Earnings Call: Q3 2015

Nov 13, 2015

Good morning, ladies and gentlemen, and welcome to Equitable Group's third quarter 2015 conference call. Before we begin, 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 Group and Equitable Bank. Please go ahead, Mr. Moor. Thank you, Nick, and good morning to everyone. Joining me is Tim Wilson, Chief Financial Officer of the bank. For those on the phone, I would encourage you to download our regular slide deck from equitablebank.ca following our call. Today, we'll discuss the bank's record third quarter results and outlook for growth and performance, while also touching on the launch of EQ Bank, our mobile and online banking platform. We've invested considerable time and effort into building this new channel to market, and we're excited about its potential to add ways that we deliver excellent service to Canadian savers. I'll have more to say on this later. First, let's turn to the third quarter results. Equitable earned a third-quarter record CAD 31.4 million, or CAD 1.93 per share, as we efficiently translated double-digit year-over-year growth in mortgages under management into great results for our shareholders. Those earnings, combined with the bank's ongoing effectiveness in deploying capital, produced an ROE of 17.5%, which is right in line with the high standards of value creation Equitable has achieved over many years. As you know, our goal is to be consistent producers of dividend growth. While this is neither a forecast nor a promise, we aim for at least 10% dividend growth per annum. With the strong earnings growth we've achieved this year, our positive outlook, and in keeping with our goal, our board elected to increase the common share dividend by one cent to CAD 0.20 on a quarterly basis with the payment on January the 7th. This marks our seventh dividend increase in four years and results in a dividend that is 11% higher than the dividend that we declared last year at this time. This demonstrates our board's confidence in the bank's earnings power. We couldn't have accomplished any of this without our team. People development is something that our leadership team makes a priority, and I'm thrilled to tell you that our efforts have recently been recognized. Just last week, it was announced that Equitable was an Aon Hewitt Best Employer for 2016, which places us in the elite top 40 with a gold standing. The competition was judged on the basis of employee engagement and means that our employees speak positively about Equitable to others, are committed to staying with us, and are motivated by our leaders and culture to go above and beyond to contribute to the bank's success. Turning to lending markets, the bank continues to attract higher volumes by providing outstanding service to borrowers and mortgage broker professionals. On record third quarter originations of CAD 744 million, our single-family mortgage principal increased by 27% year-over-year to CAD 6.2 billion, a new high watermark. The 15% plus year-over-year growth in originations reflected strong performance in most of our regional markets. This strength was enough to overcome a 43% decline in single-family originations in Alberta and Saskatchewan compared to last year. Expect conditions in these two provinces to remain depressed on the origination side for a while. You heard also that CMHC recently predicted that Canada's housing market as a whole will cool somewhat over the next two years, and that risks are elevated. This is not surprising to us. It means we need to continue focusing on building borrower and broker affinity in all regional markets, but also, and as always, to keep managing our risks prudently. Equitable team received more recognition from the broker community this year, as Canadian Mortgage Professional Magazine awarded our sales team a gold medal for Best BDM Team in Alternative Lending. In addition, our marketing team received a silver award for Best Broker Support. Kim Kuropatwa, our VP of Residential Sales, and her whole team have worked hard to earn these honors and put us in such good stead with the brokers. My thanks go out to all of them. With all of that, and based on what we know today, we expect the year-over-year growth of the single-family portfolio will remain at approximately the same high level in the fourth quarter as in the third quarter, and then just below that level in 2016. I will add some caution to that outlook by stating that competitive conditions are uncertain these days, and any changes could affect our originations and portfolio growth. Commercial originations were also up, this time by 22% year-over-year. We've discussed market conditions and our approach to this business on the past calls, and they remain unchanged. As a result, we expect our ongoing pricing discipline and prudent risk parameters to produce good results for our shareholders, even as the commercial books remain at or slightly below the current level of CAD 2.2 billion in Q4 and into next year. I'd also like to highlight here that we are excited about recently hiring Darren Lorimer to lead our commercial business. Darren is an experienced commercial lender and joined Equitable with over 20 years experience at one of Canada's large banks. I believe he will have a positive impact on our competitive position. Turning to securitization financing, prime mortgage growth had a very positive influence on mortgages under management, which were up 31% year-over-year to CAD 7.5 billion. Key to this growth was our prime single-family business. Our prime business funded CAD 523 million of single-family mortgages in Q3, up almost 38% sequentially. This number includes volumes originated directly by our internal team and volumes sourced through third-party partners. We're pleased with these early results. Looking ahead, we believe that the level of origination and securitization activity for our prime business will increase in Q3 as we successfully expand our book relationships and geographic coverage. As a result, prime mortgages will be the key driver of growth in overall securitizing financing in MUM. From an earnings perspective, we chose not to sell any of our IO strips in the third quarter as we had previously expected, and accordingly, do not benefit from any upfront gains on sale. This decision was driven by the fact that many of these mortgages were originated recently are in MBS pools, where retaining the strips for now creates more long-term value for our shareholders. Our intention is to use IO strip sales or other transactions that create fee recognition treatment regularly in the future. We believe the volumes will be most significant beginning in the first half of 2016. Turn to credit. The very thorough underwriting standards we operate with and I described last quarter, including income verification, continue to serve us well. While no financial institution is immune from fraud for profit or for shelter, we remain very confident in EQB's practices and the high quality of our book. Impaired loan balances were up a bit from last quarter, but I am not overly concerned about the trend. Balance was exceptionally low last quarter and just returned to levels more in line with the earlier part of the year. Another point to note is that there are not any large commercial exposures behind the increase. A good metric for the high credit quality of the bank's mortgage portfolio is our impairment provision, which reflects the level of newly recognized losses anticipated on our impaired loans. It amounts to less than one basis point in the quarter. To be prudent though, we added CAD 4.4 million to our collective allowance in the quarter. As a reminder, adding to our already high collective allowance at this rate is an approach much more conservative than you would find at other Canadian banks. This approach had a CAD 0.03 negative impact on EPS. Touching on another topic of interest, you may remember that late last year and early this year, we took proactive steps to insulate the bank from deteriorating economic conditions in Saskatchewan and Alberta. I will highlight a few metrics about the quality of our portfolio in the West. The current LTV on uninsured mortgages in those provinces is 67%, reflecting our conservative lending stance. 92% of our uninsured mortgage portfolio in Alberta and Saskatchewan is in the major cities of Calgary, Edmonton, Saskatoon, and Regina, where the economies are more diversified and employment is not solely reliant on the energy industry. Our risk management strategies paid off to date in Alberta and Saskatchewan and will continue to do so. It is not clear when we will see an arrears uptick in those provinces, but with the jobless rate climbing in Q4 early 2016, it is one of the possibilities. Even with these dynamics, we believe that arrears rates and impairment provisions will remain low in the fourth quarter at a national level based on current economic indicators. I will now ask Tim to provide his report. Tim? Thanks, Andrew. In Q3, net interest income grew 19% year-over-year. The driver was 21% growth in average asset balances, which more than offset the decline in NIM. You will recall that we expected total NIM to decrease slightly on account of a combination of factors, including lower levels of prepayment income, the high relative growth of our single-family assets, and continued convergence of the growth rates in our core lending and securitization financing portfolios. Quarter 3 was in line with those expectations. Core lending NIM decreased by 7 basis points, primarily because we almost doubled the size of our lower spread liquidity portfolio. The liquidity portfolio was up due to an unusual bulge in GIC maturities and mortgage funding, which require us to keep more cash on hand. Even though we had no trouble raising the funding for these obligations, when our expected future cash outflows are high, we bulk up on our liquidity portfolio to protect us in the unlikely event of a disruption in the funding markets. We expect our liquidity portfolio to drop substantially in Q4 and for that to have a positive impact on NIM, the opposite of what we saw this quarter. Core lending margins saw a benefit from us having added some new cost-effective funding sources last quarter. On the other hand, securitization financing NIM was up by 1 basis point over last year, thanks mainly to prepayment income, which was higher than expected and which offset the anticipated spread compression within the book. Focusing on the quarterly trending, NIM was down due to a decline in core lending margins. Core lending was down by 6 basis points as a result of several factors, including our liquidity portfolio growth and a decline in prepayment income. Looking ahead, we expect net interest income to increase at year-over-year rates in the low to mid-teens throughout 2016 due to ongoing growth in the bank's assets and despite a slight decrease in NIM. Consistent with our view for the past several quarters, NIM will likely decline in Q4 and next year, mainly as a result of changes in our asset mix that are explained in detail in the outlook section of our MD&A. Other income was lower in the period compared with the prior quarter and the prior year, despite an increase in mortgage administration fees. Within other income, securitization gains were down because of the volume of mortgages that qualified for derecognition. As a reminder, we did not sell any IO strips in Q3, but were able to derecognize some mortgages anyway. This is accounting treatment that is unique to non-prepayable, multi-unit residential mortgages. We also recorded a slight loss in some derivative positions, which had an even more pronounced impact in our quarter-over-quarter comparative because we recorded a gain last quarter. Moving to non-interest expenses, we continue to make investments that build the bank's franchise and customer service capabilities. Sequentially, expenses were relatively flat, but there were a number of puts and takes under that headline number, and we provide the highlights in our MD&A. One important point to note is that expense volatility was reduced as a result of the RSU and DSU hedging program that we put in place midway through last quarter. On a year-over-year basis, third quarter non-interest expenses grew by 25%. 74% of that increase was due to growth in our franchise, including hiring to support origination growth and risk management. The remaining 26% was for investments in our strategic initiatives, including systems costs and marketing in support of our digital banking launch. We invested a total of CAD 3.4 million in these strategic initiatives in the quarter, but the majority of that was capitalized and will flow through expenses in future quarters, beginning in Q4. As you know, we were expecting to invest an extra CAD 3 million-CAD 5 million in marketing in the back half of 2015. We very recently chose to defer that spending to early 2016 because we think that we will be able to better reach our customers then and will achieve better value for our money and our advertising dollars. The odds of cutting through the clutter of seasonal advertising are much lower in November and December. Marketing investments will continue throughout 2016 to provide ongoing support for our digital initiatives, but at lower levels than in Q1. As the cost of incremental marketing should be largely offset by gain on sale revenues generated from securitized mortgages, the impact on quarterly EPS should be minimal. Over the next five quarters, all other non-interest expenses will generally increase at rates in line with overall business growth. As a result, we expect that our efficiency ratio in Q4 will be consistent with Q3 and then increase in 2016 as a result of our strategic investments. Our capital ratios continue to surpass minimum regulatory standards and most industry benchmarks. We expect to continue operating above those benchmarks as we grow, including above the Basel III leverage ratio, which we began to report in Q1. Now, back to Andrew. Thanks, Tim. Looking ahead, we are confident our assets will continue to grow at healthy rates supported by our service quality, but likely at rates a little slower than what we experienced so far in 2015. Our access to funding and our capital position are solid and will support this growth. Before our next report to you at the end of February, the event we at Equitable are anticipating the most is the launch of EQ Bank, our mobile online banking platform. This platform will take Equitable to the next level as a branchless bank. Under the leadership of Dan Dickinson, Vice President, Digital Banking, our digital banking team has put a tremendous amount of work into the creation of the platform and the consumer awareness campaign that will kick off in the first part of 2016. This initiative was put in place with two goals in mind. Firstly, to launch a product that delights Canadian savers and broadens our franchise. Secondly, but no less importantly, further diversify our sources of funding. As this is our first foray into online banking, we are unencumbered by legacy technology and entrenched IT thinking that have been known to hamper digital launches at other banks. Because we do not have the overhead of branch networks, we can pack a lot more value into our online products for consumers and still deliver great returns for our shareholders. As with our savings products, our branchless business model allows us to offer a higher rate of interest to Canadian savers. This means Canadian savers who choose the EQ Bank Savings Plus account will earn more and keep more every month. That's a huge plus. Investor Economics suggests that Canadians have about CAD 43 billion in accounts earning almost zero interest. That's not good for savers, who are in aggregate, leaving billions of dollars a year of interest on the table compared to what they could earn by saving with EQ Bank. That's a substantial opportunity for us to bring benefit to Canadian savers. We put the Plus in Savings Plus in other ways with unique functionality. We'll save most of those details for later for comparative reasons, but we'll share one example to give you some sense of our approach. We've harnessed our knowledge of consumer behavior and digital banking by introducing what are known as smart savings settings. These settings allow savers to easily allocate funds to sub-accounts that help them meet their specific personal goals. For example, they can keep money aside in one sub-account to pay tuition, another account to fund vacation plans, and a third to save gifts. All these sub-accounts are accessed from a single screen so our clients can divide and conquer with ease. We think this capability will make a world of difference in helping Canadians focus on and achieve their savings goals. Our platform has an elegant, intuitive design that consumers will find easy and quick to access and use, and is powered by a globally recognized core banking system. We're supporting EQ Bank's launch with a significant investment in a consumer awareness campaign. Remarkably, given that we already have an CAD 8 billion savings business, this is the first time in Equitable's history that we will engage in broad advertising campaign to support our brand. We think the investment is crucial to building consumer awareness. Let me be very clear here. While the direct-to-consumer nature of EQ Bank is a new approach for Equitable and could grow in importance over time, we have no intention of originating mortgages through this channel, and will always support the mortgage deposit broker channels that have been critical to building the bank to where we are today. To summarize our prepared remarks, the bank delivered record third quarter earnings, managed our risks effectively, and recorded very low loan losses, raised the common share dividend for the seventh time in four years. On the strength of its high-quality book and growth and diversification strategies, is gearing up for another productive and profitable year in 2016. That concludes our prepared remarks, and now we'd like to invite your questions. Nick, can you please open the lines to our callers? Yes. Thanks. We will now begin the question and answer session. If you would like to ask a question, please signal by pressing the star key followed by the digit 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. If you have signaled for a question prior to hearing these instructions on today's call, please repeat the process now by pressing star one again to ensure our equipment has captured your signal. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from the line of Jeff Fenwick at Cormark Securities. Hello, good morning. Please go ahead. I just wanted to start off focusing in on the expense growth. You gave us some color there, and it has been obviously trending higher at a pretty rapid rate, and it looks like it is going to continue higher into 2016. It is kind of dense, I guess, a little bit of the growth that you are getting from the loan book in the business here. How should we be thinking about that a little longer term? Is there a point here through the back half of the year when that efficiency ratio can start to dip more meaningfully looking forward? Hi, Jeff. It's Tim. Thanks for the question. I wouldn't expect it to dip within 2016. I think you probably have to look a little longer term than that. Remember, a lot of the investments we're making now are for the long term. They won't pay off over the next couple of quarters. I think it's probably out middle of 2017, beginning of 2018, where you'll see the efficiency ratio start to return to more normal levels. These are really important investments we're making for the bank's future. When we look at over the long term, there's definitely the payback there, but it is going to have that negative impact on our efficiency ratio in the near term. Okay. I guess one thing just within that, I look at the headcount growth here. You're up over 25% year-over-year. How do you think about it from a risk perspective here? You're going to have, or I guess you would have almost a quarter of your workforce that would be new within the last year. What's the approach to managing that? You mentioned some of these are just to help with growth in terms of originations and underwriting, and clearly that's an area where you want to be well-trained and monitored. What's the approach to managing that growth? I think that, Jeff, that's the way to think about it. When you think about digital banking, it's an entirely new team with a new mandate, and that team comes together and builds something from scratch as a standalone entity and isn't putting general pressure on just. It's not like every department's growing at 25%, which would clearly raise control issues. When you actually look at the individual department levels, while we have been adding headcount in those critical areas, underwriting and so on in the single family, the growth is definitely manageable. We have a top-notch trainer in-house who helps us onboard people so they understand our credit criteria in all the controls we have in place. I'm very comfortable that we've got the right control environment in place, and the talent we've recruited over the last year is truly spectacular. I think it really positions the organization well for the future. Thanks. Maybe we can move on to competition. It was mentioned in passing in the disclosure in the MD&A there. What are you seeing with respect to the competitive environment? I imagine some of the disruption we have seen this year with other competitors may have created an opportunity for you. Are you seeing any new entrants or changes in the competitive space? A little bit. I think clearly, probably we were gaining share around this time last year without truly understanding what was behind it in terms of other issues that were coming out of the era. I would say that we are seeing a little bit of Laurentian, a little bit more active in the market than we would have previously seen or B2B. It is definitely having some impact, but generally the competitive landscape has still continued to be the same players we have talked about historically. Credit losses are always top of mind. I guess the thing that continues to impress me is just how low you have been able to keep the loss provisions and the charge-offs. You gave us some indication you think you should start to see it through the end of the year. I would have thought we would have seen it by now already, frankly. How do you put that in context and think about how you stand heading into next year and how that is going to evolve? I do not think this does surprise us, actually. I think it is so far so good with Alberta, but we are certainly not taking Alberta and Saskatchewan, but we are certainly not taking a view that that so far so good actually means very much. Even this time last year, or just a little later, maybe by the middle of December, when it was clear what was happening with commodity prices and when we actually dialed in on our credit appetite in those provinces, we thought it might well take nine months to a year before we would start to see things unfold. The employment situation does not change that quickly. People have savings and so on. So far so good. We feel like we have done what we have to do as a management team to position ourselves well for whatever comes ahead. I certainly am concerned about what Alberta might look like by March next year. It doesn't feel like things are moving fast enough in the market that we are going to have particular concerns by the end of the year, but I could be wrong on that. I am going to spend some time in the province over the next few weeks. We continue to remain cautious. It is a very important market. Alberta has this history, but it always comes back, and that is our view, that it will, and it will come back strong, and we want to support our customers through what is obviously a difficult period. We are committed to our employees in the province, and we are committed to building our franchise there. This is just a time for extra caution. Jack, one point that I will add to that is that we said in prior quarters we continue to run pretty severe stress tests on our portfolio in that province and believe that even if arrears do tick up and impaired loans tick up, that any losses we would experience are manageable for the company. I guess within that, the thing I am just trying to gauge is how quickly that can move. It seems like if it has not happened in a meaningful way yet, would there be a quarter where you suddenly have a big uptick, or is this something that evolves over six or nine months? When I look at it from a loss provisioning perspective, it is quite meaningful to the earnings outlook, obviously, going forward here. Whether you get a step function change there, you suddenly have to do some catch-up on the loss provision or whether it kind of trends into the numbers over the course of six or nine months. I would expect it to be more like that nine-month build. I had a chance to see how the U.S. subprime. I am not suggesting, by the way, it is anything corollary, but if you look at the shape of those curves, they do not go in step function. You tend to see a sort of increasing trajectory before you see deceleration and flattening. I think that is just kind of the history when you look at healthy markets around the world that go through a correction. I would not expect to see a step function. We might see evidence of increasing deterioration, but I think once we start to see a deterioration, it will be a fairly long burn. I would stress, by the way, just again, I think it is always instructive. If you look at our level of collectives compared to all of our peers, we are extremely well reserved. We made the point in the script about how much that impacts us in the short term in earnings against these reserves we are setting up without any identifiable specific loss against them. If you look at and see how we compare to all of the major banks and all of the groups that you generally think about in our coverage universe, we have extremely conservative provisioning at EQB. Okay. Thank you. That is all I had. Thanks, Jeff. Our next question comes from the line of Shubha Khan at National Bank Financial. Please go ahead. Thanks. Good morning. Good morning. Morning. I had, I guess, a follow-up to Jeff's question on credit quality in Alberta. Just wondering, have you made any changes or any further changes to underwriting in Alberta or Saskatchewan, in an effort to grow those loan books more selectively or more conservatively? Well, I think, yeah, we have. We talked about this on other calls. We haven't made any changes since the last call. But in December of last year, we dialed back on the loan-to-values generally in Saskatchewan and Alberta on our single-family credit book. In February of this year, we were more selective again in dialing back in certain types of property that we were more concerned about. Probably the ones are the most obvious, which would be the lowest value homes that tend to have more severity associated with corrections, and also the highest value, where you could see some houses that were at the higher end that tend to be particularly volatile in price in a housing correction. We made those decisions in February, really anticipating exactly what's unfolded. I think what's happened since then is completely consistent with the view that we had back in December and February of last year. As you're probably aware, we're pretty connected with the Alberta market. I've lived there for a number of years. We have a very strong leader in the Alberta market. I think we've done a good job in adapting to what comes to us, and we're handling all of our responsibilities well. As I mentioned, we're very concerned about making sure that our employees are excited to be still working with EQB, and how we look after our customers. On the other hand, we obviously have broader obligations to our shareholders and other stakeholders as well. Trying to thread that needle, I think we've done a very good, prudent job. In fact, we saw some of our competitors be much slower than us to adjust those new parameters, although I do believe some of them are moving to follow us around about now. Okay. Sounds good. The prime single-family business, that's been ramping quite nicely. I guess in light of the fraud issues that surfaced at Home Capital earlier this year, I guess I'm curious as to how diversified the sources of origination are. Is the bulk of your prime single-family business coming in from a handful of brokers, let's say in Ontario, or is it from a number of brokers spread out across the country? Maybe if I could be even more specific, how large is the single largest slice of the mortgage volume that is being sourced by one broker or brokerage? In the prime space or what? In the prime space, yeah. Yes. We actually, as you know, we know the brokers very well. We've lived in this world a long time. We actually went out more selectively. We're certainly happy to deal with who people want to deal with in the prime business in particular. In order to improve our systems and our customer service approach, we went and approached some brokers that we believed represent some really high-quality business and have chosen to make some selector arrangements with them in exchange for volume. I think the biggest one is to be something quite big. Maybe 15% of our total flows are coming through one broker who, as I say, we have a strong relationship of trust with and have every belief that the quality of the book is great. That's kind of where we're coming from. I think the risks come as they get slightly broader. When we're buying from, we're also buying, as we also mentioned in bulk. That's talking about the flow of transactions. These are individually dealing with brokers one by one, and then we deal with another large originator that we're buying in bulk. They've got very good processes in place to make sure there's no issues coming through. I see. To the extent that any single broker or brokerage accounts for a large slice of the flow, these are longstanding relationships that you're comfortable with and you're comfortable around the QA process as well. Is that fair to say? I think that is fair to say. I think it is fair to say that the geographies in which we are originating these mortgages are not those that are typically associated with this kind of activity. Okay. Just going onto the funding side of things. You are continuing to make progress, I guess, on diversifying your sources of funding. You gave us more color on EQ Bank, and then you are getting traction with the HISA as well. Just wondering how that might impact the outlook for net interest margins going into 2016. Should we be looking for slightly tighter spreads on your mortgages given your funding diversification initiatives, or how should we think about that? Yeah. I add to that, Sam. We have given you guidance in the outlook section about how we expect NIM to trend next year. As you noticed from that, there are going to be some subtle changes in the NIM within each portfolio and overall, but it is mostly driven by asset mix rather than funding mix. We have seen a little bit of benefit in NIM this year from adding those new funding sources since they are more cost-effective for the company. That has been good news, but I think that effect is going to level out as we proceed through 2016. I think EQ Bank has the potential over the long term to be helpful to margins, but I think initially, the volumes won't be substantial enough to have much of an impact, at least in 2016. Yeah. Just to be clear, we are likely to go out with a rate that surprises you in terms of being high, but I wouldn't extrapolate that as the cost of funding over the long term. Don't forget when you first launch, we have one unique advantage when we first launch is we have no balances in the accounts. One can think of going out with a rate that grabs some attention as being a relatively low-cost promotional item, at least in the first year. That is our intent is to start with a rate that grabs attention and then back off to a rate that is still attractive every day to everybody and is a very compelling part of our marketing mix but perhaps isn't something that is something that should be built into the model over the long return from just a pure financial modeling perspective. Okay. I take your point. Final question maybe for Tim again. I guess you're contemplating IO strip sales going into 2016, and Andrew Moor indicated that volumes will be significant as we head into next year given the amount of prime single-family that you're already originating. Is there any additional guidance that you can give us on how significant IO strip sales could be? For example, how much of your prime single-family going forward might you want to de-recognize? Just wondering how we should be thinking about that as this becomes a more significant piece of your overall business. Yeah. It's a good question. We have said we're committed to a program of IO strip sale going forward. I think the challenge is it's a tough number to forecast primarily because the economics of mortgages that we're originating at any point in time can impact our decision to sell or not sell. I think Andrew Moor highlighted that the nature of the mortgages, the economics of the particular mortgages we've originated recently have been such that it's much better for long-term value creation for us to have retained those rather than sell the strip on those mortgages. With that caveat, I would say that our broad view is when we look out over the next one or two years, that when we look at the prime single-family that we originate, we'd be selling strips on roughly 50%-75% of those volumes. Okay. That's helpful. Yeah. That's roughly the target that we have in mind. It could vary, as I mentioned, because of those economic factors. Just generally speaking, just to sort of peel a little bit behind what Tim Wilson was saying there. When interest rates are dropping, you end up having fatter IO strips actually than you otherwise would. So you give up more economics when you sell the IO strip. In a rising interest rate environment, that is less likely to be the case. So that is sort of one of the things that impacts the relative trade-off between to the shareholders and the IO strip buyer is exactly how an interest rate while you are actually originating the mortgages. Perfect. Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your touch-tone phone. We will take our next question from the line of Graham Ryding at TD Securities. Please go ahead. Good morning. Maybe I could follow on just on that interest-only IO strip topic. Can you give us some color on sort of your comfort on the demand for the IO strips? It sounds like it is more a decision coming from your part based on the economics that are out there right now. Are you comfortable that when you decide to go into the market that there is enough demand to offload what you want? Absolutely, Graham. We've said that in prior quarters that we've developed a good network of potential investors and believe that there's more than enough demand for this product. It's a supply question that's limiting the sales that we're doing. Okay. Can you talk about the funding cost both on the deposit base side of your business, also the prime side? Are you able to maintain your mortgage spreads right now or is competition such that there is a spread compression? I'll answer that question in two parts. On the broker deposit side, I think 2015 has been fabulous. There's been solid demand from the product through those channels. The costs on the GICs, just when you look at the absolute interest rate, are lower than we've experienced in other recent periods. So that channel's been performing well. I think in terms of the funding for securitized mortgages, the MBS market hasn't behaved the way we wanted it to this year. Spreads in that market have really opened up over the course of the past six months, and as a consequence, have had a negative impact on the spreads within that business. We do mention in the outlook section of the MD&A that we expect those conditions to persist for the near term, and to be operating with lower margins on the prime business. Okay, great. Could you give us an idea of the mix of your very strong originations on the prime side? I understand part of it is what you originate yourselves and part of it is coming from a third party. Can you give us a feel for what the mix was this quarter? Yes, Graham. Roughly CAD 100 million or so of the originations. I think it is actually in the MD&A, but about CAD 100 million or so was our own directly originated, and the balance was I think bulk. That is a step up then. CAD 100 million is, I think correctly, is up from last quarter and year-over-year in a material fashion. Is that correct? That is right. Look, we only launched this in August of last year, so clearly we are building out the platform. Great. Then just my last question, Tim, you mentioned that you had a lot of deposits come to maturity this quarter, and you had to increase your own liquidity to offset. But it looks like your liquidity ratio actually dropped in the quarter. Am I missing anything there? I just sort of feel like it makes- You're absolutely looking at that the right way. I think the nuance to that is what you're looking at is quarter-end balances, and what impacts our margins over the quarter is the average balance. The average Q3 versus Q2 was way up, even though the ending balance was down. I think the ending balance reflects the drop in liquidity portfolio that we expect going into Q4 that I mentioned in my remarks. Does that make sense? Yeah, that makes sense. So that liquidity ratio going into the Q4 or in Q4 should be higher. It should be the liquid asset ratio. The liquid asset relative to total assets will be lower in Q4. From the 5.7 that was for Q3? Yeah, it will come down a little bit off that. Yeah. Okay. Yeah. We are always projecting forward our liquidity needs. So just seeing a snapshot in time at the end of the quarter is really projecting our liquidity and factoring in many of the factors that we anticipate coming up over the next few months. Okay, thank you. Mr. Moor, there are no further questions at this time. Back to you. Thanks, Nick. As there are no other questions, we look forward to reporting our full year results in February. While it feels a little early, and since we won't be speaking to you before then, I wish you all a happy holidays and look forward to talking to you again. Thanks for listening, and goodbye for now. Ladies and gentlemen, we thank you for your patience. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may disconnect your line, and have a great day.