Welcome to Equitable's third quarter analyst call and webcast on Wednesday, November third, twenty-twenty one. It is now my pleasure to turn the call over to Richard Gill, Senior Director, Corporate Development and Investor Relations at Equitable. Please go ahead, sir.
Thanks, Pam. Your hosts today are Andrew Moor, President and Chief Executive Officer, Chadwick Westlake, Chief Financial Officer, and Ron Tratch, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our webcast as well, as it includes our quarterly slide deck, including slide 2 containing Equitable's caution regarding forward-looking statements. It's now my pleasure to turn the call over to Andrew.
Thank you, Richard, and good morning, everyone. I'm really pleased with the bank's progress this year. Equitable is now larger, more diversified, and more capable than ever. In every area across our single family alternative, wealth accumulation, commercial loan leasing businesses, and EQ Bank, our teams are challenging the status quo, working really hard to fulfill our purpose every day and generating great success. Today, with three quarters complete towards our high-growth ambition for 2021, I will offer more context on what our record conventional loan growth and outstanding performance at EQ Bank mean for the fourth quarter, and offer an early look at 2022, guidance we normally reserve for February. Chadwick will then provide more details, and Ron is here to address questions on our credit outlook, which has continued to improve.
To start, I remind you that we raised our 2021 growth targets in May based on our read of demand signals and clear signs that Canadians in increasing numbers are ready to embrace fintech-driven challenger bank services. This was the right call. Today, we are within striking distance of achieving our 2021 growth objectives. We have conviction that at the end of Q4, we will meet or exceed all of our stated targets on a full year basis. Pursuing these objectives, we've gained the trust of a significant number of new customers, and through engagement metrics, we know Canadians are relying on us more than ever to give them the enriched experience that we promised.
Looking at the trend beyond Q4, we foresee another great year ahead for Canada's challenger bank, reflecting the expected impact of continued strong growth in higher margin conventional loans, plus an additional cost of funds tailwind with the benefit of our new covered bond program. Following our Q4 results next February, we will provide more detailed guidance. What we want to notably offer today includes perspectives on ROE, our North Star, capital, and key balance sheet categories that drive earnings. One of the most important categories are alternative single-family loan portfolio, which we expect to grow 12%-15% next year. This guidance partly rests on the assumption that housing activity will return to a more normal cadence post-pandemic. We like the prospect of greater stability as it allows us to focus on the fundamentals of service excellence rather than making disruptive adjustments to our risk appetite.
A return to the office for many workers and Canada's plan to welcome up to 420,000 permanent residents next year will help big city real estate, where the bank has a very strong franchise and a constructive view of risk. Once again, we forecast a significant expansion of wealth accumulation business. In 2022, we are targeting reverse mortgage asset growth of more than 150%, and CSV asset growth of more than 100% on market share gains and mutual success with our business partners. Our ambitions are also high for all commercial bank lines, and we've published 2022 targets for each of our conventional commercial loan categories.
For EQ Bank, we will seek 20%-30% deposit growth, a target that does not take into account the expected uplift from planned innovations in payments to arrive in 2022. To achieve our goal, we intend to give customers more products to use and more reasons to use them, which is good for them and good for the bank, as it means keeping customer lifetime value well ahead of acquisition costs. Of note, as interest rates rise, we expect EQB or EQ to be an even more competitive source of funds for the bank. As you know from past calls, EQ Bank is a huge part of our plan, but it is only one element of growing and diversifying our deposit book. Directionally, our 2022 outlook supports ROE of 15% or greater, consistent with our historical best-in-class returns.
Now the third quarter results and further context on our milestone achievement. Assets under management surpassed CAD 40 billion at September 30, 13% or CAD 4.7 billion higher than last year. As managers, we do think long-term, and it pleases me to note that the bank's AUM is more than twice as large as it was at the end of 2015. As you saw in that earlier slide, our full year 2021 target for total loan growth is 8%-12%. After nine months, we're now at 14% with good contributions from both sides of the bank. What's important is that year-over-year loan growth of 17% in the commercial bank and 13% in the personal bank very much favored wider spread conventional loans.
Conventional loans are the earnings engines of this bank, so it's good to know that Q3 was our most productive quarter ever for conventional loan accumulation. For an institution that is incredibly disciplined in risk management, you can draw an important conclusion. We believe it is now entirely prudent to put more risk-weighted capital to work than a year ago because of the economic recovery, including the recovery of all the jobs lost during the pandemic. I'm particularly pleased with the performance of our single-family alternative business, our largest generator of conventional loans. We achieved record originations of CAD 2 billion in Q3, more than three times higher than last year when we constrained asset growth to control risk exposure, and CAD 251 million higher than the previous quarterly record set in Q2 2021. Retention rates also improved towards pre-pandemic levels.
By working hard to reinforce our standing with mortgage broker partners and support their businesses, these results prove that we've regained momentum as the market leader, all while maintaining our traditional underwriting disciplines. For our personal bank, the other big news was a sharp increase in our wealth accumulation book, where assets shot past the CAD 200 million mark, led by a 229% year-over-year growth in reverse mortgage balances. The reverse mortgage market is a sleeping giant. Before entering it in 2018, we spent considerable time studying the high-growth equity release markets in the U.K. and Australasia and reasoned that Equitable had the opportunity to build a position, a business position for growth, but propelled by underlying demographic forces of an aging population. We also believed, and continue to believe, that innovation can benefit this market.
Competitively, the presence of just one monoline lender in the entire Canadian market was also appealing. That lender was recently acquired by the Ontario Teachers' Pension Plan, for what we understand was at an attractive price-to-book value multiple for the sellers. Meanwhile, CSV registered 127% growth year-over-year. With the third quarter addition of Foresters Financial, we now have arrangements with eight leading partners to bring cash surrender value lines of credit to their policyholders. We're working to expand the breadth and depth of our relationships. On the commercial side, loan assets increased 17% to a record CAD 10.1 billion, with record quarterly commercial loan originations at CAD 1.3 billion, 14% ahead of last year. The strongest contributor was conventional commercial, where production was up 53% year-over-year to CAD 786 million.
In comparison to 2021 targets, each commercial line was on or ahead of plan. In the interest of time, I will single out 2. After experiencing elevated scheduled maturities in Q2, our commercial finance group came back strong in Q3 with year-over-year loan growth of 21%, right in line with our annual objective. Within equipment leasing, portfolio growth of 25% year over year was well ahead of our target range for the year. The drivers are the transportation logistics sector of the economy. The credit metrics in this business are performing very well, and I'm delighted with the performance of this business since we bought it just over 2.5 years ago.
We also set out to build stronger channels to market for both our multi-unit and prime single-family insured mortgage businesses as a means of improving franchise value, and we're doing that too. Our growth ambitions and our broader purpose of enriching people's lives are very much supported by the fantastic success of our digital platform and fintech-related operations. This year, we've added real substance to our claim of making EQ Bank the hub that Canadians can rely on for their most important financial transactions, and we're seeing the benefits. EQ Bank deposits grew 60% over 2020 to a record CAD 6.9 billion at September 30 against our full-year 30%-50% target. Growth continued through October as EQ Bank deposits surpassed CAD 7 billion and the number of customers increased to 240,000.
I'm proud of the fact that we reward all customers with good everyday rates and an even better experience. While this means that we don't chase hot money, it does say something really positive about our customer philosophy and the confidence we now have in the services we offer. In Q3, those services were well used. Digital transactions increased 99% on a year-over-year to-date basis. Engagement like this means that EQ Bank is becoming more important in the lives of our customers. One of those new services is the EQ Bank US Dollar Account. Launched in June to address the needs of financially savvy customers who want real-time exchange rates with full fee transparency and easier, cheaper, and faster money transfers in US dollars worldwide. It reached our annual deposit growth goal in the first quarter.
With ongoing account growth, it now has nearly $150 million in deposits and has formed a source of growing non-interest FX revenue for the bank. I know I'm repeating myself by saying how proud I am of the US dollar capability we've built, but I do urge you to use this solution to really experience what a state-of-the-art digital bank is capable of delivering. Our journey to enrich people's lives continues. In late September, we launched a new e-transfer service. Our original capability was built using our minimum viable product philosophy. We replaced this basic service with an innovative capability using the insights we gained by talking to customers. There has never been a better time to have a modern, flexible, cloud-based infrastructure.
I say so not only because it enables us to serve Canadians the way they wish to be served, but because the future will see the modernization of Canada's payments infrastructure and the advent of open banking. The Real-Time Rail, a major part of that modernization effort, will arrive within the next couple of years in the form of a national payment system that will enable fast, data-rich payments, giving Canadians the ability to move meaningful sums of money instantly and with certainty. We are readying ourselves for this advancement in several ways. In the second half of 2022, we will introduce an EQ Bank payment card, true to our brand philosophy, will allow customers to use their funds to make e-commerce and in-store purchases, along with cash withdrawals, all with no fees, attractive rewards, and a seamless all digital experience.
The EQ card will add an important new level of convenience for customers and cement our status as a fully capable hub bank. The card will also add an interchange-based revenue stream to the bank. We recently entered a six-year strategic arrangement with Mastercard as a formative step in our payments plan. That plan also envisions offering credit card services to fintechs and others by positioning Equitable for what's known in the industry as a BIN sponsorship. Thinking more broadly, as part of our payment strategy, we are committed to connecting directly to the Real-Time Rail. This will allow us to enable real-time payments and become a service provider for fintechs to connect into the RTR.
Another important milestone achieved in Q3 is that the bank became carbon neutral in our Scope 1 and Scope 2 greenhouse gas emissions, with details contained in a press release issued last night.
Our emissions per dollar of revenue are far lower than branch-based banks. We'll share more details of our ESG strategy in a new report next year and plan to set meaningful reduction targets that align with the bank's purpose. We think publicly expressing targets, whether for GHG or asset and deposit growth, gives all stakeholders the means to assess progress and hold us to account. Stepping back, it's been just over a year since Chadwick joined as part of a broad organizational redesign and the realignment into personal and commercial banking divisions led by Mahima Poddar and Darren Lorimer, respectively. We made those changes to ensure that our structure and leadership are suitable for an institution that is far bigger and more capable than the Equitable of old. We also added more strength and depth in our management team with key hires and promotions in many areas of the bank.
I'm glad we have the executive talent around decision-making and strategy development that is well-aligned with our long-term ambitions. We absolutely have the proven management talent to take Canada's challenger bank to the next level and detailed plans in place behind all of our 2022 targets. Most important, our team numbering over a thousand challengers is aligned and ready to take on new possibilities with the creativity and discipline that has been so critical to record-breaking performance this year. My thanks to all team members. Chadwick, over to you.
Thanks, Andrew, and good morning, everyone. As a footnote to Andrew's comments about leadership, we will also be sending out save the dates in coming weeks for an investor day that will land at the end of February or early March 2022, at which time you will see our broader team in action and in person. Results through the third quarter and first nine months are right on point as we close in on meeting our high-growth targets for 2021. As expected, we made significant investments in order to create future shareholder value while delivering the ROE, tangible book value and EPS growth that rewards our owners today. I'm pleased to say that among Canadian banks, Equitable's 2021 performance to date continues to stand out.
Through Q3, risk-managed deployment of capital resulted in growth of 13% year-over-year and 6% quarter-over-quarter in AUM. This reflected CAD 3.8 billion of originations, up CAD 1.5 billion from suppressed levels in Q3 last year. As Andrew said, we purposely skew growth in favor of wider margin conventional loans, all while remaining within our prudent risk appetite framework. Growth in those assets, combined with wider spreads arising from lower funding costs, provided NII and a NIM expansion in Q3 and a favorable tailwind for earnings in the coming quarters. The work we've done to broaden and improve funding sources is paying off. Total deposits of CAD 19.8 billion were up 21% year-over-year, including digital bank deposit growth of 60%.
Quarterly revenue increased to an all-time high of CAD 162.1 million, +9% year-over-year and +2% sequentially. The outcome was our best quarterly earnings performance of 2021 so far, with Q3 diluted EPS of CAD 4.14 a share. Just as a reminder, the numbers we present today are on a pre-split basis as the 2-for-1 common share split occurred into Q4 as of trading on October 26. Reporting on a new share count basis will be as of Q4 results. Compared to last year, Q3 EPS was lower by CAD 0.16, half due to an increase in diluted shares outstanding, a third resulting from planned investments into new capacity, digitization, and process improvements, and the remainder is the result of temporarily elevated gains in securitization last year due to COVID-related funding market disruptions.
EPS through the first nine months of 2021 was the best ever and up 38% from 2020. On ROE, our bank delivered again at 16% in Q3 and 16.6% year to date, compared to our target of 15%-17%. We chose to deploy more of our excess capital in Q3 to generate higher future earnings. Notwithstanding, CET1 remained well in our target range of 13%-14%. If CET1 was at our target floor of 13%, ROE would have actually been about 17.2% in Q3. We think expressing excess capital versus the target floor rather than the mid-range of CET1 as we've done in the past, provides a more meaningful reflection of our excess capital. As in Q2, we did have a PCL reversal in Q3, reflecting improving economic variables.
Aside from the impact of PCLs, pre-provision, pre-tax income was higher than in Q2 and in Q1, and book value per share shot ahead to CAD 105.80 a share after breaking the CAD 100 barrier for the first time last quarter. Moving to funding, our markets continue to provide everything we need to grow. With our recent success in adding more digital deposits, expanding our institutional deposit note program, and with the highly successful first issuance of our European covered bond program, we've improved our cost of funds sequentially. We issued EUR 350 million of covered bonds in September, or more than CAD 500 million.
This was at a spread of just 15 basis points over euro mid-swaps, which translates to this becoming the lowest cost of wholesale funding in our stack, more than 55 basis points cheaper than GICs. We were very pleased to earn participation by more than 40 net new international institutional investors across 15 countries, resulting in a 3 times oversubscribed first issuance. These bonds have been trading well since issuance and are now marked at a spread of 11 basis points over euro mid-swaps or about 4 basis points tighter than issue, making it a successful transaction from both the issuer and investor perspective. We have CMHC's approval to make this a CAD 2 billion program, and you can rest assured we will take full advantage. We expect to be back in the market later in Q2 or into Q3 next year.
I've mentioned this in past calls, but I will reiterate that at program maturity with this early success, we could expect to see annual cost of fund savings of more than CAD 11 million, higher than previous guidance. We are well-positioned with liquidity of CAD 3.2 billion at the end of Q3 and a liquidity ratio of 9.3% versus 9.1% a year ago. The combination of higher asset growth and lower cost of funds translated into Q3 NII growth of 18% year-over-year to CAD 150.9 million and NIM of 1.83%. NIM expanded both sequentially and year-over-year. In both cases, this is the result of the shift to conventional loans, particularly alternative single family.
Compared to 2020, NIM growth in Q3 was also due to the higher levels of prepayment income within the personal bank loan portfolio. Sequentially, this was a headwind. The highest yielding business line continues to be leasing at 9.8% in Q3, which is a little lower than a year ago, reflecting Bennington's success in growing its prime business, which has increased approximately 73% year-over-year. NIM for the remainder of 2021 is expected to be relatively consistent with Q3 as we continue to shift our mix of business to uninsured assets while prepayment income declines from the seasonally high summer months. Prepayment income is variable, as are other factors such as seasonal variations in our liquidity holdings that may shift NIM in a given quarter.
Currently, the bank's non-interest income growth is heavily influenced by derecognition volumes and gains on sale, both of which were abnormally high last year due to funding market disruption caused by the pandemic and lower in Q3 this year as markets stabilized. This revenue from gains on sale has returned to pre-normalized pre-COVID levels. In Q3, fees and other income grew 12% year-over-year. This is an early reflection of our plan to increase the flow of non-interest income from new products like the EQ Bank US Dollar Account. It will take time to make this flow more meaningful, but we are challenging ourselves to work towards double-digit growth in non-interest income annually outside of gains on sale, which are driven by other market factors.
This will include flow from some of the payment innovations that Andrew mentioned, our new aggregator business, FX, continued gains from strategic investments in Fintechs, wealth solutions, and much more to come. On our last call, I said to expect expense growth to return to low single digit quarter-over-quarter levels in both Q3 and Q4 after a big uptick in the first half of 2021. That's exactly what transpired. Total non-interest expenses were up 3.8% sequentially. This means we continue to operate within our 2021 full year efficiency target of 39%-41%. After three quarters, we're at 40.3%. We expect to end 2021 within our target range. We've been making incrementally smart, more smart investments for the future while generating our North Star ROE and keeping a lens to our best-in-class efficiency.
We look at costs in three buckets of people, process, and platform. For people, we increased compensation costs 19% year-to-date and 3% quarter-over-quarter. The sequential increase reflected growth in FT. The year-to-date increase reflected talent additions, but also more competitive compensation. We have world-class talent and need to compensate accordingly. For processes, including corporate and marketing categories, expenses were down slightly quarter-over-quarter, even as we launched a campaign in June to support our reverse mortgage business, which contributed to sizable market share gain. Growth and process improvements over the first nine months reflected marketing support for reverse mortgages in EQ Bank with good results. In platform, Q3 product costs were up 4% quarter-over-quarter and 27% year-over-year. These are good costs. We refer to them as investments as they will pay off next year and beyond.
I think it's worth noting that amortization in increasing technological programs can have an impact in this category. 5 percentage points of the 20% increase in non-interest expenses over the first nine months was due to overall higher depreciation and amortization. Within our 2021 guidance, we said to expect a continued positive trend in credit metrics and the reopening of the economy. In Q3, we had a CAD 3.5 million reversal of stage one and stage two. As previously expected, credit losses did not materialize. I'm pleased to say macroeconomic forecast improved across two key variables since Q2, unemployment and HPI. These positive macro variable changes resulted in a decline in expected loss rates on both stage one and stage two loans.
While reversals occurred across all portfolios, our single-family and leasing portfolios benefited to a greater extent from this positive trending than our commercial real estate book. Of note, we did not make any changes to our five scenario weights, and if our base case translates, we would be in a position to release potentially CAD 4.2 million. Our overall ACL now sits at CAD 52.1 million, 8% lower compared to Q2 and 25% lower year-over-year, but still up from what we would view as a potentially normalized level of approximately CAD 40 million. To put this into context, we currently hold 17 basis points in ACL, appropriately elevated from 14 basis points prior to the emergence of COVID, but gradually reducing to near normal levels as the economy continues to improve.
As a forward-looking comment, we expect credit loss provisions on our loan book to remain low or reverse further next quarter and into 2022, assuming the path to Canada's economic recovery reflects our base case and losses remain low. Arrears in our personal bank and commercial bank are also expected to remain low, with midterm annualized loss rates of 1-2 basis points for our mortgage portfolio and 150-200 basis points for equipment lease. Gross impaired loans were down 40% sequentially and down 21% year-over-year. The improvement since Q2 was due to the re-resolution of two commercial loans amounting to CAD 40.1 million, plus a CAD 9.4 million net reduction in single-family mortgages and equipment leases.
While we have a great track record of managing risk, we also know how to resolve problem loans when they occur. Moving to capital, the story of the quarter is about increased deployment to build an even stronger earnings platform for 2022. RWA increased 8% sequentially to CAD 12.4 billion in Q3. As a result, the CET1 ratio of 13.7% was down seven basis points from Q2. As I mentioned earlier, this remains within our range of 13%-14%. Compared to our 13% target floor, we now have excess capital of about CAD 88 million or CAD 5.17 a share. From our perspective, this is the best way we can deploy excess capital toward organic growth that will provide consistent and predictable NII growth in coming quarters.
We were also pleased to gain strong shareholder support for our first-ever stock split on a 2-for-1 basis, with 82% of eligible votes cast and 99.9% support. As I noted, shares began trading on a split basis on October 26. This is part of our broader program towards closing what we firmly believe remains a material discount in our share price to fair valuation. In closing, we're moving from strength to strength. Q3 has set us up perfectly to deliver on our annual growth targets, and we expect to start 2022 in great shape, ready to take on the challenge associated with our new next level ambitions as Andrew outlined this morning. With that, I'll ask the operator to open the line up to your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Meny Grauman with Scotiabank. Please go ahead.
Hi, good morning. Chad, you highlighted risk-weighted asset growth 8% sequentially. Clearly, strong loan growth is a big part of that story, but it doesn't seem to be explaining everything. I'm just wondering if there's anything else driving that. I don't know if it's simply business mix. Anything you can add to kind of highlighting what's driving that RWA growth that's so strong on a sequential basis?
Do you want to go first, Andrew?
No, no. Chad.
Yes. It's what it is. It is the conventional loan portfolio, Meny. You've seen a lot of our growth. The focus of our growth has been the alternative portfolio in key commercial categories, including the great growth, say, for example, in specialized leasing and right across the commercial book. Those have higher risk weights, of course, which are driving up the RWA at a faster pace, but they're going to translate with better margins. That's part of why we have the conviction in improving NII growth from here. That's really the art of it, because of course, again, when you look at the pipeline or when the loans were booked, it was sometimes that can land a little bit later in the quarter, right?
You see the RWA go up, but the earnings are not yet reflected, hence the CET1 dropped a little bit.
That's certainly Meny, that just to reiterate what Chad said, to finish that. I think it's important to reinforce that you're not really seeing the earnings growth from that risk-weighted asset growth flow through into its entirety this quarter. Obviously we start the beginning of October in great shape because we've got those assets on our books. I would say that September was where we started to see a lot of the asset growth. The other thing is just similarly on the covered bond side. The covered bond was issued quite a bit towards the end of the quarter, so we didn't really see much benefit from that in the current quarter, but in the quarter we're just reporting. In this current quarter, we should start to see that flow through.
Just in terms of the outlook for RWA growth, you know, based on your guidance for 2022, it seemed like you're expecting RWA growth to moderate in 2022. Just wanted to check your thoughts on that.
Yeah, I think a little bit. I mean, clearly, we've seen some dramatic growth in the alternative single-family business. We continue to believe that the market's in great shape, and we're really well positioned to continue to gain market share within it. Nonetheless, I think our guidance as we commented in the script is based on a slightly more normal cadence for the sales in the housing market.
In terms of the outlook for 2022, I'm not sure if you mentioned it, but what's baked in in terms of your rate expectations for 2022 underpinning some of the guidance that you provided us?
Yeah, we don't really build in any rate expectations, so we don't see that as. We haven't certainly built in any kind of increase in NIM based on rates going up. I did kind of allude to that in my comments around a belief that as prime rates increase, for example, that we wouldn't follow lockstep in the EQ Bank side of things. So there may be some reasonable NIM to be captured if you do see prime go up, but that hasn't been factored into any of our projections at this point.
Just one more from me on that front. You highlight portfolio growth expectations for 2022 over a number of categories, but I'm wondering if you kind of sum it all up, how does loan growth look, you know, relative to the 8%-12% range that you gave for 2021? What would you expect for 2022?
I think more. The average for this year was more in that 8%-12% range, so next year it'll look more in the 12%-15% range.
That's it for me. Thank you very much.
Thanks, Meny.
Your next question comes from Jaeme Gloyn with National Bank. Please go ahead.
Yeah, thanks. Good morning.
Good morning, Jaeme.
First question is on the payment card launch. If you could maybe just give us a little bit more color as to what you're expecting from customer acquisition, client retention, and potential revenue coming off of that interchange fees or is there anything else that we should be thinking about on the payment card launch?
Yeah. Thanks for that question. We know from our customer research. We do have some really interesting conversations with our customers, and that really drives our thinking about where to go next with product. That there are a significant number of our current customers, and particularly some customers that choose not to sign up with us because they believe they can't make payments or draw out cash. The principal part of the play, at least for this point for us, is to eliminate that objection and allow people to use the EQ Bank product as a much more fundamental source of, you know, more fundamental relationship. It will be you know, we almost have to get there and deliver the card to see how that will play out.
There is obviously a cost around building a card solution. In order to both defray our costs because we can spread them across a broader range of services, but also provide useful services to many of our partners already in the fintech community, we'll be launching that BIN sponsorship approach so that for non-regulated FIs, fintechs that want to offer a prepaid card solution, we would be the bank underlying those solutions. There's two elements, two sides to the story. The interchange revenue I think we'll give you sort of better guidance when we get to the investor day in the early part of next year.
We're not building a lot of interchange revenue associated with this from our own operations, but we do already see significant revenues coming from third-party services. We currently have one third-party fintech under contract with us to deliver the service, and we've got three in active stage of negotiations. We're seeing some pretty good interest in the solution.
Okay. Both interchange and third-party fee is gonna be the revenue component from a payment card. I would assume this is like step one. Do you have also you know step one, three, four to add other you know payment options like credit or you know with the e-commerce platform anything with respect to the buy now, pay later, where you've made some investments in the past?
I mean, certainly, you know, we have been poking around buy now, pay later. Haven't really pushed hard there. Clearly, as we start to get into payment cards, there may be a need for, you know, some of our customers may see some benefit in providing lines of credit that support, you know, temporary cash demands. You know, certainly that's where it leads you next. You know, to date, we see that payment card as functioning more like a debit card, a way to make a payment from money that's already in the account.
Okay.
Thank you, James. That's great. Thank you, James, as well. Of course, with the payment solution, that's the direct question is asked, but as you can appreciate, this is part of rounding out the entire digital bank, right? This is one of the top requested solutions by our customers today, and we believe this will help further increase customer acquisition, improve that ratio of customer lifetime value that the customer acquisition, and then further engagement, which we publish as well, right? More products to bring them in. We're looking at the whole economics as it starts to come into play. I'm really excited about that momentum we're gonna establish.
Excellent. Second theme was just on the Alt-A single-family book. Obviously really strong growth in originations. I think Alt-A originations were CAD 2 billion in the quarter, which is obviously a really strong result. Can you talk about, you know, what you're hearing from the boots on the ground in terms of, you know, market share, competitive dynamics? How did that market play out in Q3? What are some of the adjustments you're looking at today in the Alt-A space as we're seeing, you know, five-year interest rates back up a little bit?
Yeah. I mean, the adjustments you make are effectively as we change pricing, things like GDS, TDS, automatically, you know, people have to have more income. That's an automatic kind of credit adjustment, if you like. Certainly we are hearing that our team are doing a great job on customer service. We're engaged with the brokers. We've delivered some pretty good technological solutions in the first half of the year or the first three quarters of the year that are making us easier to deal with. We expect to have some more advancements, a pretty significant advancement launch before the end of this year to continue that journey to really excel on customer service, which has really always been our calling card.
I'm pretty excited about how this business will be positioned coming into next year. That's in contrast with how we started last year. As I've mentioned on this call in the past, and I, you know, it's on me, but I, we were overly cautious last year in the middle of the year and did cause some fraying of the broker relationships with a, you know, as it turns out, in retrospect, a overly sensitive view of how the credit might play out in the face of the pandemic. It's, you know, the team's done a great job, frankly, rebuilding those relationships and with it delivering kind of digitally enabled in the innovation that I think is gonna take us up to the next level there.
Okay. Do you feel from your conversations that you've grabbed some market share here, or is this more a case of the industry doing really, really well as a whole?
We certainly are understanding from kind of boots on the ground feedback from our sales team, our business development managers and from the data that we get. You know, we do have some proprietary data around market share. It's not entirely clear. You know, it's not entirely crisp. It is a bit more focused in Ontario rather than it's more easily available in Ontario than other provinces. Certainly our understanding, and we'll obviously see as the, you know, the other people participating in the space report, certainly our belief is that we've gained share.
Great. Thanks very much.
Your next question comes from Graham Ryding with TD Securities. Please go ahead.
Oh, hi, good morning. Just on the interest rate mortgage rate side, as we start to see interest rates rise here, what are you seeing in terms of mortgage spreads both on your Alt-A and your commercial book?
You know, essentially, those spreads remain the same. As we've mentioned many times, we use our ROE calculator to calculate the spreads and returns we're driving. You know, when rates move very fast, things can get a little bit out of whack for a short period of time, but we're pretty quick to adjust. Certainly seeing spreads being well-maintained. You know, we're probably in this period of what looks like some pretty significant volatility in the upcoming interest rates. We'll need to be sort of on our toes to keep adjusting rates. Don't forget, we compete in the Alt-A space, you know, with other people that fund through similar mechanics than us. You know, use most of the funding coming out of the broker GIC market.
You know, we obviously have some really good funding sources in covered bonds now, which are cheaper than GICs, and, you know, our own proprietary channels through EQ Bank, which may give us a slight funding advantage vis-a-vis our major competitors. Broadly speaking, we have the same kind of cost structure there. Similarly on commercial. You know, commercial's much easier 'cause it's priced on a loan-by-loan basis, and people understand that we're, how we're thinking about that. We do have to be a bit more rapid to change in the single family business, which is more of a rate card type of business. Those rate cards do change fairly frequently as we see underlying rates change in the market.
I do think compared to many other types of financial services, we have a pretty good position to, you know, push rates through as our underlying funding costs rise.
Okay. Appreciate that. On the funding side, my math tells me that deposit notes and your covered bonds represent about 8% of your deposit mix today. Where would you sort of be targeting to see that by the end of 2022, perhaps?
Yeah. Higher for sure, Graham. You're right. The deposit note program where Andrew was mentioning the our competitive position with funding the markets were as our program has matured, in some cases, we're seeing spreads even tighter than GICs as well and in deposit notes. Then covered bonds we see higher. To answer your questions, we would see covered bonds being at least double from where it is now. It kind of, if you call it 2%, go to 4% kind of thing. Deposit notes probably, you know, if it's a billion-dollar program now, you know, you may see that another 50% increase by next year.
You know, you do the math on that and assume this level of growth rates too that we've projected for EQ Bank. You can kind of build that funding stack up. Also, when we're seeing another 20%-30% growth in EQ Bank deposits, you can sort of get that updated perspective. Broker GICs would come down a little bit more in the funding stack. In that's some tailwind.
Yeah, just to follow up on that, the one number that's important in terms of dropping in the bottom line is how much we do in covered bonds and when we do those.
You know, broadly speaking, the deposit note cost is roughly speaking the same cost as, depends on any day, any market, you know, the day in the market, but roughly speaking the same price as or same cost to us net or as broker deposits. In terms of your models, I don't think you're particularly sensitive to the growth in the deposit note program, although it's great from a safety and diversification of funding basis. Clearly, saving that 50 basis points or so on covered bonds becomes really important.
Okay, understood. I thought deposit notes were a cheaper funding source as well, but it's just.
Well-
Covered bonds, that's where you're gonna get the funding cost benefit.
Yeah, I mean, deposit notes can get, you know, sometimes they could be 10 basis points cheaper for that sort of thing. It's not as though it's completely inconsequential. I think when you're building out an aggregate model of the bank, it's probably not gonna be a big driver. The deposit, the covered bonds certainly just because the delta is that much bigger, there's more sensitivity to the earnings.
Okay. My last one, if I could. Just, with the rollout of payments in, I think you said, second half of 2022, any material expense associated with just the infrastructure or the marketing behind that? Or should we expect that to just be embedded within, you know, a reasonable expense growth rate that we're sort of seeing this year?
Yeah. I mean, of course, you know, as you're building these new programs, generally you're capitalizing a lot of that cost so that then starts to kick in in the second half of next year. But none of that, obviously, when Chadwick's projecting our kind of efficiency ratio and the ROEs he's projecting, you know, that is how the team is doing that build up. Nothing that you should be, you know, overly concerned about.
Understood. Okay. That's it for me. Thank you.
Thanks, Graham.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Geoffrey Kwan with RBC. Please go ahead.
Hi. Good morning. I just had one question. As you look to get your transition to AIRB, you know, at the start, I think it's 2023, are you able to talk about, in terms of where the areas of your loan book that you would get the most risk-weighted asset relief? In particular, just curious if that changes your appetite on where you wanna grow the business versus what you're doing right now.
I think Ron can maybe add some more color to what I'm saying. Certainly we expect in our current business, we would expect pretty significant capital relief in our single-family mortgage business and in much of our commercial business. It does, though, become a bit more nuanced in our commercial business. There's some parts of our business where capital relief would be more significant. I do think it will allow us to compete in better quality commercial assets where the risk weights will reflect the fact that we're lending on lower risk assets. Things like cash flow apartment buildings will become an area where we can be more competitive, you know, post AIRB than we are today. It will change the mix of our business, and I think generally move it to a less risky asset business.
Ron, you're deep in the weeds on AIRB. Does that kind of align with your thinking?
It absolutely aligns. Geoffrey, the only comment that I would make in addition to what Andrew has said is recognize that typically when a bank is blessed with the AIRB approval from the regulator, the capital savings are typically staged in over a period of time. Could be three, four, five years. It gives management a lot of time. It's not a cliff-like effect where we would immediately change the composition of the book. It would be a very gradual change. Your question was directed at specific business lines, but when you become AIRB, you do have to hold a certain percentage of capital at the top of the house. So management will have some very interesting decisions to make in terms of how we deploy capital to the various businesses.
If you think of it being staged over time, limited at the top of the house, I think it helps you to understand it would be a gradual shift into some of these areas that Andrew's referenced.
Jeffrey, just to kind of reinforce, I mean, which is the way we think about this is there's two things that really excite me about AIRB. One is to be able to support our clients over a longer lifespan. Today I find it really frustrating that we help a customer build an apartment building, for example, fill it with tenants, get to a lower risk type of asset, and then we can't compete with AIRB banks because that asset is now safer and therefore they're able to use lower risk weights. In our new world, we would envisage holding, you know, high risk weights on that asset we first put on the books, lower the risk weight as the risk weight drops, and be able to support a customer over a longer period of time.
It should be relatively cheap for us to service that customer because we'd obviously have the history of that for that client relationship. The other thing is that the bank is becoming more sophisticated, and I will show this to you in spades in our investor meeting in the spring. As we become more sophisticated, we need to have better ways to measure credit risk across the various books and be entirely objective about how we're allocating capital. AIRB allows us to do that. We're well aware that under standardized approach, there's some sort of approximations to risk being used and when we think about that a lot. AIRB allows us to align our capital allocation with the true underlying risks.
Maybe if I could just a quick follow-up on that is to your comments around the single-family residential book, you know, in your Alt-A book. I mean, does that allow you or do you plan to kind of use that to your advantage in terms of, you know, improving further your competitive position in that space?
Certainly, I think it opens up that opportunity. Today, as you know, we have prime mortgages and Alt-A mortgages. All of those mortgages are risk-weighted 35% under the standardized approach. The big banks are risk-weighting their mortgage books somewhere in the 10%-20% range. So much lower. Clearly, there are buckets of risk within that mortgage business that, within the Alt-A and prime mortgage businesses, that should quite correctly demand different risk weights.
We will be able to be more finely tuned as a bank in terms of which parts of the space we choose to compete in, you know, based on the pricing that we can demand in the marketplace for that component and the risk weights that should be applied.
Okay. Thank you.
There are no further questions at this time. Please proceed, Mr. Moor.
Well, thanks, Pam. If you would like to engage on any of the topics we discussed today, our door is always open. Thank you for your time and attention, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.