrics were quarterly records and led to ROE of 19.3%, well above our bank's typical expectations. The bank's core performance was driven by growth in our mortgage book. Record mortgage originations of CAD 2.2 billion in the fourth quarter seemed to us to be a sure sign that our strategies and plans are working as intended. This is the third consecutive quarter that originations surpassed CAD 2 billion. Origination growth of 25% year-over-year reflected positive results in every one of our lending businesses. The most important contributor to our earnings was single-family alternative lending. Fourth quarter originations were CAD 930 million, also 29% above last year. This reflected market share gains in the broker channel that we earned over the past 12 months as a result of our outstanding service quality. Share gains were supplemented by growth in the overall alternative market. Single-family alternative mortgage principal ended the quarter at CAD 7.9 billion, up 22% from a year ago, with positive implications for earnings in 2017. I want to take a moment to stress that we achieved this growth without sacrificing quality. We have maintained our rigorous approach to underwriting. We will not overreach for growth. Credit management is paramount to the bank and is critical to the achievement of our longer-term goals. For the third consecutive quarter since refining its approach to the market, commercial lending operations posted strong performance. Commercial fourth-quarter originations grew by 46% to CAD 378 million, its most productive period in five years. We have a very experienced team in commercial driving these results, and through a focus on service, they continue to increase the size and quality of their deal flow pipeline. As a result of recent growth, commercial lending mortgage principal stood at CAD 2.8 billion, 27% ahead of last year, and up about CAD 170 million from Q3. Commercial balance growth has been helped by retention, which has been high in recent quarters and has surprised us on the upside. We do expect attrition to climb a bit as we progress through 2017. Moving on to prime single family, fourth-quarter originations were CAD 652 million, up 33% from a year ago, bringing total prime originations for the year to CAD 2.1 billion and prime mortgages under management to CAD 3.9 billion. Internally generated prime originations were CAD 125 million in the fourth quarter or 16% above last year. We've made good progress. In keeping with our goal of developing a track record as a consistent dividend grower, our board increased our common share dividend again yesterday, this time by 4.5%, meaning that the dividend to be paid on April 6th will be 15% ahead of the dividend declared by our board in February last year. While paying an increased dividend of 14%, we believe that we have a strong CET1 ratio that provides a solid foundation for the bank's future growth. Our capital position was assisted by a CAD 50 million equity investment made in December by OMERS. This is the first call we've had since completing the equity raise, and we thought a bit of color on our thinking might be helpful. Towards the end of last year, as part of our annual strategic planning process, we assessed the richness of our opportunities. We concluded there was a compelling business case to be made for additional equity. Following this assessment, we took the decision to complete a private placement with a highly regarded pension manager, a move that allows us to pursue more growth and value creation without sacrificing our always strong capital ratios. We're always keenly aware that new equity is dilutive to existing shareholders. We would not have completed this offering without being confident in the bank's potential for ongoing growth. Maintaining appropriate capital levels for banks is always a judgment and might change over time. Our own view is that running with a CET1 ratio of about 13.5%, plus or minus a percent or so, is the right place for Equitable to be. Moving on to credit risk. You will note that net impaired mortgage assets at CAD 36.8 million were up by almost CAD 5 million from last quarter. This increase was in part a result of impaired formations in Alberta and Saskatchewan. At those levels, they are still only at 0.21% of our total mortgage book, down a basis point from a year ago. Our allowance for credit losses, which is the amount reserved on our balance sheet to absorb credit losses, represented 19 basis points of our total loan assets. This is much higher than the bank's average loss rate experience of four basis points over the past 10 years. All things considered, we remain well reserved. Provision for credit losses that you see on our income statement, which represent the net additions to that allowance in the current period, was CAD 900,000 in the fourth quarter or just two basis points to average mortgage principal. This was down from a year ago and from Q3 and in line with the bank's long-term norms and well below the industry average. Looking at the West for a moment, our Alberta and Saskatchewan portfolios have performed better than we had expected to date in the face of energy price declines. That said, impaired loans did trend higher in the fourth quarter in these markets to CAD 14.6 million from CAD 11.6 million in the September quarter. However, totals of delinquencies in the fourth quarter, which includes early arrears, remain small in the context of our overall business and are down from Q1. Although oil prices and economic conditions appear to be stabilizing, we expect arrears rates and impaired loans in these provinces to rise in 2017, but continue to expect that losses, if any, would be manageable and certainly less than we might have expected two years ago as energy prices drop dramatically. Overall, for the bank as a whole, we expect our arrears rates and credit loss provisions to be low in 2017, assuming that Canadian economic conditions stay within the broad range of market expectations. I'll return with thoughts on 2017 in a few minutes, but first, Tim will provide his report. Thank you, Andrew, and good morning, everyone. As you've now received an update on the bank's annual results and long-term track record, I'll focus on a few specific aspects of our Q4 financials. As Andrew said, the fundamentals of our business continued to be strong. Our performance was really a story about the sustained growth of our mortgage assets. That growth exceeded expectations, the markets and our own, by several hundred million dollars. Also contributing to Q4 performance was the Maple deal that we closed in the quarter. It had a CAD 0.07 per share positive impact on earnings. We had expected accretion of between CAD 0.06 and CAD 0.08 per share, so it came in at the midpoint of that range. We also recorded CAD 1.3 million of gains related to some defaulted insured mortgages that we acquired from the liquidators after the Maple deal closed and referenced this as an item of note in the MD&A. Continuing on Maple, now that we have better data about how these mortgage pools actually perform, we believe that income for 2017 will be closer to the top end of our original range, which was CAD 0.25-CAD 0.30. We also expect a few hundred thousand dollars of gains on some more defaulted mortgages that we have acquired and which are insured by CMHC. The fourth quarter got an assist from two other factors, unusually strong prepayment income and derivative gains, which together contributed CAD 0.10 to our EPS. These items don't necessarily repeat each quarter and are therefore not ones we count on to drive results, but we'll take them nonetheless. Even after removing these items, fourth quarter performance was strong, and net interest income, it was an all-time quarterly record of CAD 78 million, up 23% from a year ago on growth in average asset balances and stable margins. We had indicated that margins would be around 1.64% in the quarter, consistent with Q3, and they came in six basis points higher, a real positive for earnings. This increase was a function of a few different factors, including prepayment income in our securitization financing business, growth of the high-margin commercial portfolio, favorable pricing in the GIC market, and the benefits of interest rate reductions on our EQ Bank and brokered high interest savings accounts. Looking to 2017, our outlook for net interest income is for more growth, at year-over-year rates in the mid to high teens on continued similar growth rates in our assets. I'd now like to move to our margin outlook, and will use Q4, our most recent performance, as my reference point. The various drivers of that margin outlook are itemized in our MD&A, along with our key assumptions, but I will touch on a few of them now. Looking at our expectations for the various portfolios, we anticipate that 2017 core lending margins could be up to five basis points lower than in Q4 2016, even though margins within single family and commercial should be relatively consistent with Q4. This decrease is the effect of a portfolio mix shift towards lower spread but higher ROE single family assets. On securitization financing NIM, we anticipate that it will also decrease slightly, mainly due to the unusually high level of prepayment income that we recorded in Q4. Prepayment income aside, margins should be relatively stable. Margins in Prime will be highly dependent on the market's reaction to regulatory changes, however, so we may need to revise our thinking there as we gain perspective in the coming months. Moving on, current growth in the business, as well as investments in support of our key business strategies, led to an increase in Q4 non-interest expenses compared with last year. This increase was planned, and it was designed to create long-term value for our shareholders. Fourth quarter non-interest expenses, excluding the impact of strategic investments, increased by 17%, or CAD 3.7 million year over year. FTE was again the primary driver, as our headcount increased by 15% in order to support high levels of service and risk management. Similarly, FTE and cost grew in line with one another quarter over quarter, with both up 3%. Non-interest expenses to support strategic initiatives amounted to CAD 4 million, 69% above last year's level. These are important investments that will help to drive future shareholder value and brought total investments in our future to CAD 17 million for 2016 as a whole. Due to these investments, our efficiency ratio was higher in 2016 than in past years, 37.8%. Although as expected, it did decline throughout the year. It dropped to 33.9% in the fourth quarter, but that was a function of the denominator as much as it was good cost management. As noted earlier, we had some revenue tailwinds in Q4 that served to reduce our efficiency ratio below expected levels. Looking forward, we expect total non-interest expenses to continue increasing at year-over-year rate consistent with the growth rate of the bank's assets. We expect our efficiency ratio will remain just above the mid-30% level in 2017, a rate that would once again qualify Equitable as Canada's most efficient Schedule I bank, a title we have held for many years without interruption. Finally, and as Andrew said, the recent equity investment by OMERS increased our capital base and will allow us to pursue the best opportunities available in our lending business. On a related note, and you will likely already have this baked into your forecast, please remember that the equity issued, 809,000 shares and CAD 50 million in dollar terms, will really only begin to affect our EPS and our ROE starting in Q1. The weighted average impact of the issuance on Q4 was negligible, given that the transaction closed on December 23rd. With that, now back to Andrew. Thanks, Tim. We look to make 2017 another year of great performance for our shareholders through the execution of our strategies and value creation model. There is no question that recent regulatory moves, which we discussed in previous forums in detail, including our third quarter call, will have an impact on the single-family mortgage market. The degree of that impact is still an open question. While there are early signs of softening activity levels, I think we need to wait for the spring market to unfold before we have a really good sense of that effect. At this point, we aren't in a position to confidently say how much change will happen with consumer and competitor behaviors. What we do know is that prime insured single family represents less than 2% of our overall earnings. So any decline in this market will not have a noticeable impact on our 2017 earnings. Also on the regulatory front, you are likely aware that the government has circulated a proposal for lender risk sharing on insured mortgages. While the details are still being worked out, we do not believe that any version of this proposal is needed in the Canadian market and could have significant unintended consequences on competition and access to housing. We are actively engaged with industry groups and regulators to get across this perspective and know that it is shared by many. We'll have more to share on this development as we move through the year. In this environment, consistently delivering shareholder value means realizing our vision of being Canada's leading branchless bank. That involves additional investments and further development of our digital capabilities and solutions. In that light, I am pleased to report that we have just launched some new EQ Bank features to add more value and convenience for our customers, and in so doing, attract more deposits. EQ-to-EQ transfer is new functionality that allows money to be moved instantly between EQ Bank Savings Plus accounts. So if you and your daughter both have accounts with us and you want her to have funds to buy some textbooks say, you simply log on and do an EQ-to-EQ transfer. Unlike other forms of money transfer, ours is almost instant, free, does not use email, so it is more secure without burdening the receiver with password requirements each time it is used, and there is no hold on the deposit. It is straightforward and almost frictionless. We believe this functionality will encourage more Canadians to open EQ Bank Savings Plus accounts, because let us face it, for most of us, the transfer of funds between friends and family is an almost weekly occurrence. And why should Canadians pay extra for that convenience? In addition, because we respect the fact that many Canadians work with more than one bank and hold several different accounts, we make it possible for customers to easily link their EQ Bank to up to 10 different accounts versus just three for the other well-known digital bank in Canada. We have also enabled electronic pre-authorized deposits and payments, reasoning that for most of us, there is no better way to save than to have your paycheck deposited directly to your EQ Bank account, start collecting interest, and then move your money from there. Being able to set up automatic bill payments to add to the bill payment functionality that already existed adds additional convenience for our customers and value. At other banks, this capability is typically only offered from a non-interest-bearing checking account, while with EQ Bank, our customers earn interest every moment until the money is withdrawn. Because our core banking platform was purposely built for a digital world, these new features were relatively easy to add from a technology perspective. But our team invested time and effort to ensure that we had the best customer experience and the most elegant user flow possible. These additions are part of our strategy of diversifying our sources of deposits while offering different choices for the large and growing segment of Canadians who know intuitively there are better ways to bank and are trusting Equitable to deliver that to them. Over time, in fact, again, later this year, we expect to add more convenience and additional value to our EQ Bank offerings, and in the process, continue to further our standing as Canada's challenger bank. This year, our goal is more qualitative than quantitative. We want to create the services that allow EQ Bank customers to choose Equitable for the vast majority of their day-to-day transactions. Engaged customers that think of EQ as a key provider of financial services will, of course, help build the bank's franchise value. We are also determined to grow our lending businesses by using service to create stronger and deeper relationships with both our distribution partners and borrowers. At times like these, when regulations are changing the home buying calculus for many Canadians, the support and advice that Equitable provides is more important than ever. We always expect competition in our businesses, and I'm sure 2017 will be no different. So maintaining our customer service edge and making sure our products are competitive and properly priced will be important again this year. To summarize, this was a transformative year in our quest to cement our position as Canada's challenger bank. The successful launch of our digital platform positions Equitable well for the evolution of banking in a cashless society and creates an important new funding channel for the bank that we continue to develop. Our lending businesses performed at record levels, and we believe there is plenty of potential to grow assets at high rates through to the end of 2017 and beyond. And we sustained our multi-year track record as one of the Canadian banking industry's best creators of shareholder value, even while reinvesting heavily in our business. That said, our job is not to celebrate past records. It's to create long-term value. In that regard, we look forward to channeling our advantages, including our efficient business model, ability to innovate and change, proven capital allocation process, and the enthusiasm of our team into more performance for our shareholders in 2017 and the years beyond. That concludes our prepared remarks, and now we'd like to invite your questions. Ashley, can you please open the lines to our analysts that have questions? Thank you. We can take questions from participating analysts at this time. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Jaeme Gloyn from National Bank. Please go ahead. Yeah, good morning. Good morning. First question is related to deposit funding. Just looking at the strong performance, obviously from EQ Bank, and good year-over-year growth from brokered HISAs. But just looking at brokered HISAs on a quarter-by-quarter basis, there's some fluctuations there. I was just wondering if you could just speak to how you manage the brokered HISA accounts and building those relationships with investment advisors and wealth managers. Well, we have a broad network of wealth advisors across the country. The interesting thing about the brokered HISA, that typically is not something that is listed by the IIROC affiliates of the Big Six DSIBs. This is typically coming from independent investment dealers. We have seen some changes on one or two boards where one of our competitors is paying a higher commission, and as a result, they were discouraging their advisors from using us. But other than that, it's a fairly stable environment, and we continue to be in good dialogue with all of the significant distributors of that product. Okay, so it's primarily coming from wealth managers. The Big Six don't participate in the broker HISA arena. That's right. The Big Six see that as competitive to their sort of core business of providing High Interest Savings Account. Right. Okay. In terms of the breakdown of deposits, how do you see that progressing over the course of 2017 to fund uninsured mortgage origination growth? Well, I think it's not going to change dramatically over the upcoming year. As we sort of related to, our focus on the digital bank is to continue to build capabilities and provide more services to the same customers. We actually are seeing good deposit growth in that channel right now. But that's not really the goal for the year. The goal is really to get people in a more engaged relationship with us so that we can be more confident that those relationships can withstand ups and downs of the market. Frankly, we're seeing plenty of opportunity in the brokered GIC market to fund all of our needs. In fact, I would say that if you look at the pricing of GICs, at least the GICs we're able to raise vis-à-vis, say, government rates, which is the way we think about that as a benchmark. Those spreads have actually been tighter in the last little while, so we've been able to get plenty of liquidity at attractive funding sources. I think if you just look at the liquidity position we ended the year at, that was partly reflective of that. We saw a good opportunity to raise money relatively cheap to benchmarks at that year-end. Okay. How do you look at the risk in the deposit funding channel? Do you see any areas where you may be concerned that you could elaborate on that? Well, I think one's always concerned about control. We live in a banking industry that's fairly concentrated. To the extent that some of our large distributors decided for whatever reason not to deal with us, that's a risk. Maybe they're doing that to keep the funding for their own book, for example, could be one of the motivations. Certainly the EQ Bank play is very much about being able to go direct to the consumer and control our own distribution channel. I think what we showed in the first few months of the year, in particular when we were relatively aggressively trying to build that book, is that our ability to go directly to Canadians and raise funding is much stronger. I sleep much better at night now knowing that we always can turn that tap on more aggressively if we needed to fund the bank. I think that really positions us well. It's a really strong, solid funding source. Don't forget, these are CDIC-insured deposits, so what we saw in 2007, 2008, when I was running the bank then, was that people like to deal with small institutions and have the comfort of a CDIC Limit. Even though there are bigger institutions with higher credit ratings, not all the deposit sits within that CDIC limit, so we like to spread it around amongst the smaller banks. Right. Just one last question drilling into the brokered HISA. What is the concentration, I guess, within the wealth management community? Is it well-diversified? Are you exposed to a handful of advisors or shops? How does that breakdown look? It's fairly well-diversified. There was one broker that had about 30 million or so of deposits with us that there's been some chatter on the boards about that did reduce the position we had with them. We're in very active dialogue with the senior executive team there, and I'm pretty confident we'll be back on that board before the end of the year. A lot of that goes to I think the underlying decisions there are really more related to compensation issues than they are particularly to some other sort of views. But it is fairly well-diversified. We do call on a lot of small independent wealth managers and distributors, and that book is pretty well diversified. I think there's one or two that might be at close to 100 million, Tim. Are you Yeah, a little in excess of that. That's right. Okay. But I think it is a very well-diversified book. On top of that, the brokered HISA period adds to our overall funding diversification. As you know, we've moved from about two funding sources to seven over the course of the past couple of years, so are actually feeling very good about our ability to manage those related risks. Today we're paying 0.9% on that HISA, and the book is growing, I think, slightly. Yeah. We're not looking actively for money in the HISA. We're more tending to focus not on the brokered HISA. We're looking more for the branded EQ Bank high-interest savings account or Savings Plus account in preference. Great. That's excellent color. I appreciate that. Just shifting gears quickly to the core lending and your guidance of single-family originations of 18%-20% asset growth for 2017. Some of what's driving that is the improved renewal rates is a bullet in the rationale and assumptions. I was wondering if you could just elaborate on what you're seeing there, how you're driving improved renewal rates, and how does that compare to the industry standards? Actually, not entirely sure. We are expecting good retention this year. Renewal rates have been relatively stable over the last couple of years, and we think we've done a good job. Maybe there's an opportunity to sneak it up. One of the things that is interesting this year, though, is a significantly lower portion of our book is actually up for renewal this year. So a lower percentage of the overall book actually needs to be renewed this year. Clearly that is encouraging for retention. I was just doing some math on the back of an envelope, but I think that delta alone actually helps potentially the portfolio growth by about 3%. Okay. It's not really anything that you're doing with fee changes or actively pursuing, I guess, mortgages that are up for renewal at some point. There's no real change in the strategy. It's just the mix of mortgages renewing is different this year. Yeah, I would say we've stepped up our game with our people. Our people have always been fantastic. Jessica and Arthur on our team are some of the most dedicated employees we have. They have simplified some of the documentation. I rate that. They really do try to spend a lot of time on the phone with our customers, making sure that our customers understand what their options are and where they can go. We find that that's the biggest determinant of renewal performances, is that engagement with our customers. Helping people make their decisions. These are obviously important decisions, and taking it forward from there. I think there's always, even though I think the team is doing a fantastic job, I think they would be the first to acknowledge there's always room for improvement. Okay. I think Jamie just had a bit of additional color on that. I think part of our expectation, and again, we may not be right on the mark with this given the uncertainty, is that the regulatory changes that were introduced last fall could cause us to increase our renewal rates. Those changes might make it a little bit more difficult for borrowers to move from one lender to another and make it totally slightly easier for us to retain the customers that have maturing mortgages. Okay, great. Thanks. I'll let somebody else jump in. We'll take our next question from Geoffrey Kwan from RBC Capital Markets. Your line is open. Please go ahead. Hi. Good morning. I just had one question, and just I guess maybe getting a little bit of an update on the move to AIRB, just in terms of the timing. Is it still in line with what you guys were originally expecting? Then two, if you are just able to talk, even if it is a little bit more higher level, is with the benefits you get on the capital perspective, how you think about how that plays out in terms of you getting your business and your various mortgage segments, whether or not on the residential side or on the commercial. Yeah. Thanks, Jeff Kwan. The AIRB is actually sort of moves hand in glove with IFRS 9 change. I do not know who is really up to speed with IFRS 9, but IFRS 9 is a huge project for banks. It moves to an expected credit loss model that involves many of the same aspects that are involved in AIRB. So our team, the AIRB team, have been pretty focused on the transition to IFRS 9 in recent months. We have put in a software made by a company called Wolters Kluwer to model all of this, and we are progressing along well. So the big picture is we still are on track for AIRB overall timing, although the focus has been slightly less AIRB and it has been more IFRS 9 related, but those two things are quite closely linked. I know there are other banks out there suggesting that there is a lot of capital relief from AIRB. That is not really what we are after with respect to AIRB. It is more about being able to be more precisely defined about how we are allocating and making sure that our capital aligns with our risks in the business, and being more quantitative about that as our business grows. For example, today, under the standardized approach, a construction loan is 100% risk-weighted. A fully cash flowing apartment building at 30% loan to value is also 100% risk-weighting. It is very clear that the risks inherent in those two properties are different. As a result, we find it very difficult to compete on that lower risk project. So we would hope that our commercial business in particular would benefit from being able to price certain loans that reflect a lower risk weight, and thereby be able to continue to grow faster because they would be chasing a broader spectrum of opportunity. Tim Wilson, do you have anything on the progress? Sorry. Are you able to get any sort of benefits on the residential side of your business? Because not all players out there that are on the regulated side would be on the AIRB. They would still be on the standardized approach. Well, I think the big issue for us, and I was sort of getting into that a little bit on the risk-sharing arrangement, is that the Big Six banks put very little capital up against the residential mortgage books, even though, generally speaking, the mortgage is not that different than ours, frankly. So we are putting up 35% risk weights. I think many of the Big Six banks are operating in 8%-15% risk weights. So it would make it very difficult on the insured mortgage book if we end up having risk sharing because we would be putting up 35% risk weights or something on the inherent risk left where they would be putting up, say, a third of the amount or less. So again, being on a level playing field when we have got assets of similar quality will be helpful to us. It is always tough to compete with people that might be working under a different regulatory regime, and I think that that is really where AIRB leads you. Other institutions that are using a standardized approach, I am thinking Western Bank, Laurentian Bank of this world that are also competitors, of course, do use standardized like us today. So that is a much fairer level playing field. Yeah. No, so I was getting is if you are under the AIRB on the prime side, you can better compete with a lot of the other big players out there. But on the non-prime side, I would have thought you might get some sort of benefit rather than having to put the 35% risk weight. Is that a fair assessment or? Well, I think that's a fair assessment, and of course, how the regulator allows you to actually use that is a tricky thing to figure out. But certainly our view would be that under AIRB, our risk weights would be more appropriately in the kind of 20%-25% level on the single family book. Okay, great. Thank you. Again, that is star one if you would like to ask a question. We'll take our next question from Graham Ryding from TD Securities. Your line is open. Please go ahead. Hi, good morning. Morning, Graham. I think you showed in your supplemental, you mentioned in the call your employment count is up 15% year-over-year, which is in line with the growth of the book. I am just wondering how you actually manage that when you are looking at your underwriting teams and trying to manage the risk properly around a business that is growing at such a high rate. What is your approach to making sure that you do not compromise or sacrifice at all on the underwriting side? I think that is actually what constrains our growth to some extent. We feel comfortable at the levels we are at. I think we would be less comfortable growing faster, frankly. It is not a scientific number, but adding 15% is not such a hard number to onboard, to train. Often we have people with some experience in the industry. We do have a dedicated training team within the single family business that can teach new underwriters and particularly mortgage officers the Equitable way. Often we find that people migrate through the organization, so they might start in certain areas of the company in administration and fulfillment and then move into underwriting over time. It is relatively easier to onboard people into some of those jobs and then as they gain experience move them up the ladder. That is certainly a big focus that we have is identifying talent in certain areas of the company and then deploying them into those areas where they can be really useful to us in making those critical risk judgments and so on. Probably it is worth saying that we are an Aon Platinum employer in terms of employee engagement. So we actually have a really engaged workforce that are really committed to helping us grow, and we are very picky about who we bring on. In fact, every single person that comes into this organization we apply intelligence tests to and other kinds of tests around character to make sure that we have got the right people joining our team. That is really important to our culture and having the people, the skills to actually be able to execute in what is a pretty challenging business. Okay, that's helpful. The Toronto housing market is getting a lot of attention from media, but also some economists. How are you feeling about underwriting mortgages into the market right now with the price growth above 20%? Yeah. It certainly is something that we keep looking at, studying. I think it is something that we're constantly monitoring it and certainly looking for pockets that might be particularly overheated. We take a very granular approach to that. There are certain condo buildings, for example, we won't lend on them. We just view them as inherently overvalued and likely to cause difficulties. Yeah, no, it's certainly a time to be more cautious rather than more aggressive in the Toronto market. How do you deploy that, a more cautious approach? Well, a lot of that comes through in the debt service ratios, don't forget. The people that we're lending to have to have the employment income to support the debt service on higher loan amounts, which are a function of higher property prices. A lot of people do end up not being able to borrow at the full amount they would like to borrow because they just haven't got the debt service ratios to do that. That's kind of an automatic feature of the lending criteria that we put forward. That in particular is an area that has a lot of focus. Is the income there? Is it real? Can they service the debt? Got it. What would you have to see in this market for you to decide that you want to slow down the growth of your portfolio? I think it could be a number of things. In particular, the concern is always something that would change the immigration pattern to the city. One of the things that's causing the increase in housing prices is clearly strong immigration into the city based on a strong economy, and a relative lack of supply of housing. If, for example, we suddenly decided we were going to build houses all over the green belt, that obviously could dramatically increase supply. We look at the supply side of that. Also if there was anything that actually sort of limited immigration into the city or made it less attractive, that would also be something we'd be looking for. It's those fundamentals. In fact, when we think about it in a Canadian context, obviously Toronto's getting a lot of attention right now, and others might get attention at different times. If oil prices spike again, you could see the same thing happen in Alberta. We look to lend in those cities where you're seeing growing populations. We look at census data over the last five years. We like to lend into those communities that have got growth. Frankly, while there may be risk in Toronto today, the highest risks historically in Canada have been lending in small towns where actually the populations are dropping. It's just a natural function that real estate prices tend to be declining in an environment with less demand. Right. Maybe I could sneak one more in. Just within the broker channel, with respect to mortgage rates and also broker commissions, are you seeing any pressure or any change with those factors? Certainly in the prime side, mortgage rates are very tight, as we mentioned in our script. Certainly one of our competitors has come out with what they view as a sort of middle-range product between prime and alt. We do not really understand why it is priced the way it is. That is a little bit of pressure for us. Something we can respond to, at least in the short term. Commissions is always, as there is a bit of concentration on the broker side, we need to support those larger brokerage houses, and they have a little bit more leverage with us, frankly. But we work with brokers right across the country, and there is always a satisfactory arrangement that can be made. Okay. Thank you. We have a follow-up question from Jaeme Gloyn from National Bank. Please go ahead. Yeah. I just wanted to follow on the conversation of single-family, core single-family lending growth by geographical areas. Looking at British Columbia, quarter-over-quarter growth is about 12%. It led the pace of quarter-over-quarter growth as well as on an annual basis up almost nearly double from Q4 2015. I just want to sort of get your comments on what you are seeing in the B.C. market and the rapid pace there. Granted that it is only a small piece of the overall pie, but some commentary would be nice. Yeah. It's a smaller piece of the overall pie, and actually it goes back to, it almost relates to some of the questions that were asked earlier actually around how do we think about that. In 2011, we were very concerned about overheated prices in Vancouver and chose to sort of back away from the market there. That's just why we have a historically smaller book there. Just to give you some sense of it, we're not really a lender in downtown Vancouver. We will lend there occasionally. But more generally, if you think about this book, it's lending on houses that are worth CAD 700,000 to CAD 1 million in the Langleys and the White Rocks and the kind of areas in the Lower Mainland close to Vancouver, but not actually in Vancouver itself and to kind of middle-class households. We have, well, first of all, we've really cranked up our sales effort there. We have a really excellent sales team in Vancouver supporting our growth, which wasn't the case a couple of years ago. That's seeing us with higher penetration. As you probably know, we put an office there I think only two years ago. So we have been making further inroads into that market. We continue to be relatively optimistic about that market, although there is obviously a lot of noise around Vancouver itself and the high-end homes and the question about sort of foreign capital flows and capital taxes. But really that's not the market we're participating in. The condo market has held up pretty well in Vancouver and those homes that are priced in the range that you're lending into. But does that not concern you that single detached homes are down 20% and that's sort of trickling down to the market that you're lending into at a more aggressive pace right now? Yeah, no, I think that's again, just another area we've absolutely got our eyes on closely. The market is doing what real estate markets tend to do when they go through an adjustment, which is slow down dramatically first before you have really good price discovery. So, it's definitely an area of concern that we need to be looking at closely. Okay. Thank you. I would like to turn the call back over to Mr. Moor for any closing remarks. Well, thanks, Ashley, and thanks everybody for your participation. We look forward to delivering our next quarterly report in May and to seeing you at our annual shareholders meeting here at our office on May the 17th at the Equitable Bank Tower at Yonge and St. Clair in Toronto. Thank you everyone for listening, and we look forward to talking to you next quarter. That concludes today's conference. Thank you for your participation. You may now