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Edited Transcript of EQB.TO earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 Equitable Group Inc Earnings Call

TORONTO Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Equitable Group Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew R. G. Moor

Equitable Group Inc. - President, CEO & Director

* Tim Wilson

Equitable Group Inc. - Senior VP & CFO

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Conference Call Participants

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* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Jeffrey Michael Fenwick

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

* Marco Giurleo

CIBC Capital Markets, Research Division - Associate

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I'd like to welcome shareholders and analysts to the Equitable's Second Quarter 2019 conference call and webcast. Later, we will conduct a Q&A with participating analysts on the call. Before we begin, and on behalf of our speakers today, I will refer webcast viewers to Slide 2 of the presentation and our callers to the following information, which contains the company's caution regarding forward-looking statements. We remind you that certain forward-looking statements will be made today, including statements regarding possible future business and growth prospects of the company. You are cautioned that forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Certain material factors or assumptions were implied in making these forward-looking statements, and many factors could cause actual results or performance to differ materially from those conclusions, forecasts or projections expressed by such forward-looking statements. Equitable does not undertake to update or -- any forward-looking statements made by itself or on its behalf, except in accordance with the applicable security laws.

Additional information on items of note, the company's reported results and factors and assumptions related to forward-looking statements are available on Equitable's Q2 2019 MD&A and earnings news release. This call is being recorded for replay purposes on July 31, 2019. It's now my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Bank. Please proceed, Mr. Moor.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [2]

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Thank you, Marcella. Good morning, everyone, and welcome. I'm joined by Tim Wilson, Chief Financial Officer of the bank. Over the past couple of years, Equitable has positioned itself as Canada's Challenger Bank. At first, there was a significant aspirational element to this claim. More recently, we have turned ambition into reality by finding new ways to deliver banking services. In so doing, we won thousands of new customers for our now much broader business lines. In many ways, Equitable is not the same bank we were just 2 years ago. We are stronger, more innovative, more diversified and more capable of creating value for customers and shareholders than ever before. Hitting our stride as Canada's Challenger Bank has created tangible momentum and return. At EQ Bank, we added 20,000 new customers over the past year, including 5,000 in Q2 itself. Our digital team also unleashed their imagination again in the quarter, revisiting our approach to digital onboarding. In my view, they have created the best, most elegant onboarding app of any digital bank in the country and our conversion rate has soared. I invite everyone on this call to download the EQ app and open an EQ Bank account. It's simple enough that you can do it while listening to me, and so fast that you can have an account in place before our call is finished. And you will benefit by being able to use the Savings Plus bank account to move money like a checking account to pay bills, while getting all the best elements of a savings account, including a 2.3% interest rate.

Our strength in technology development is manifesting itself with the migration of our core banking system to the cloud. We set the stage for the significant technical advancement during the second quarter. By the time of our third quarter call, we expect to be Canada's first bank with a core banking system running in the cloud. Our new operating model will give us enormous scalability. And from a business perspective, will allow us to accelerate product development time lines to bring meaningful innovation to Canadian financial services marketplace.

Speaking of new services. In May, we launched our reverse mortgage product with Quebec mortgage brokers, meaning now we are actively building our channels to this market across Canada's 4 most populist provinces. In July, we entered into a partnership with BMO Insurance. Holders of BMO Whole Life policies can now use the EQ Equitable CSV line of credit to borrow up to 90% of the cash surrender value of their insurance policies. This is one of several partnerships with Canada's leading insurers we've secured as a means of reaching and helping more Canadians to meet their financial needs later in life, what we internally think of as our decumulation businesses. Challenger Bank momentum is also providing asset growth across the board, including at Bennington. We're getting to know the Bennington team, and it's clear that these people share our values and priorities for customer service and shareholder value creation. I've also had the opportunity to meet with many of Bennington's key brokers and the strength of these relationships has impressed me and suggests we might find even more opportunity. It's still early, but the decision to acquire Bennington feels more and more like a good one.

The effectiveness of our strategy is also evident in other retail and commercial businesses, where we have long challenged industry norms for service. Combined, our assets are now approximately $31 billion. And with solid loan growth expected in the next 2 quarters and for the year as a whole, 2019 should be another record profit -- period of profitable expansion.

Of course, for shareholders, we like to think about the financial metrics as well as the strategic story. On this score, our Challenger Bank business model continues to pay off. Earnings for the quarter and year-to-date are our best ever. And our ROE, which we consider our true North, was a very satisfying 16.9% for the quarter. Two other developments reflect the strength of the bank. In recognition of Equitable's solid and growing franchise and I quote, "DBRS recently upgraded its outlook to positive from stable." In the signing of an improved outlook, DBRS noted the successful launch of new lending products that complement our mortgage offering and the fact that we continue to attract direct deposits through EQ Bank while enhancing our wholesale funding channels.

The other development worth noting is the advancement of AIRB. We've recently submitted the plan to OSFI, a milestone that keeps this program on track. We're not the same bank as we were just 2 years ago. We are Canada's Challenger Bank with all the strength and the potential that goes along with it. As the momentum has grown, so has our confidence in the future and the bank's ability to find a new way forward for our dividend policy. As you know, strong earnings growth has supported consistent dividend increases for 10 years, averaging over 10% per annum. As the bank strengthens, we recently went through a process to consider changes to our approach going forward. The conclusion of this thinking is that from now through 2024, we intend to increase dividends at a rate of 20% to 25% per annum to bring the dividends to as high as $4 per share 5 years from now. We are pleased to note that we've already acted on this new approach by increasing the September dividend to $0.33 or 22% over that paid a year ago.

I'm not going to speak in detail to our credit performance this quarter, except to say that we refined our arrears and risk modeling assumptions for our lease assets, that we remain well reserved and that economic data supports our view that risk in residential real estate has moderated in most markets. With that backdrop, we expect credit loss provisions in our mortgage book to remain low in 2019. Our capital ratios did tick up in the quarter as we planned and are now within our target range. By year-end, we expect that our CET1 ratio will be returned closer to the midpoint of our target range, which is 13.5%. I'll offer a few more thoughts about the way forward, but now it's Tim for his report.

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [3]

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Thanks, Andrew, and good morning, everyone. On both a reported and an adjusted basis, EPS was a quarterly record and ROE moved up again. The change analysis slide in our deck illustrates the impact of various drivers of profitability. And once again, assets were the key propellant of our year-over-year earnings growth, along with an increase in NIM and a reduction in backstop facility costs. Cost growth was a partial offset to those other factors. We invested more in operations generally in support of our growth strategy and incurred expenses of about $0.5 million for the migration of our core banking system to the cloud. I'll detour briefly here to highlight that the majority of the costs for our migration to the cloud will show up in the second half of 2019, one quarter later than expected. Costs in each of these last 2 quarters of the year should be about $1.5 million or approximately $1 million higher than in Q2. Costs will reduce in Q1 of 2020 as we complete the migration and decommission some of our infrastructure, which will be surplus to our needs by that time.

Turning now to NII and margin trends. Q2 reported net interest income was up 44% and 34%, if adjusted for last year's write-down of upfront costs related to our backstop funding facility. The increase was due to growth in average asset balances of 23% and improved margins with both of those metrics benefiting from our new leasing business. Our NIM of 1.76% was the highest it's been since Q2 2015, up 15 basis points from last year adjusted for the write-down and 9 basis points above Q1. The year-over-year increase in NIM was primarily the result of adding Bennington's higher spread equipment leases, which had an 11 basis point positive impact and to reductions to the size of our backstop facility, which had a 7 basis points positive impact. You will likely have seen that we successfully negotiated a 2-year extension to our backstop facility in June, with the support of 5 of Canada's major banks and at a lower rate. The quarterly interest expenses on our now smaller backstop will be $1.6 million lower in Q3 as compared to Q1 for a $0.28 annualized EPS benefit and $800,000 or $0.14 lower as compared with Q2. And alongside expanding retail and commercial margins, the less expensive backstop should support a NIM in the range of 1.75% to 1.80% through Q4.

Before I move to costs, I'll note that PCLs were up over 2018 due to the addition of Bennington but lower sequentially. Q2 credit performance was solid, which helped keep PCLs low, but they also include the effective changes to the loss modeling assumptions for our lease portfolio. Those assumption changes provided $1 million or $0.04 EPS uplift in the quarter. IFRS 9 will make PCLs volatile. But going forward, I would expect that in a typical quarter, total PCLs will range between $2 million and $2.5 million, most of which will relate to leases and that estimate is notwithstanding any significant changes in the broader economic environment. Our long-term expectations remain that loss rates in the lease portfolio will range between 1.5% and 2%, which is well within our risk appetite.

Moving now to expenses. You will recall that our expectation for all of 2019 was that noninterest expenses would increase at a year-over-year rate between 30% and 35%. That rate of growth is elevated because of the addition of Bennington in Q1. The actual rate of year-over-year growth in total expenses in Q2 was 26%. Excluding the Bennington effect, expense growth was 10%, as we continued to invest in our capabilities and incurred insurance costs on our higher deposit balances. That said, expenses were a bit lower than expected due to the timing of spending on our cloud migration and in EQ Bank marketing campaign. Those expense deferrals also caused our quarterly efficiency ratio to be 39.3%, which was slightly lower than our forecast. We expect expense growth to be higher in Q3 and Q4, largely due to the onetime cost of our cloud migration and other core banking system upgrades as well as some EQ Bank marketing campaigns. Overall, costs are likely to increase by about $3 million to $3.5 million each quarter or about $6 million in total from Q2 to Q4. So I'll remind you that $1.5 million of that per quarter relates to our cloud migration and will fall away in Q1 of next year.

Overall, we continued to expect the 2019 annual efficiency ratio of between 40% and 42%. Taking all of these items into account, we anticipate that adjusted EPS will grow between 15% and 17% in the second half of 2019 compared to 2018, and our ROE will be between 15% and 16%. This forecast is predicated on our expectation that loan growth will be between 12% and 14% for 2019 and that NIM will be at or slightly above Q2 levels for the remainder of the fiscal year. Now back to Andrew.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [4]

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Thanks, Tim. Thinking about the big picture, Equitable now has far more choice of where to grow than ever before. Whereas in past, our choices were limited to residential and commercial mortgage markets, we can now pursue growth across a wide variety of secured asset types. And do so with the knowledge that we have strong, diversified and cost-effective funding sources in place to support our ambitions. Our team is executing really well, and this is a credit to everyone here at the bank. They're executing well at a time when the bank has the benefit of a tailwind of broader industry forces. Open banking continues to be a theme that presents opportunity for Equitable. The endorsement of the Canadian Senate and the broadly positive views that we expect to come from the report to the Ministry of Finance on open banking are encouraging developments in this area. Moreover, Minister Nav Bains' recent announcement of Canada's Digital Charter is also broadly in line with the constructive move towards open banking.

During the quarter, I had the opportunity to visit London to observe the Challenger Bank and FinTech scene there and came away with 2 key thoughts. Firstly, banking is changing around the world, and there's lots of opportunity in Canada to bring additional value to consumers here. And secondly, Equitable is extraordinary well positioned to thrive in this new world. I'm certainly excited about our prospects over the next 5 to 10 years. As good as Equitable today, we can be even better tomorrow. Life at Equitable is always intense, as we, as always, keep unrelenting pressure on improving our execution and customer service while at the same time delivering new products, innovation. This is certainly my expectation for the balance of 2019. So fellow shareholders, the bank's opportunities for value creation have never been broader and will now include a commitment to higher dividend growth. This concludes our prepared remarks, and I would like to invite your questions. Marcella, can you please open the lines to our analysts that have questions?

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Nik Priebe.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [2]

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Just wanted to start with a question on the net interest margin in the quarter. Of the factors that affected the sequential change in NIM between the first quarter of this year and the second quarter, one of the listed factors there was fair value changes on derivative instruments which was related to the deposit portfolio. Maybe this is one for Tim, but I was just wondering if you could expand a bit on what that related to?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [3]

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Yes, that's really some fair valuation we do on GICs, different than other fair value losses on hedging positions. It actually flows through our net interest income and our net interest margins. It was worth probably a couple of hundred thousand dollars in the quarter and is embedded in the 5 basis points you see on the table on Page 12 of our MD&A.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [4]

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Got it, okay. And then I also wanted to ask one on the impaired ratio. It did decline in the quarter. Looks to be mostly attributed to the leasing portfolio, and I think you made reference to that being connected to some refinements that were made in arrears and risk modeling assumptions. I was just wondering if you could give us some insight on what that entailed as well?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [5]

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Yes, sure. I'm happy to do that. You're right to point out that the decrease in the impaired balances came primarily from the lease portfolio. And there were 2 factors that came into play there. One is that the Bennington team has done a fantastic job of putting more emphasis on collecting the accounts that are over 90 days past due. So there was a concerted effort to bring that balance down, and they had a lot of success. The second was some refinements to our arrears modeling. I won't get into the details. I'm happy to do that offline. But we refined the methodology we were using to measure arrears on the lease portfolio with the way we traditionally do it at Equitable, and that brought the balances down a little bit more on that portfolio.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [6]

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Okay, okay, got it. Maybe one last one for me before I pass the line. I also wanted to ask about the conventional commercial loan portfolio. It looks like principal on a year-to-date basis is about 2% lower than it was at the outset. And maybe that largely reflects your intent to rebuild capital organically this year, but just when I look at guidance for the -- for that conventional commercial loan portfolio, it continues to stand at about 8% to 10% for the full year. So I'm just wondering if we should expect to see a bit of an acceleration in the growth of that portfolio in the second half of this year relative to the first half?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [7]

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Yes, I think you absolutely should. We're certainly -- the way you characterized it is actually showing a pretty deep understanding of what we've been doing. So we've been -- that's obviously the higher risk weight density to assets, so we have been constraining growth in the first half of the year. But we -- I think about a month ago, we opened up some other lending lines, or maybe 6 weeks ago. And so we're seeing a lot of activity in the market now, and we're back in the position to grow that portfolio faster and our guidance is based on that thinking. So yes, our commercial team are very busy, and we still expect to meet the ultimate kind of guidance that we provided originally.

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Operator [8]

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Your next question comes from the line of Marco Giurleo.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [9]

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I just wanted to follow-up on the last question about the commercial growth. You guys maintained your targets at 8% to 10%, so implies a pretty strong growth in the back half of the year. Can you just speak to the pipeline and factors that are driving those expectations?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [10]

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Yes, we constrained making commitments on certain types of commercial mortgages in, I think, back as far as February and held that position for about 4 months. So that slowed down the pipeline, as we were trying to get our capital ratios back in up within our target range. I think in the beginning of June, we communicated to the market that we're opening those lines again, and we have strong partnership relationships. And we're seeing really strong traction in that market. But it's quite a -- these are complicated transactions that might easily take sort of 2 to 3 months from the time we start working on them to funding or sometimes as much as a year, but it takes time for those flows to turn into actual funded transactions. But we have certainly -- certainly have been operating at pretty strong cadence for a month already and those will turn into fundings over the next month or 2.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [11]

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Right. Are there any geographies that are seeing particular strength? Or is it broad spread?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [12]

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It's actually certainly pretty broad. While we see the housing market in Vancouver, for example, as being fairly on the single-family residential, the activity on the single-family housing market is lower. We're seeing good construction -- good activity in commercial real estate, including thin sets of residential construction. Obviously, Toronto and Montreal continue to be very active. Montreal is, I would say, a bright spot in the Canadian economy, and that's translating into opportunity as well in that marketplace where we have historically had a very strong position in Quebec. So we've got some great leadership in our Quebec market. We've got great people on the ground, and we understand that market well. So -- but it's fairly broad spread right across the country.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [13]

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All right. Great. And my next question is just on the margin and some of the dynamics you're seeing on -- with respect to funding and mortgage rates. So we've seen a pretty material decline in the GIC rates year-to-date and looks like your mortgage rates have held up pretty well. Can you just speak to the pricing environment and what you're seeing with respect to competition?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [14]

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It continues to be, I would say, constructive in terms of pricing. I think you are also concerned about big competitors behaving in ways to sort of try and win market share. It seems that we're all, while trying to win market share through service and price from time to time, are making sure that we're pricing properly for the risk of the loans we're putting out. So feeling more confident about that than I might have been feeling a year ago. I think just the dynamics of the competitors has improved. So yes, it is translating into decent margins at this point.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [15]

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And is there any, I guess, deliberate decision to sort of like hold those mortgage rates while the GIC rates come off. Just maybe sacrificing a little volume in the process? Or is this -- could you sort of speak to that?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [16]

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I wouldn't say there's a deliberate decisioning going on there. And generally, I think it's fair to say that mortgage rates require somebody to make a deliberate decision. GIC rates move much more in lockstep with market rates. If the bond market rallies and swap rates come down, then naturally the GIC market is being repriced every day. So it's a bit of a function of that. Frankly, when the underlying funding rates drop, we do tend to see a little bit of a gapping of spread. And then if underlying interest rates would be coming up, I would expect to see potentially spreads shrink for a bit until decisions were made to sort of reprice the market up, which is the spreads become narrower. So you do see that dynamic. We don't change mortgage rates daily. It's more of a decision that's made as we look at the overall market dynamics.

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Operator [17]

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Your next question comes from the line of Geoff Kwan.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Just had one question. Curious how you're finding on the residential side the 905 area around Toronto. That was obviously an area that was pretty soft last year. Just wondering if you -- whether or not it's within the various regions within the 905? There's comments that you've got on the different housing types, areas that you're seeing better activity. And then maybe conversely, areas that may still be soft?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [19]

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Certainly, my sense is that we've got good activity in the 905. I think a year ago, that was an area we were keeping a closer eye on. My sense is that, along with the broader increasing activity in the GTA, is all rising together. So I think from being an area of concern, we are less concerned about the risk there. The broader story in the GTA is still maintained, high levels of immigration, a bit improved affordability now that we've got interest rates dropping down, benchmark stress test interest rates dropping. I think it provides constructive backdrop to the 905 as well as the 416.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [20]

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And are there specific municipalities that are doing better than others?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [21]

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Certainly. I'm sure there are, but I'm not familiar. It certainly is not raising a concern with our group, like we're generally being constructive on the 905 and the whole sort of Horseshoe around Toronto right now.

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Operator [22]

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Your next question comes from the line of Jeff Fenwick.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [23]

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I wanted to, Andrew, target my questioning on the funding side here with deposits. And I know you've been making some very good headway there with EQ Bank and growing that contribution, but the broker deposits or the term deposits are still a very large majority of the total here. If you were to look forward over the next 3 or 4 years, is there a path towards a different mix that you'd like to see things get to, to balance that out from your perspective? And how should we expect that to trend?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [24]

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I certainly think you should expect to see EQ Bank growing faster than the broker deposit market, so that we end up with more direct customer relationships. Having said that, we're obviously growing the deposits fairly fast. I do think there's actually a more general trend in the deposits market to make it a more open competitive market that we're going to see. It's one of the reasons why we support open banking so clearly, that the rates you get on a CDIC deposit at Equitable Bank or EQ Bank are materially higher than what you might get if you walk into a typical bank branch. And that price difference seems odd to me. When you think about mortgages for the last -- which is a space I've worked in for maybe 20 years now, the price delta between a broker and a branch today is really quite narrow. And yet, if you walk in and buy a GIC in a branch, you might easily be getting a rate that's like 1% to 1.5% less than you would get in a more open transparent market. So we're certainly -- while we're, on the one hand, trying to have great distribution and proxy distribution flow through EQ Bank, I'm actually feeling more confident about a more competitive open GIC market opening that can provide that stable deposit funding. And then frankly, our deposits are insured by CDIC, the Government of Canada. There's no reason why they really should be priced more than just -- they should be priced the same as any other GIC provided by any other bank. And yet, because of distribution issues, that there's a delta there. And frankly, there's so many products that get sold, whether it's fixed income mutual funds with high MERs that provide a lower net yield to the consumer than just buying a GIC from a bank, there's a lot of opportunity to -- for basically comparable risk. If you buy a Government of Canada bond in a mutual fund, it's a really poor investment compared to buying a GIC directly in terms of the additional pickup you would get with essentially the same underlying credit risk of the Government of Canada. So we do see and we continue to promote the idea that people should shop around for GIC. And obviously, Equitable tries to be as easy to access in that world as we can.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [25]

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That's helpful commentary. And then one area there. You've also seen a lot of growth is with some of the partnerships you've established with some fintechs. Can you just remind us of the characteristics of those deposits there in terms of composition? How sticky they are? And anything we should be thinking about on that front?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [26]

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Yes, so these are deposits where the individual consumer has to make the decision to move the money out. So there's no broker involved, which is -- there's no broker involved in the sense there's no individual that controls the book of business that could certainly make a decision to withdraw the funds from many accounts. So that is much less risky in our mind than what we saw back in 2017 with particularly one of our competitors, where brokers making decision to pull wholesale funds out. And then we have institutional relationships with the fintech at the top of the house. Clearly, one of those that we've talked about quite openly is Wealthsimple, which we regard as the leading robo-adviser in the country where we have strong institutional relationships with them, with that cash sitting in Wealthsimple than sitting as a deposit on Equitable Bank's balance sheet through that relationship account. We track the stability of that vis-a-vis the stability of our own EQ Bank deposits, and it looks very favorable.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [27]

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And then maybe we can turn over to capital, uses of capital. Good to see the change in the dividend growth policy there and you were, alongside that, building up your capital ratios. You'd mentioned, I guess, earlier in the year, thinking about what are some of the options you could do as you get back into that zone for capital. So what about things like buyback activity? Is that an area where you may put some focus later this year?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [28]

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I don't think we'll be there later this year. I think all our models show that we're going to have really attractive loan growth through the end of the year. So to fund that, to drive the capital for that loan growth plus buildings that wind back up to 13.5% is going to be -- and paying this new attractive dividend is going to be what we use capital for. Going forward, NCIBs are certainly something we consider. I think how you should think about that is if we have periods of softer loan growth and you see our CET1 rising above the midpoint of our target and looking like it's going to maintain that position for a while, then we might use NCIBs to bring that back down and manage our capital ratios. The difference between NCIB in our view than a dividend, a dividend you commit to and you know you're going to be paying it for many years. And NCIB is something that one can use slugs of incremental capital to return to shareholders, but then also can use on a targeted basis to manage your capital, kind of fine-tuning of your capital. So it's certainly part of our longer-term set of tools that we have in the tool kit, we think. But I wouldn't expect to see that before the end of this year, that's for sure.

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Operator [29]

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Your next question comes from the line of Jaeme Gloyn.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [30]

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Just wanted to just get a little bit of clarification around the guidance for alternative single-family asset growth down a little bit from the prior quarter. Just trying to square that with what looks like better underlying fundamentals for the housing market and for that segment, especially, in the Toronto area?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [31]

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Yes, Jaeme, I wouldn't put too much in that. We follow a process of just reforecasting every quarter. So when you really think about it, we're comparing our first forecast back in February with where we stand today. We've come to -- I think we're down 1% in our expectation after 4 or 5 months of -- 5 months of activity, we're down 1% compared to where we thought we might have been in February. So I think it's just a bit of fine-tuning there. There's always variables that we look at. These are potentially mortgages that liquidate prior to their terms. They've also got renewal rates written into it. You're thinking about both Western Canada, which is a nice franchise for us, which is a bit softer, along with Eastern Canada. And I wouldn't be surprised, frankly, if we're being on the conservative end of this, but I'm not changing that. But our business is in good shape right now. Our underwriters are busy. There's good flows. We have good relationships with the brokers, and this is simply almost a rounding error on the spreadsheet, I would argue.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [32]

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Okay. And just, sort of, wanted to just follow-up on something you mentioned there about the sort of the geographic dynamics you are seeing softness in the western provinces. Is that -- maybe just speak a little bit more about what's going on in either Vancouver and Calgary, Alberta?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [33]

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I think it's particularly Vancouver, which won't surprise anybody. I think the transaction volumes are down, I believe, 24% year-over-year. So it's -- we're not seeing any issues on the credit side. The values are staying up, and we're not seeing the deposit back -- the default rates and arrears in Alberta have been falling over the last few months. But it continues to be a market that's going through a bit of a softness for now. It's a nice thing about having a national business, frankly, where we're seeing the opposite. Clearly, Ontario is a core business for us, but Quebec is -- our team into Quebec just did a bang-out job in the first 6 months and exceeded our expectations. So we're seeing that counterbalance.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [34]

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Okay. And then on the commercial mortgage side, looking at the breakdown between mortgages to corporates and to small businesses. It seems like it's the corporate side that's driving a little bit of the softness here to start the first half of the year. Just can you speak to, I guess, some of the dynamics between the 2 groups of commercial mortgages? And I guess, speaking to that pipeline, maybe a little bit more about what kind of corporates we're looking at versus small businesses?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [35]

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Yes, that's a good observation, Jaeme. So when we think about small businesses, so we're thinking about -- and I want to talk about the storefront on the Danforth as being the guy that's operating a restaurant on the ground floor and owns a couple of apartments above, may indeed live above it with his family or her family. So that's our small business program. Small apartment buildings, 6-unit, 12-unit apartment buildings. We try to face that market to be consistent all the time, much like a single-family business. We'd be very reluctant to dial that down. We always want to be facing a broad distribution network in that area. So in reaction to wanting to build capital would not be to slow that business because you damage the franchise value of it. Once we're dealing with large corporates, we may well be dealing with large mortgage banks that are putting huge -- or significant mezzanine money behind us, people that are working on a more transactional -- they're relationships, but they understand and they have other funders they're working with all the time. So it's easier for us to maintain our relationships with those people, reduce the amount of capital we're applying to the market. And yet when we choose to step up again, step back and get the flow relatively quickly. And for that -- many of those partnerships, we will be quite clear that if there are things that they rely on us for or there are certain issues, even when we slow down funding, we will continue to fund those and maintain the warmth of the relationship. But we're able to kind of dial it up and down a bit without having any long-term impact on those relationships.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [36]

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Okay. And then still within the commercial segment, looking at construction loans. A little bit of growth here for -- versus the end of the year, but quite a bit of growth if we were looking back over 2017 end of year levels. Maybe just speak to what you're seeing in the dynamics in the construction loan market and where you expect that growth to come from going forward?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [37]

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Yes, I mean, it's a core area of expertise. People, when they're building many asset classes think about Equitable first in the construction loan business. So if you're building a self-storage facility or student residence, multifamily apartment building, we're one of the banks that get the call. And -- so we're seeing it across a broad spectrum of asset types across many cities. And across Canada, you can see there's a lot of activity, mostly major-urban-center driven, I would say, today. And we happen to be in certain -- we have some deep expertise in some areas, but they're proving to be extremely valuable because our clients are being active.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [38]

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Okay. And last one for me. I just want to get a little bit more color around the Bennington credit performance coming in at about 70 basis points. That's below the range that you guided to around 1.5% to 2%. I'm just wondering if there's anything in particular in this quarter that you can speak to that drove a better-than-expected outcome, especially after the Q1 that resulted in a little bit higher-than-expected performance? Or is it all just related to this, I guess, change in strategy to more actively collect on 90 days past due loans?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [39]

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Jaeme, there are 3 factors that come into play when you're looking at the Bennington PCLs in the quarter. The first is the increased focus that they put on collecting over to your accounts that I mentioned earlier. They were able to bring down those impaired balances nicely, which reduced the amount of allowance we need and caused a provision reversal. The second, it relates to the macroeconomic climate. As you're aware, we do all of our loss modeling internally and then we lay -- per IFRS 9, we layer on third-party macroeconomic forecasts and look at different scenarios. The assumptions that we're provided through that third party improved during the quarter, which actually resulted in a net reversal of Stage 1 and Stage 2 provisions on that portfolio. And then the third, as pointed out in our items of note, was a $1 million reversal related to changes in our approach in our loss modeling assumptions.

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Operator [40]

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Your next question comes from the line of Graham Ryding.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [41]

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Just 2 questions. On the alternative business or, I guess, your retail business, originations were flat year-over-year, and we saw some other mortgage companies report some pretty strong numbers also yesterday. So maybe you can just talk to sort of the competitive landscape, particularly in the alternative space and how you're feeling about that relative to sort of the originations and your outlook?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [42]

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Yes, it's a tricky one this quarter because we accelerated the -- our reporting. So we don't actually have good data from our competitors at this point. We have some, sort of, internal insight from what we hear on the street and other pieces of intelligence. We actually think we did pretty well. We think we gained share in the alt space in Q2, which I think as corollary might suggest, the alt space isn't growing as fast perhaps as one might have expected. But we think our teams are right there in the market in terms of service, and we think we're actually gaining share in the alt market. And we actually believe that we may be in a period right now, so not somewhat active in Q2, but appears at Q3, the alt market may be starting to grow again. So I don't know what all the dynamics are there. I think that the larger big 6 banks are having some influence on the size of the alt market. That's our sense, but really hard to put a finger on it.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [43]

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Okay, okay, that's interesting. AIRB, could you just give us a little context on what sort of impact that could have? And can you just confirm sort of the timing of when you're hoping to officially shift?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [44]

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Yes. So we're hoping to be running parallel by middle of next year, which is the next step. It's going to be a matter of working with the regulator to make sure we've done, put everything in place for the following year. And then we would expect to get sort of a gradual migration of how they think about trusting the capital calculations that we come up with in terms of how we run the bank, but it could be a meaningful reduction in the risk weights associated with the business. But really, as we've always talked about, this is really about how do we grow this bank over the next 5 years, making sure that we've got the economic capital reflecting its appropriate bucket, so that we're making sure that we're applying risk and putting appropriate capital against the risks in the business, which is really the quantitative methodology that AIRB brings to the table for us.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [45]

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And is it fair that it's -- it would be more -- your commercial business would be more sensitive to this approach. And you could -- it opens up some -- you can be more price competitive, it can open up some increased volume for you, if you can have a lower risk weighting on some?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [46]

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That for sure is true. So it's a -- one opportunity it clearly creates is the different intervals at construction project for, say, a multifamily residential building. Today, we can be competitive on the construction financing. Once the building is full and the building has been fully rented out, then we continue to risk weigh that 100% under the standardized approach. Under a AIRB approach, that risk weight might drop in half, for example. The building is -- at that point is much lower risk. It's a positive cash flowing building. Yet, we can't be competitive on that funding. So having earned the trust of the customer and done all the hard work associated with that construction funding, we're not able to then provide the next solution for them, and we would certainly like to be in that position that's obviously a customer that is easy for us to get to, we already deal with them and also easy for underwriters to underwrite a building that they know intimately through that process. I think it's also fair to say, though, that risk weights of single-family could also be significantly helped through the AIRB process. It's true to say that some of the large banks might be risk weighting residential mortgages under the AIRB approach in the -- around 10% risk weights, plus or minus, compared to the 35% risk weights that we put on at Equitable under the standardized approach. So quite a large delta. I mean 1/3 of the amount of capital in that case. Now we wouldn't expect to be as low as that, but we certainly would expect that our risk weights under the AIRB approach might be as low as 22%, 23% compared to 35% under standardized. So it's a meaningful delta on an $11 billion book.

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Operator [47]

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There are no further questions at this time. I turn the call back over to Mr. Moor.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [48]

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Thanks, Marcella. We look forward to reporting our third quarter results this fall, and thank you for listening, and enjoy the rest of your summer.

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Operator [49]

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This concludes today's conference call. You may now disconnect.