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Edited Transcript of CWB.TO earnings conference call or presentation 29-Aug-19 2:00pm GMT

Q3 2019 Canadian Western Bank Earnings Call

EDMONTON Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Western Bank earnings conference call or presentation Thursday, August 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolyn J. Graham

Canadian Western Bank - Executive VP & CFO

* Christopher H. Fowler

Canadian Western Bank - President, CEO & Director

* Matthew R. Evans

Canadian Western Bank - Senior VP of Strategy & IR

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Conference Call Participants

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* Doug Young

Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst

* Gabriel Dechaine

National Bank Financial, Inc., Research Division - Analyst

* John Aiken

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Meny Grauman

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Nigel R. D'Souza

Veritas Investment Research Corporation - Investment Analyst

* Scott Chan

Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst

* Sohrab Movahedi

BMO Capital Markets Equity Research - Analyst

* Stephen Gordon Theriault

Eight Capital, Research Division - Principal & Head of Research

* Sumit Malhotra

Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services

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Presentation

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Operator [1]

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Please go ahead, sir.

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Matthew R. Evans, Canadian Western Bank - Senior VP of Strategy & IR [2]

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Thank you, Sylvia. Good morning, and welcome to the CWB Financial Group 2019 Third Quarter Financial Results Conference Call. My name is Matt Evans and I lead the Investor Relations team for CWB. Presenting to you today are Chris Fowler, CWB's President and Chief Executive Officer; and Carolyn Graham, our Executive Vice President and Chief Financial Officer. I'd like to remind listeners and webcast participants that statements about future events made on this call are forward-looking in nature and based on certain assumptions and analysis made by management. Actual results could differ materially from expectations due to various risks and uncertainties associated with our business. Please refer to our forward-looking statement advisory on Slide 14.

Before we begin, we recognize it's a busy day for the audience and I'll note that we do have a hard stop at the top of the hour so we'll look to wrap up just ahead of that. With that, I'll turn the call over to Chris.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [3]

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Thanks, Matt. The agenda for today's call is on the second slide. I'll begin with our third quarter fiscal 2019 performance highlights and comments on the continued execution of our strategy. Carolyn will follow a detail on our financial results before we moved to the question-and-answer session.

Moving to Slide 3. We delivered strong third quarter financial performance, including a new record of quarterly loan originations as we gain momentum and make significant progress on our strategic transformation. Continued execution of our Balanced Growth strategy delivered a very strong double-digit increase in common shareholders' net income compared to the third quarter last year driven by double-digit growth of both branch-raised deposits and total loans alongside solid credit quality and effective expense control. Our strategy has significantly expanded CWB's addressable market over the past several years, and we continue to create value through strategic diversification. We also continue to generate very strong increases in the lending categories and geographic regions, where we've focused investment to step out our capabilities, which is general commercial loans in Central and Eastern Canada.

General commercial loans provide excellent opportunities to create maximum value by delivering our full-service client experience that includes solutions for both sides of the balance sheet. Relationships with business owners in this space now comprise nearly 1/3 of our portfolio and strong growth here demonstrates our expanding presence across the broadest segments of Canada's economy. Growth in Central and Eastern Canada is underpinned by solid performance from our businesses with a national footprint.

I'd like to highlight the contributions of CWB Maxium and CWB Franchise Finance, both acquired in 2016. From a combined starting point of less than $0.5 billion of total assets, our highly entrepreneurial and specialized teams have generated about $2.5 billion of net growth, more than a fivefold increase over 3 years. CWB Maxium is approaching the $2 billion threshold and CWB Franchise Finance surpassed the $1 billion milestone this quarter. This growth is highly strategic as our relationships here are primarily concentrated in the general commercial lending category and mainly in Ontario. Together, these 2 acquisitions have more than delivered on our commitment to deploy the proceeds of noncore business divestitures 5 years ago and transform our addressable market to a broader geographic footprint.

CWB National Leasing and CWB Optimum Mortgage also continued to contribute to our diversification story. CWB National Leasing is a nationwide equipment leasing leader, a 3-time winner of the Operations and Technology Excellence Award from The Equipment Leasing and Finance Association and one of Canada's Top 100 Employers. Through our highly entrepreneurial and innovative approach to the market, CWB National Leasing continues to generate strong growth. And through our positive and relentless client-centric culture, our teams are focused to deliver against changing expectations of small business operators across Canada. The relatively constrained growth within CWB Optimum Mortgage over the past year, mainly reflects our choice to tighten our approach to the market using our AIRB capabilities and in response to B20. And we clearly tighten more than our competitors in the Alt-A space.

With new mortgage products in the pipeline, specifically targets the business owners, we are confident in the outlook to resume growth at a rate resembling the rest of our book. With ongoing contributions through each of these highly entrepreneurial challenges -- channels, alongside an increased Ontario presence within our standard industrial equipment business, Central and Eastern Canada now account for nearly 1/3 of our portfolio and generated nearly 40% of our growth this quarter. In recognition of the meaningful business presence we've developed in Ontario and the top talent we continue to recruit, we're excited to open our Toronto regional corporate office at 150 King Street West this quarter.

Going forward, we are very excited to be on the cusp of serving business owners through our first full-service branch in Ontario. Our Mississauga branch will open in 2020 and is ideally situated to anchor service for a broad range of business owners in the Greater Toronto area. Together, with accelerated investment in digital capabilities, the Mississauga branch will enable our teams to deliver CWB's uniquely proactive full-service client experience to business owners in key Ontario markets through both human and digital channels. Ongoing investment in our full-service capabilities continues to represent a central pillar of our Balanced Growth strategy to diversify funding growth, and on Slide 5 our success is demonstrated. Very strong double-digit growth of demand and notice branch-raised deposits over the past year included contributions from our full-service banking branches, CWB Trust Services notice account line of business and rapidly accelerating contributions from Motive Financial. Motive deposits have more than doubled so far this year, reflecting strategic pricing initiatives and focused investment in Motive's capability to deliver a winning client experience. Both in terms of total deposits and funding value, Motive now represents our fourth largest source of branch-raised funding behind only CWB Trust Services and our main branches in Edmonton and Vancouver. Resulting from this strong branch-raised deposit growth, both the brokers-sourced deposits was well below the growth rate of our total loan portfolio.

It's clear that we continue to gain momentum and make significant progress on our strategic transformation, while delivering strong financial results. Further development of our differentiated full-service client experience will include highly scalable digital capabilities and increasingly focused team-based personal service model. These efforts will continue through 2020.

Together, with end-to-end process improvement, this integrated transformation represents a clear path to higher growth, increased profitability and maximum value creation for our upcoming transformation into the advanced approach for capital and risk management. I'm proud of the progress we've made and excited for the changes to come. We continue to strengthen our presence in Ontario, while building on our proven strength in BC and navigating a challenging operating environment over the past 5 years in Alberta. Notwithstanding the potential for another slight contraction of GDP growth in Alberta this year, business owners are starting to benefit from lower taxes and less red tape.

Approval of the Trans Mountain pipeline is positive for BC, Alberta and for Canada overall. We are confident it will provide significant opportunities for our core clients and support renewed investment in our country. We are especially excited by the recent notice to proceed directed to contractors lined up for pipeline construction. We continued to closely follow developments in the domestic and global economies and the application of monetary policy. While trade-related headwinds persist, Canadian housing markets, the risks have moderated compared to earlier periods.

Looking forward, we are committed to mitigate the revenue impact of potentially lower interest rates with disciplined control of expense growth. We also remain confident in the strength of our disciplined underwriting and proactive loan managing practices and expect our prudent approach, that we've augmented with our enhanced capabilities, to support strong financial performance through the coming phase of the cycle.

As the operating environment continues to evolve, we remain confident that our Balanced Growth strategy will maximize long-term value creation for our clients, our teams and our investors. Our proven business model is focused to support growth and prosperity for business owners who deliver 50% of Canada's GDP and employ 90% of Canada's workforce. The investment in capabilities to broaden our client relationships is clearly yielding in results, and we see tremendous growth potential. To accelerate growth and boost awareness of our unique brand within targeted markets, we were also excited to launch our new Obsessed With Your Success brand promise and We come to you ad campaign. We'll continue to take the key steps necessary to set CWB apart as a disruptive force in Canadian financial services and a clear alternative for successful business owners across the country.

With that, I'll turn the discussion over to Carolyn.

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [4]

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Thank you, and good morning. As Chris mentioned, we delivered a strong third quarter. Common shareholders net income and pretax preprovision income were up 14% and 6%, respectively, from the third quarter last year. Total revenue was up 7%, including a 7% increase in net interest income. Noninterest income was up 2% from last year, mainly reflecting growth of credit-related fees, retail services fees and Trust Services income.

Net interest expenses were up 7%, primarily due to an 8% increase in salaries and benefits driven by hiring activity to support overall business growth, execution of our strategic priorities and annual salary increments. Premises and equipment expenses increased 11%, primarily reflecting ongoing investment in technology infrastructure in premises to position CWB for future growth. Other expenses were up 4%, partially reflecting higher advertising expense associated with our new brand and marketing campaign. A higher growth rate of common shareholders net income compared to pretax preprovision income reflects completion at the end of February this year of the CWB Maxium contingent consideration 3-year earn out period, along with a lower provision for credit losses and a lower effective tax rate from the reduction in Alberta corporate income taxes. Quarterly diluted and adjusted cash earnings per common share of $0.81 and $0.82 were up 16% and 9%, respectively, from last year.

Reevaluation of our deferred income tax balances from the change in Alberta corporate income tax rates amounted to less than $0.02 of earnings per common share. On a year-to-date basis, common shareholders net income and pretax preprovision income were up 8% and 7%, respectively. Earnings growth reflects an 8% increase in total revenue, including 9% growth of net interest income and a 4% decrease in noninterest income.

Within noninterest income, growth of credit-related fees, net gains on securities and retail services fees was more than offset by the impact of approximately $3 million of gains realized from the CWB strategic transactions recorded within other noninterest income in the first quarter last year, along with lower wealth management fees.

Diluted and adjusted cash earnings per common share of $2.27 and $2.37 were up 10% and 6%, respectively. With 3 quarters of 2019 in the books, we continue to expect full year earnings growth and return on common shareholders' equity to fall slightly below our medium-term targets. Compared to last year, 7% higher net interest income reflects the benefit of double-digit 10% loan growth, partially offset by a 4 basis point decrease in net interest margin. The change in net interest margin mainly resulted from higher funding costs, reflecting the higher interest rate environment, competitive factors and longer duration fixed-term deposits in both the branch and broker channels.

On a year-to-date basis, net interest income was up 9%, again reflecting 10% loan growth along with a 2 basis point increase in net interest margin. The increase in net interest margin reflects higher asset yields and lower average balances of cash and securities, which more than offset higher funding costs.

Looking forward, we continue to expect to deliver growth of net interest income in the high single-digit range for fiscal 2019 driven primarily by strong loan growth. We expect net interest margin in the fourth quarter to be relatively stable sequentially, reflecting no changes in the Bank of Canada interest rate along with continued strong branch-raised deposit growth. Our third quarter efficiency ratio of 46.5% compares to 46.0% last year and 46.8% in the previous quarter. Operating leverage was negative 1.1%, improved from negative 1.4% last year and negative 3.1% last quarter. On a year-to-date basis, the efficiency ratio of 45.9% compares to 45.4% last year. Operating leverage of negative 1.3% compares to positive 2.5% last year. And I'll note that operating leverage in fiscal 2018 benefited from the cumulative effects of successive Bank of Canada increases as well as higher acquisition-related revenue from the business lending assets we acquired on January 31 of 2018. Changes in the efficiency ratio and operating leverage this quarter reflect noninterest expense growth from continued investment to advance our strategic execution. Our strategy is focused to deliver industry-leading growth over the medium term, and there is typically a lag between the timing of necessary investment and return, and quarterly volatility in operating leverage is expected.

That said, we continue to expect the annual efficiency ratio to fluctuate around the average of the past 3 years at approximately 46% over the near term. We remain committed to prudently manage expenses based on expected revenue growth and expect to deliver slightly negative operating leverage on a full year basis in 2019.

Turning to Slide 10. Sound overall credit quality continues to reflect our secured lending business model, disciplined underwriting practices and proactive loan management. We continue to carefully monitor the entire loan book portfolio for signs of weakness and have not identified any current or emerging systemic issues. Under IFRS 9, the third quarter provision for credit losses as a percentage of average loans was 19 basis points, with 22 basis points related to impaired loans and a reduction of 3 basis points related to performing loans due to a lower proportion of the portfolio classified in stage 2 from a relatively stable macroeconomic environment.

In the second quarter this year, the provision for credit losses of 23 basis points consisted of 22 basis points related to impaired loans and 1 basis points for performing loans. Under IAS 39, provisions for credit losses represented 21 basis points in the third quarter last year, the 22 basis points for impaired loans and a 1 basis point reduction for performing loans.

On a year-to-date basis, the provision for credit losses of 22 basis points related entirely to impaired loans and this compares to 20 basis points also entirely related to impaired loans, last year under IAS 39. Gross impaired loans at quarter end totaled $143 million, representing 51 basis points of growth loans, compared to $135 million or 53 basis points last year and $168 million or 62 basis points in the prior quarter with continued proactive management of our impaired accounts, resolutions exceeded new formations this quarter. As we said before, the level of growth impaired loans fluctuates as new impairments are identified and existing impaired loans are either resolved or written off. And does not directly reflect the dollar value of expected write-off, given tangible security held in support of lending exposures.

The overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends. Our business model remains focused on secured mid-market commercial lending, and we have no material exposure to unsecured personal borrowing, including credit cards.

At July 31, our total allowance for credit losses in stages 1, 2 and 3 was $111 million, which compares to $118 million last quarter. With the balance -- the allowance for stage 1 and 2 performing loans essentially unchanged from last quarter. At this level, the allowance for performing loans represents more than 2.5 years of average annual losses over the past 5 years and that includes the elevated oil and gas losses in 2016.

Slide 12 provides our strong capital ratios at July 31 of 9.0% common equity Tier 1, 10.6% Tier 1 and 12.8% total capital. Our Basel III leverage ratio of 8.3% remains very strong. With these capital levels, we are well positioned to create value for shareholders through a range of capital deployment options consistent with our Balanced Growth strategy. Ongoing support and development of each of our businesses will remain a key priority, and we will continue to evaluate potential strategic acquisitions. We repurchased approximately 63,000 shares under the normal-course issuer bid in the third quarter and average price of $27.91, and a total of 1.8 million shares so far this year and average price of $27.08. And this compares to our July 31 book value of $28.82 per share. Approximately 1.7 million shares remain available for repurchase under the normal-course issuer bid. While our primary focus remains to drive continued growth and support strong capital ratios, the NCIB is a prudent tool to create value for shareholders when circumstances warrant as they have at various times in the past year. Yesterday, our Board declared a common share dividend of $0.28 per share, up $0.01 or 4% from last quarter and up $0.02 or 8% from the common share dividend we declared 1 year ago.

Our steady execution on all fronts also includes progress towards our planned transition to the advanced approach for calculating and managing regulatory capital. We continue to expect to submit our final application and receive regulatory approval to transition to the AIRB methodology in fiscal 2020. We've undertaken an interim and conservative approach to achieve this transformational milestone, which will create meaningful and lasting value for shareholders.

In closing, we're pleased with our strong performance this year. We're very proud of our teams as we continue to deliver on our strategy, transform our capabilities and create value for business owners across the country. And with that, I'll turn it back over to Matt.

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Matthew R. Evans, Canadian Western Bank - Senior VP of Strategy & IR [5]

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Thank you. That concludes our formal presentation for today's call, and I'll ask Sylvia to begin the question-and-answer period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Sumit Malhotra at Scotiabank.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [2]

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Carolyn, your comments on net interest margin and specifically, the fact that your current expectation is that NIM will be flattish into Q4. Curious how the shift in the rate backdrop in the last few months is impacting asset yields? I would have thought that the loan repricing or new business that you are underwriting is being done at lower spreads and that would have a negative impact on NIM, but at least based on your comments, it sounds like that is not the case?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [3]

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You know, Sumit, we continue to set thresholds and return targets for all of our portfolios and the loan growth is coming in exactly the areas that we're looking for and meeting our return hurdles. So it's been, I think, a combination of both where we're seeing the loan growth and a strong branch-raised deposit growth that is funding it.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [4]

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So as of now, no material shift in -- and I'm leaving the funding side out of it for a second because I know you -- Chris spent some time on the success you're having there, but specifically on loan yields, no major impact yet from the rate shift?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [5]

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We haven't -- Yes, we haven't seen a significant change in loan pricing.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [6]

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All right. And then secondly -- and I'll just leave it at this question for today. So the provision in the quarter had a release of just under $2 million in the stage 1 and 2 portfolio, so this is the first time we've seen, at least in 2019, a release from you folks. Is that -- can I tie that into what -- the movement we saw in gross impaired loans, the category you mentioned there was a major repayment or reversal? Am I right to tie those 2 together? And if you could give us a little bit more detail on what was the driver of the movement in that reversal? That would be appreciated.

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [7]

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Yes, I wouldn't tie the 2 together. So I wouldn't tie what happens to the stage 3 impaired loans, necessarily, that would work over time, but not -- I wouldn't say that that's what attributed the Q3 movement. It really was the combination of both the expected macroeconomic factors, which were relatively stable, our internal default rates, the past due presence of where our clients fall in the portfolio and so on, a conditional probability of default basis we had more clients move from stage 2 back into stage 1. So that takes some from lifetime expected losses to 12-month expected losses, and that's primarily what created the difference in the quarter.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [8]

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And how about the GIL reversal itself?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [9]

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So we had a very strong quarter of resolutions of impaired loans. We -- We're always very focused on credit quality and as the kind of the life cycle of impaired loans, you've got a whole process on collection and we just had a very good quarter of resolving and finalizing loans. We -- Of the $43 million, $39 million were actually gone and paid out, and $8 million were upgraded. So very, very strong results in credit quality management over Q3.

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Operator [10]

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Next question will be from Gabriel Dechaine at National Bank Financial.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [11]

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Just -- Can you run it by me again, the margin factors this quarter, the [pipeline] reduction in health and then deposit pricing didn't -- I've got a follow-up, but I just want to make sure, I got that straight?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [12]

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Yes. Let me just -- yes, so it's really -- it really was -- 3 basis points that wasn't made up of anything material. It was a basis point here, a basis point there. So not really anything that draws, solely, to the 3 basis points. As I think about it...

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [13]

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I don't want to make a big deal out of it, I actually -- what I want to know is -- because we did see some big growth in your deposit base at the branch, 13% both in term and in branch, and add them in an order -- sorry. Twofold question, how does that inform your margin outlook having that access over the past growth and that cheaper source of funding? And two, was there perhaps some promotional pricing that drove those increases in the quarter and leading up to the quarter? And if so, do you kind of [turn that tap off] at some point, and then we see a margin pick up at some point?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [14]

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So I'll come at it. That's 2 different questions. So how does it inform our future outlook? Our outlooks have always included and continue to include strong growth in branch-raised deposits but having 2 solid quarters of 3% branch-raised deposits growth, sequentially, helps gives us more confidence in the amounts that we are considering for branch-raised deposits going forward. We are really pleased with how our strategies are bearing fruit in that regard. As far as promotional pricing goes, we do not offer limited term pricing promotions that are in place for several months and then reduce to lower levels. So we offer, what we believe are, fair and competitive pricing, and we tend to hold them there.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [15]

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Okay. And let's -- maybe if you hadn't had that type of growth and again, you've had it for a couple of quarters would you have a more bearish view on the margin perhaps?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [16]

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It's -- always you look at the most recent future and think about what that means for -- or the most recent past and think about what that means for the future. I think we are -- we've been talking for a -- several years on this strategy that we were implementing to help support general commercial clients who would bring us both asset and liabilities, both sides of the balance sheets. So we are really pleased that we are seeing continued growth in those areas.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [17]

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It's right on strategy, Gabe, and that's the real focus we have, and what we also see this quarter is reduction in broker deposits. We really have focused on how we can grow that full client relationship.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [18]

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Now last question is on the Optimum Mortgage book. 3% growth, so it's been trending downward. Do you still expect the upper single-digit growth for the full year? I'm just trying to think of -- if you can help me out with the beyond 2020 outlook -- sorry 2019, actually. Where do you see mortgage growth evolving in the next year? The -- some of your peers have been reporting a bit of a rebound here?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [19]

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Yes. so I'm going to start, and then I'll turn it over to Chris. So from an overall growth in personal loans and deposits, Optimum is one portion of that. We expect to see high single-digit growth in that for fiscal 2019 and that is what we're seeing year-to-date. Optimum growth, as a component of that has been slower, though. And I'll let Chris speak to Optimum a little bit.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [20]

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Yes, so Optimum we talked about it about a 1.5 year ago as we -- it was one of the first portfolios that we moved into the AIRB modeling for risk grading and what we did at the time was target to have a higher quality [bars], so a lower risk grade in that book. So we've been zeroing in on that, plus adopting the B20 rules for the sort of underwriting guidelines. And with that, it actually has reduced our underwriting, but we are very confident in the quality of that book. We've -- in terms of overall residential mortgages, we've tremendously increased our capabilities with the core technology investments we've made that now gives us more access to A mortgages and the ability to securitize them. So we see the whole mortgage area as an opportunity for growth. As we look into the next number of quarters, we will be delivering a new business for self-residential mortgage in the Alt-A side. So we see that allowing us to capture more market share as well. So we're very confident in the go-forward approach for residential mortgages both Alt-A and A.

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Operator [21]

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Next question will be from Steve Theriault at Eight Capital.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [22]

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So Carolyn, you talked about the efficiency ratio in terms of your outlook being stable, but Chris, I thought I caught that you were going down the line of lower rates, potentially being offset by better expense performance. So I guess I'm just -- we're still 3 months away from Q4 call, obviously, but should I take that, so that maybe you mean you're starting to telegraph a deceleration into the next year, especially if you get some rate cuts and you think you might have some offsets there?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [23]

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You're right, it's still early, but as we work on our projections, we continue to have -- as our large transformational projects come to conclusion and go live, we will start to have the depreciation cost associated with them. So we are always looking at the combination of growth in net interest income, other fee income, compared to expense growth, so we are continuing to think really carefully about what is our -- how do we deploy our strategy and manage within the revenue projections that we have. We are also -- and we talked about it in the quarter, reworking -- given the results of our technology, we're reworking how we deliver that great client experience through our branched network combining our focused committed teams, efficient processes and leveraged by our technology investments. So as we work through the rest of 2019 and 2020, that work continues actively in the business, and so that will drive out eventually a more -- run rates that are more -- sort of the go-forward run rate.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [24]

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Right.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [25]

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Yes, that's helpful. And as I think about [closely] like as you wrap 2019, you changed the year outlook statement to negative on operating leverage, just for this year, but Q3 was better than Q2. Would you expect Q4 to be better -- like are you on a positive trajectory there and you would think Q4 is better than Q3, and you're on a bit of an improving trend here or not necessarily?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [26]

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So we were anticipating that the second half of the year would improve compared to the first half and that is what we're -- we've delivered. And a strong branch-raised deposit growth, that we've seen helped support that assumption looking into Q4. So yes, we think we're on a positive movement, but again, as we've mentioned in the past, for us as we think about executing on our strategy, positive operating leverage is positive but not materially large, right? So positive in there, probably 1% would be very good results for us.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [27]

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Okay. And then lastly from me, just a follow-up on the demand and notice you're at I think about 32% demand and notice deposits relative to your deposit book, are there -- you've had a couple of good successive quarters here now in terms of driving growth, is -- would you be prepared yet to share any targets or aspirational targets or otherwise in terms of where you'd like to see that get? Like do you think you could get up to 40% over the next couple of years?

It's hard to tell, given the virtual branch effort is still in the early stages but you're, obviously, showing some growth trajectory there. So anything on that front would be helpful.

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [28]

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I think it -- we don't have a target that we've explicitly thought about communicating. There's also a factor in this that is client driven. So if our branch-raised client prefer GIC rates versus holding in one of our other savings accounts, then we could trend a different way. So we tend to focus on the branch raised overall, think about the components within, but not a target that we've put out.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [29]

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And we see lots of opportunities as we look into fiscal '20, we've got a -- our -- the digital front end of the bank is going to have significant investment, which then really help us on onboarding as well, so we see great opportunities as we look at, for example, Motive that had a -- over 100% growth in this year. We would be able to improve that with better onboarding, digital capabilities that are coming and investing in more fully in fiscal '20.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [30]

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And is it [to quote] how big Motive is relative to the total anywhere?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [31]

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No. We don't separate it out, it's just been very strong growth for us.

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Operator [32]

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Next question will be from Doug Young at Desjardins Captial Markets.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [33]

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Just going back to NIMs and the branch-raised deposit, and I apologize if you covered this and I missed it, but what impact did that growth in branch-raised deposit have this quarter? And I know branch-raised deposits are viewed as being more favorable. I guess it depends on the rates that you are offering. So what's -- and maybe, within the same vein, can you talk a bit about, what's the funding cost advantage from a rate perspective between wholesale and the demand and notice deposits that you're raising?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [34]

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As far as the impact on NIM, this quarter, could be a basis point, no more than a basis point. One of those small factors that contributes. On the comparative funding cost, I'm going to have to -- we'll have to come back to you on that, I don't have that at my fingertips. The positive with the relationship-based, branch-raised deposits is not only the direct rate we paid to the client, but they also have -- they have a higher funding value from a liquidity perspective, so we may potentially carry less liquidity against those.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [35]

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And also, it's creates a stickier client, too. I mean we -- our goal is to satisfy both sides of the balance sheet and the transformation we've had underway is to materially improve that offer to our clients and it's -- what we are seeing is the benefits of that, with our businesses performing very well.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [36]

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And I know you've given what your outlook for NIMs would be without the Bank of Canada rate cut. Can you remind us, let's say, the Bank of Canada were to cut 25 basis points, what -- and you look out over the next year as you do your planning, what is the impact, potential impact that you foresee on the NIM for fiscal '20?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [37]

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We continue to work on our 2020 forecast. We do think about the fact that we have a better mix in the balance sheet than we did the last time that rates fell. And the key issue for us, as we think about the impact on NIM, will be around our branch-raised deposits and the portion that are, what we call administered rates, so where they are not directly tied to Prime or SEDAR, but we're -- we make the decision of the rate to offer on those. So that'll be a fact of thinking about the rate environment, thinking about the competitive impact there.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [38]

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Okay. And then just back to the -- Chris, and I apologize, I think I missed the numbers, you said there was reductions in impaired amounts of $43 million and then there was an amount you gave that was returned to performing an amount, that was, I think, written off. And I forget what the 2 numbers were.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [39]

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$39 million were paid out and then the difference was upgraded. So the loans returned to performing status.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [40]

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And I apologize because I'm able to do the numbers, but it looks like your write-offs were larger than normal and so within that whole equation was it higher than normal? Was there any surprises in the write-offs that occurred?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [41]

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So as we -- so as I mentioned in my opening remarks, as you work through impaired loans, you kind of -- they come to a conclusion at certain points and then you have a bunch of resolutions. We had that this quarter. So we had significant resolutions occur in the quarter, which then included higher write-offs. And that's really the outcome of the -- sort of the loan management process. So we're -- as we look at our book, we're very comfortable where we sit today. We are very -- I think the credit quality is very strong. If you look at -- in the news release, we've got about $49.5 million of gross impaired loans in our top 10, that's over 303 accounts. So it's a -- so we've got a -- I think a very stable, very strong credit quality book today and not seeing any systemic issues in it.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [42]

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That doesn't sound -- it sounds like it was more volume related than any particular surprise when you settled up.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [43]

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Yes. No surprises. Yes.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [44]

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Okay. And then just lastly -- more hypothetical question, I mean your CET1 ratio was flat. You've had risk-weighted assets growth under the standardized methodology. If you had a similar quarter and you were under AIRB, with this level of growth and deposits growth and whatnot, would you be building CET1? And what would be an organic CET1 build under AIRB, on a normal basis?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [45]

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We would be building organically from levels of growth that we've had this quarter. Exactly, what that would be? That's a good question. Yes. I don't have that at mind.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [46]

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Yes. The big win for AIRB is really the categorization of our portfolio and being commercially focused, as you know, at 80%. The opportunity for us to have just much better capital allocation is definitely what we are driving for here and our current world where anything in the 10% or above growth rate does consume capital, and we will find that being alleviated under AIRB.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [47]

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I'd just be curious to see how you compared to some of the bigger banks, but we can take that off-line...

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [48]

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Yes...

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [49]

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Yes. Absolutely.

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Operator [50]

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Next question will be from Meny Grauman at Cormark Securities.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [51]

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If I take a step back, I look across the past few months we've had great expectations plunging, trade worries spiking and the probability of recessions increasing across North America and the world. If I look at your results, it doesn't seem to translate into -- it doesn't seem to reflect that at all, you have 10% loan growth, the drop in the PCL ratio. I'm just wondering how you reconcile those big-picture worries with your performance and what you're seeing on the ground. It doesn't seem like there's a connection there at all.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [52]

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So as we think about that, I mean that is the opportunity we have in front of us with the market share that we currently have. So we've got a low market share, and what we've brought and are bringing to the market of that sort of mid-market commercial, the areas we focused on and business owners. It's the opportunity to be disruptive to take this growth -- mid-market growth bank that we've had in Western Canada and import it to Ontario. So we've done a lot of great transformation that's allowed us to capture more market share and that's our focus. We're investing in our capabilities to continue to win more clients, really at that front end, we've had great performance by our Ontario businesses and talked about it in our opening remarks. So we see lots of potential moving forward.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [53]

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And when you speak to your large number of commercial clients, do you see those trade worries, for example, coming through in their decision making? Do you sense any sort of change in the mood out there in terms of business owners?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [54]

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I think everybody's worried. I mean there is no doubt about that. I think the -- there's a lot of noise, both sort of that -- sort of macroeconomic, geopolitical trade, all these issues are very, very top of mind, but there is always going to be economics cycles, there's always going to be ups and downs, but we're also going to have many clients that navigate their way through all economic clients -- climates. And our focus is to zero in on those opportunities, make sure we've got the right mix of products and really talented staff that gets in front of them to provide the right financial solutions. So we're focused on that.

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Operator [55]

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Next question will be from Sohrab Movahedi at BMO Capital Markets.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [56]

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I just wanted to, maybe, ask an earlier question a little bit differently. As you think about your organization under the AIRB capital regime, and you think about some of your financial targets out there and specifically, your return on equity, do you think you're going to keep it at that 12% to 15%? Or do you think your target will move up, as far as the return on equity is concerned?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [57]

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We will absolutely revisit all of the targets as we -- with AIRB approval. It changes the landscape. It changes the opportunities for us. And so yes, we'll revisit all of the targets.

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Sohrab Movahedi, BMO Capital Markets Equity Research - Analyst [58]

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But given the capital allocation benefits and the like that I think you've talked about, is there any reason to believe why you wouldn't be targeting higher ROEs?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [59]

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Well, so, Sohrab, this whole focus on AIRB, this transformation of the way that we run our bank going from a branch-centric organization to an enterprise-based bank, we have made tremendous transformation, AIRB is such an opportunity for us. And as we think about our performance targets, they will all be reevaluated, absolutely, and that will come with -- once we get to approval, looking to focus on -- we definitely have options in how we think about our performance targets. It just changes our competitive opportunities and our ability to deliver much more effectively with a better set of tools.

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Operator [60]

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Next question will be from Scott Chan at Canaccord Genuity.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [61]

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Chris, just on your geographic slide, I just noticed that Quebec is growing really, really solidly off a low base, up 35% year-over-year. Is that national leasing? Or is there some other factors that's driving that growth there?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [62]

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So Quebec is a combination of national leasing and some corporate lending, that we have in syndicated loans in that province. So it's not -- it's -- so the on the ground business in there is national leasing and the balance of it is corporate lending.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [63]

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So -- okay, okay, and then Carolyn, just going back to the NIM. You talked about stability in Q4, and I know it's tough, but if you kind of take what you did this quarter, if you look out into fiscal 2020, assuming to Bank of Canada rate cuts, is it safe to assume that you'll probably have some slight margin compression next year?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [64]

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I think it would be a safe assumption that our margin tends to move along with the Bank of Canada rates.

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Operator [65]

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And your next question will be from Nigel D'Souza at Veritas Investment Research.

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Nigel R. D'Souza, Veritas Investment Research Corporation - Investment Analyst [66]

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So I have 2 questions for you. The first is just another follow-up on the performing loan loss side. So I understand the benefit from migration of loans from stage 2 to stage 1. I want to touch on, more so, on the stable economic outlook, and the reason I bring that up is we are seeing some recent weakness in Western Canada oil and gas sector, seeing higher credit risk and there is employment pressures in Alberta. And real estate market in British Columbia is under a bit of pressure as well. So is that stability driven by an offset of more robust economic conditions in Eastern Canada? And is that how we should think about it? And does your outlook of that change so is it possible in the near term that your forward-looking indicators, under IFRS 9, would that be potentially revisited or moved lower? And -- or is it possible that you -- [the waiting you add to your] adverse case scenario, could that change or move higher given the current economic headwinds?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [67]

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So all those often -- all those things are possible. So we look at -- we consider it in our economic outlook, we consider the composition of our loan portfolios. So as you noted, things that affect one of our provincial economies differently than it does the others, absolutely plays into it, and we revisit our forecast and our economic forecast every quarter.

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Nigel R. D'Souza, Veritas Investment Research Corporation - Investment Analyst [68]

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Okay. So do you still expect stability in that forecast, in the fourth quarter?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [69]

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Well, it's an expectation and we are not through the fourth quarter yet, so I can't really -- it depends on how the market expectations move.

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Nigel R. D'Souza, Veritas Investment Research Corporation - Investment Analyst [70]

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Okay. And the last question I have is just a follow-up on the AIRB transition. Carolyn, you mentioned a wide range of capital deployment options, and I was wondering, if we think about the prioritization between growing risk-weighted assets and returning capital to shareholders, if -- hypothetically speaking, if economic conditions would cause you to prioritize returning capital to shareholders instead of growing your -- the balance sheet, would there be any challenges to that in terms of regulatory hurdles or obstacles? Or how should we -- how do you think we should think about that dynamic?

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Carolyn J. Graham, Canadian Western Bank - Executive VP & CFO [71]

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I think they are both options. Everything is on the table for us, and we will think carefully about how quickly we decide to deploy any capital that becomes available, and what we think are the best options at the time, right? We are continually committed to driving long-term value for shareholder, but in all things we pursue our long-term strategy in the face of what's going on in the environment at the time.

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Operator [72]

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Next question will be from John Aiken at Barclays.

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John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [73]

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I'm not sure -- I mean I know there's not any clarity on the resolution, but if you can actually guide a little bit of clarity on the liability issues under the new government for oil and gas loans? Would you actually consider increasing your growth targets, if that -- if those actually came true?

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [74]

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In terms of oil and gas lending?

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John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [75]

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Yes.

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Christopher H. Fowler, Canadian Western Bank - President, CEO & Director [76]

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I think it'll be a clarity on that in terms of us being able to control our destiny through exercising our security rates, we would be much more positive on that area. There's still many great companies in that market. I don't think it's going away soon, but from our perspective we're just picking our spots, and today we -- our participation in that market has been in the syndicated level, so it's sort of larger credits with strong balance sheets and good production profiles, but where we -- where the issues occurred was in the smaller producing area, and so we will continue to monitor it because it is and has been historically good business for us. And at this point, we're being very careful.

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Operator [77]

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And at this time, I would like to turn the call back over to Mr. Evans.

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Matthew R. Evans, Canadian Western Bank - Senior VP of Strategy & IR [78]

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Thank you, Sylvia. Thank you all very much for your continued interest in CWB Financial Group. We look forward to reporting our fourth quarter and full year fiscal 2019 financial results on December 5. And with that, we wish you all a good day.

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Operator [79]

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Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.