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Edited Transcript of EQB.TO earnings conference call or presentation 6-Nov-19 1:30pm GMT

Q3 2019 Equitable Group Inc Earnings Call

TORONTO Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Equitable Group Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:30:00pm 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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* Edward Friedman;McLean & Partners Wealth Management;Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Marco Giurleo

CIBC Capital Markets, Research Division - Associate

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

* Rasib Ali Bhanji

TD Securities Equity Research - Associate

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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 Equitable's Third Quarter 2019 Conference Call and Webcast. Later, we will conduct a Q&A with participating analysts on the call.

Before we begin, I'd like to refer you to Slide 2 of the presentation regarding the company's caution regarding forward-looking statements. This presentation and comments may contain forward-looking information, including statements regarding possible future business and growth prospects of the company. You are cautioned that forward-looking statements involve risks and uncertainties.

Certain material factors or assumptions were implied in making these statements, and could cause results or performance to differ from forecasts or projections expressed within these statements. Equitable does not undertake to update any forward-looking statements except in accordance with applicable security laws.

This is call is being recorded for replay purposes on November 6, 2019. It is 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, Denise. Good morning everyone and welcome. I'm joined by Tim Wilson, Chief Financial Officer. This is our first call since Equitable was included in the TSX Composite Index and we can't think of a better way of starting our membership in this group of Canada's largest businesses than by reporting adjusted net income 20

All told, the third quarter was a very productive period for Canada's Challenger Bank, as we achieved double-digit growth in retail and commercial assets, attracted thousands of new customers to EQ Bank, pushing its deposits past CAD 2.5 billion and launched Equitable Trust, another channel for customer service in the form of term deposits and deposit diversification.

These are good accomplishments, worth of discussion. But first, I'd like to talk about the future and how we are positioned to move our bank forward.

As Canada's Challenger Bank, we are on a quest to create a better banking experience, and equally important, banking value for our customers. Our strategies are geared to challenging industry conventions in targeted ways, largely enabled by our digital capabilities and superior cost structure compared to traditional incumbents.

We are focused in our mission as Canada's Challenger Bank, with a concentration on serving customers where we add value and choosing markets where are pushed along by the winds of demographic change, and where we spot opportunity for superior long-term growth and risk-adjusted returns.

To successfully execute, Challenger Banks around the world need to have a technology backbone that can enable products and service innovation, bringing innovations to market quickly and cost effectively, and integrate the best offerings with those from industry leading partners.

That's why the development that really excites all of us at Equitable happened since our last conference call, the migration of our core banking technology to the cloud and the upgrade of T24, our core banking system, to its latest version.

We achieved this following a lot of heavy lifting by our team, along with Microsoft and Terminus. Perhaps more than any recent development, this prepares Equitable, and particularly EQ Bank, to bring new products and services to market more quickly and change the way Canadians bank. We have an ambitious roadmap and over time, you'll see evidence of it as we launch some great new offerings.

For competitive reasons, we don't talk about new offers before launch but I'm confident they will challenge the industry, give Canadians new and better banking options, and support our growth and performance objectives.

EQ Bank sits at the leading edge of our Challenger Bank thinking. We launched it in 2016 because we took the view that there was an opportunity to rethink the key elements of banking in Canada by focusing on innovation and digitally enabled solutions. The financial services landscape is evolving even faster than we expected and is very encouraging.

We believe that our approach is sufficiently different and valuable to our customers and future customers that 5 years from now, over 1/3 of Equitable Bank deposits, or close to CAD 10 billion, will come through this award-winning digital channel.

Over the past year, 22,000 Canadians have opened EQ accounts, including 7,000 since June 30. And over CAD 2.5 billion, EQ now represents 17% of our total deposits, up almost CAD 0.5 billion from a year ago. This increase in relative weighting has been achieved even as we've grown other sources of deposits by 14% in the past year.

Still more recent momentum, on September 30, we launched a new EQ multimedia campaign with TV, digital, and transit ads. For those on Twitter, please see #betterbanking. This campaign, which was inspired by what our customers tell us they want and value, makes a bold statement about the ways in which the EQ Savings Plus account is different and more valuable than the traditional savings and checking account.

More valuable because it reimagines a bank account to bring the best features of both a checking and savings account into a single offering, one that pays a 2.3% interest rate with no minimum balance and provides full freedom to pay bills and move money at no cost. Campaign timing was purposeful. We launched it right after introducing significant and popular upgrades to our mobile and web-onboarding apps in the summer.

I said at the outset that to execute successfully, Challenger banks like ours, need to work both alone and in partnership. On this front, we continue to align ourselves with industry leading players across all parts of the bank. I'm very pleased to note that consumer deposits, placed with strategic partners, what we term relationship deposits, have passed CAD 0.5 billion in the third quarter.

Our ability to be open about our technology infrastructure and the desire to align with the best partners will give us at the open banking agenda advances in Canada now that the federal election is behind us. We're pleased to see a growing groundswell of support for open banking amongst policymakers and industry observers.

Principle 4 of Canada's Digital Charter, which commits to transparency, portability, and interoperability is a direct and powerful endorsement of open banking. I'm also pleased to see organizations like the Investment Industry Association of Canada come out in favor of open banking because, to quote, a client with an advisor can see all their accounts or receive better advice.

Our belief is that open banking will result in fewer barriers to Canadians to more seamlessly conduct their financial affairs across banks. We would welcome this development because we seek to be relevant with best-in-class products with specific elements for a customer's financial life. Reduction friction across the banking system will make life easier for our customers and allow us to effectively pursue this mission.

One customer group that we want to serve in a big way in the years ahead is the growing cohort of Canadians in the decumulation phase of their life. Serving this market will extend and steepen our growth runway. For this important group, we were delighted to announce in early September that Empire Life added Equitable as a partner and will bring our CSV line of credit to Empire Life policyholders for their consideration.

Just last week, we announced another new partnership, this one with IA Financial group. We now have 6 life insurance partners in place, representing the industry's Who's Who.

Winning over important new partners like these, as well as mortgage brokers on the reverse mortgage side takes time but is necessary since these are somewhat complex financial solutions and to use them, Canadians will require expert advisory support.

We're optimistic about the evolution of our decumulation businesses. We are learning and building relationships in the market. As a result, I believe these businesses will become more important to our investors in the years ahead.

Speaking of the future, industry data suggests that the housing market is stabilized and home sales have improved more than expected in recent months. As a result, CREA recently upgraded its forecast for home sales in 2019 and 2020. We'll publish our own growth expectations for 2020 next quarter but while we are definitely seeing regional variations, the housing market has a broadly constructive tone recently. This is good news for our business.

Our commercial business was also up 13% compared to last year with half that growth coming from our traditional businesses and half from Bennington. Combined, our assets under management are now over CAD 32 billion and with solid loan growth expected in Q4 2019, will be another record year of profitable expansion.

My final highlight concerns dividends. Yesterday, the board increased the common share dividend by 25% over last year and by $0.02 or 6% over the dividend last quarter. The board's stated intention is to grow the dividend at a rate of 20% to 25% per annum through 2024. This latest increase is in keeping with our long-term plans.

The very place to see the market recognize the value of Canada's Challenger Bank and Equitable's elevation to the composite index in September certainly helped. Investor confidence also apparent in demand for our most recent deposit mode offering. That mode attracted 38 investors compared with 25 in our previous offering and the spread on the deal was also 15 basis points tighter.

We have committed to building this program with a goal of providing a reliable and cost effective source of funding in the years ahead. I'll offer a few more thoughts about our future but now to 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. Q3 adjusted net income was an all-time quarterly record, up CAD 242,000 from the previous record set in Q2. Adjusted EPS was $0.01 below last quarter's record, being negatively affected by the higher dilution faster caused by the recent increase in our share price.

The change analysis slide in our deck illustrates the impact of various profitability drivers, the biggest of which were a year-over-year increase in NII and a reduction in backstop facility costs. From this slide, you will note the change in operating costs of CAD 0.29 per share. As a reminder, the addition of Bennington represented CAD 0.11 or 38% of that increase.

We also invested more in operations in support of our growth strategy and incurred expenses for the migration of our core banking system to the cloud. I said in our last call that we expected costs related to cloud migration to be about CAD 1.5 million in Q3. They were in fact CAD 1 million flat. We still expect to incur CAD 1.5 million in Q4 so we've reduced our forecast for the full year to CAD 3.3 million as a result of managing the project more efficiently. Migration costs will then reduce to 0 in Q1 of 2020.

Turning to NII and margin trends. Q3 reported net interest income was up 27% over 2018. The increase was due to growth in average asset balances of 21% and improved margins. Our NIM of 1.75% was up 9 basis points from last year and was 1 basis point lower than in Q2. The year-over-year increase in NIM was primarily the result of adding Bennington's higher spread equipment leases, which had a 10 basis point positive impact and higher spreads in our mortgage portfolio, which had a 5 basis point positive impact.

The lower rate we're paying on our now smaller backstop facility lifted NIM by an additional 3 basis points year-over-year. Quarterly backstop expenses are now CAD 600,000 compared with CAD 2.3 million last year and CAD 1.4 million last quarter. Sequentially, NIM was stable and we expect it to remain around 1.75% through the end of the year.

On credit performance, the PCL on our mortgage book was low and in line with our historical rate. Bennington was within the CAD 2 million to CAD 2.5 million range that we had expected. During the quarter, we recorded CAD 1 million of Stage 1 and Stage 2 provisions, compared to a reversal of CAD 400,000 in Q2. This is the volatility that everyone had expected for IFRS 9, resulting primarily from changes in forward-looking macroeconomic assumptions.

For greater clarity, the increase in Stage 2 and Stage 2 provisions compared with last quarter was not due to fundamental changes in the profile of our loan book. Stage 3 provisions were also higher than in Q2 by CAD 657,000. But I will remind you that Q2 was unusually low due to some lost modeling assumption changes on our lease portfolio that resulted in a CAD 1 million allowance release.

Moving to Q3 expenses. They increased 34% year-over-year, meaning that they remain in line with our expected growth rate of between 30% and 35%. Excluding Bennington, other expenses grew 18% year-over-year as we continue to invest in our capabilities and our people, and recorded higher insurance costs on our growing deposit balances.

For Q4, in addition to cloud migration costs, we expect to incur an additional CAD 2 million of expenses relative to Q3 for an EQ Bank marketing campaign. Based on customer uptake to date, which has roughly doubled since the launch of this recent acquisition campaign, we think this is a very good investment.

As well, some of the expected marketing expense will be to support a new EQ Bank product launch in Q4, which has our team pretty excited. Stay tuned for more on that launch in the coming months.

As a result of these expenses, we expect our Q4 efficiency ratio to be toward the top end of our full-year range of 40% to 42%. As for our outlook on the bottom line, we expect adjusted earnings to grow year-over-year between 16% and 18% in Q4, and to be relatively able to Q3, as the positive effects of asset growth and low credit losses are offset by increased levels of marketing and cloud migration expense. Adjusted ROE should be between 15% and 16%.

Two final thoughts. First, we pushed our CET1 ratio up again during the quarter to bring it closer to the midpoint of our target range of 13% to 14%, as we said we would do earlier this year. And finally, as you will have noted, we reset the Series 3 preferred share dividend rate in September for the next 5-year period. The new rate is 38 basis points lower with a 5-year savings to the bank of a modest CAD 1.4 million. But then again, every penny counts.

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. We see many opportunities ahead to serve Canadians in new and better ways. We're building a workforce that is highly motivated to challenge and increasingly capable of doing so, and are very grateful for the hard work our team has done this year to strengthen our platform, bring new services, and service refinements to the market.

Going forward, we have a great strategic position to drive superior growth and support long-term value creation. What I'm excited about is a proposed covered bond funding program, which we hope term life launch as early as next year.

Covered bonds have the potential to reduce our funding costs and serve as another meaningful source of funding diversification. With advisory assistance from Barclays and TD, which have market leading global covered bond structuring distribution capabilities, putting together an offering that will be attractive to investors.

In closing, we have a number of exciting Challenger Bank service and products in the market today. With our core technology migrated to the cloud, we are well prepared for a future of innovation and ready for a future of open banking. We like our growth prospects for 2020 and feel that we will have some industry and market tailwinds propelling our growth strategies.

We are, as always, committed to challenging for the benefit of our customers and our shareholders. This concludes our prepared remarks and now, we'd like to invite your questions. Denise, can you open the lines to our analysts for their questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nik Priebe with BMO Capital Markets.

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

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I wanted to start with a question just on credit performance this quarter. Just looking at your impaired did increase very slightly over the second quarter. Looks to be partly related to an uptick in the volume of impaired single-family loans. I was just wondering if there were any notable observations that you've made about that pool of impaired mortgages? Just specifically, any geographic concentration or anything else we should be aware of? I was just hoping for a bit of insight on that.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [3]

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I've sort of been involved there doing a loan by loan review and it's associated with some slightly larger loans in Ontario, I think 1 or 2 of which are resolved since quarter end. But that's where it's coming from. We've looked at the underlying security value and I feel pretty comfortable that losses will either be 0 or immaterial in the overall scheme of things. But that's the impairment formation that we've seen.

Tim, I don't know if you have any--

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [4]

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I think that's exactly right. And we will highlight that over CAD 2 million of those loans have already resolved as of today.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [5]

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And just switching gears, I did notice one of the bigger drivers of deposit growth in the quarter was a pretty significant increase in term deposits at EQ Bank. I was just wondering if you could give us a bit of color on what sort of factors are driving the demand for the GIC product there. Was that affected by the recent marketing campaign and just improved awareness of the platform? Or was there anything else that contributed to that large increase in term deposits quarter-over-quarter?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [6]

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I think our learning over the last few years has been that it's hard to attract customers into the platform with a term deposit offering. Clearly, that's possible. So we don't really focus too much on that. So really, this is about making offers to existing customers in the platform. So I think during the summer, we came out with a promotion to our existing customers. So as they were logging in, they were getting term deposit offerings and that was -- it was really a cross-sell to our existing customer base. Effectively, the message was it looks like you've got money that's been sitting here as a permanent deposit. There's a yield pickup to be had for terming that out into a term deposit. And we found people responsive to that.

We actually found the uptake very encouraging because it showed that that works as a thesis. And I think I would argue that buying a GIC on our platform is probably the best experience of any GIC buying experience in Canada. Not a lot of competition in that area, frankly. But obviously, once somebody has been through the experience once, it allows us to think that they can be repeat customers of term deposits.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [7]

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And then one last one from me. I did also want to ask, looking at the growth rate of the alternative single-family portfolio, it's kind of slightly decelerated for a few -- about 4 consecutive quarters now. And I know it can be -- I recognize it can be a little bit opaque. But I was wondering if you could just give us your read on what's happening in the alt space as well as whether you feel you gained or lost market share in the period.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [8]

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I think our market share is probably flat in the period. As you know, we've reported ahead of some of our major competitors. So it's hard to have the data but we do have other kind of underlying data as to what's going on in the market.

I mean generally, I feel that we've got a pretty good tone, pretty good share and I think we'd expect it to be slightly slower growth this year. I mean we're going to come in right on the numbers that we projected to you at the beginning of the year, which reflected really one of our major competitors obviously being challenged in 2017, getting back on their feet more towards the end of 2018. And that kind of -- so we had a great year last year and that's impacting things a little bit, as we go forward. But still, by any standard, great growth is the way we think about it.

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Operator [9]

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Your next question comes from Marco Giurleo with CIBC.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [10]

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My first question is I just wanted to follow-up on Andrew's comments with respect to the covered bond program, Just curious what impact you think it might have on the overall funding costs as well as NIM, and how big a portion of your overall funding mix this could become?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [11]

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Tim, you want to handle that?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [12]

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I can talk to that. So Marco, we're pretty excited about this program and the potential for it. We think right now, as government -- with the current government regulations, we could issue somewhere in the neighborhood of CAD 1.5 billion of covered bonds. And that number will grow in line with our balance sheet.

We are optimistic or we're hopeful that government regulations could change and the covered bond limits would increase, particularly for smaller institutions. Not hanging our hats on it but we think there is potential for that. So for the CAD 1.5 billion to become something maybe 2x to 3x that level. So stay tuned for more on that.

In terms of funding costs, we're looking at issuing in the European market where we believe we can get spreads that are 10 basis points to 20 basis points tighter than what we get on GICs in the Canadian market today. So dollar-for-dollar, significant funding costs. That said, if covered bonds are only 5%% to 10% of our overall funding mix, it's overall a few basis points of savings. But valuable funding diversification, which will both enable growth going forward and reduce the risk profile of the overall business.

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

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And in terms of the markets that you're looking at issuing in, would it be -- where geographically would you be looking at?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [14]

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in the European market.

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

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European markets. Okay. I just had a second question on capital. We saw decent capital build this quarter, 20 plus basis points in the last 2 quarters. Last quarter, you had called out contraction in the commercial book as one of the drivers. Just curious what you would call out this quarter. Was it -- did it have to do with strong growth in your prime book?

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

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It's really just capital formation running ahead of risk-weighted assets. We had constrained our commercial business a little bit just to help with the risk weights and help build the CET1. Towards the beginning of the quarter, we stopped that constraint so we expect our commercial business to grow more strongly in Q4. But despite that, we still -- it's a bit of a question of dialing up how fast you want to grow risk-weighted assets based on the way you're seeing earnings grow. And we do expect to be right in the midpoint of our range by the end of the year.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [17]

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So another, call it, 20 basis points or so of capital generation through year-end?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [18]

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Something like that, plus or minus 10.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [19]

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And then if I think about the organic capital generation potential of the business just based on your growth outlook, what do you think is a good rate to run with?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [20]

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Are you describing that in basis points?

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [21]

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In basis points just on CET1, just curious. Based on what you think the business can grow at in the coming year.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [22]

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Generally, we think that if we allow our businesses to face the markets with a proper stance of kind of good risk management but with an open approach to generating business, we don't think we get organic CET1 build. We're basically growing the risk weights broadly similar to the capital we're obtaining. So it goes back to the model I've often spoken around of generating 16% to 17% of ROE. Cutting out a couple of points of that so your regulatory capital is growing about 14% a year and therefore growing your risk weights at about 14%.

In any one year, we might be -- our risk weights might grow by 2% less than that or 2% more than that. But generally, we expect over the next few years that we will be able to find enough opportunity in the market to grow the asset base and the risk weights within that asset base about as fast as we attain capital.

Now, ARB might change that and there's also some talk about changing some standardized risk weights as well. So that might give us more opportunity, which would leave us having surplus capital or able to grow faster. But based on kind of the current regulatory regime, that's how we see the world.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [23]

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And then maybe just a follow-up. You just mentioned change in standardized risk weights. What are you alluding to there?

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

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There's just some conversation around that at the Basel level and there would be a Canadian version of the Basel regime, which in general would have -- and it all depends on how that actually gets adopted in Canada. But in general, it would appear to be favorable to releasing or to reducing our average risk weights.

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Operator [25]

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Your next question comes from Jaeme Gloyn with National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [26]

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First question is just related to the Saskatchewan and Alberta portfolios. I'm noticing a little bit of contraction quarter-over-quarter and I'm hoping you can shed a little bit of light on that experience versus the Calgary office expansion that you guys press released earlier this quarter.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [27]

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I think clearly, we've seen minimals and no losses in either Alberta or Saskatchewan over the last few years. We did approach -- since the end of 2014 when we saw commodity prices dropping, we've taken a more conservative view on our lending criteria in those markets, but continue to feel comfortable that we've got the right stance there.

The Calgary Office move associated with a number of things. Supporting our bank more broadly outside of lending in the province, but also an opportunity to move into better lease space at a lower cost than we previously had. And we wanted to use it as an opportunity to demonstrate that we're committed to the financial wellbeing of Albertans as that. And (inaudible) came along to help us open the office and it was a good experience for our team. I wouldn't say that you should expect to see the portfolio grow dramatically differently than it has in the recent past.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [28]

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Related to RSU, DSU, PSU expenses, just to clarify, are those expenses completely hedged? And what I'm getting at is given the significant increase in the share price this year, should we expect any accrual or catch ups in either Q4 or is that completely hedged?

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [29]

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It's Tim. The vast majority of that exposure is hedged. So the increase in the stock price will not result in a commensurate increase in our expenses.

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

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The significant growth in the prime mortgage portfolio acting as a little bit of a drag on total company NIM. 15% growth quarter-over-quarter, I mean that seems like it's unsustainable. But if you could just sort of maybe talk about outside of the Q4 guidance that you've given, talk about 2020, what you envision for the prime mortgage portfolio.

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

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I think the way I think about prime, it's almost not helpful, frankly, that we have to include it in the overall calculation of NIM and so on because it is a different business. It takes 0 capital from our regulatory capital provisions, or virtually 0 capital. So anything we do in that area is additive to our overall business and generally, you're going to see earnings from that activity more pronounced 5 years from now than you do today. So it is definitely a business -- it's a business that you get excited only if you're a very patient investor.

But it's nonetheless, it does add to ROE and I think it's always best. Certainly, I start by not really worrying about the -- I'm much more concerned about focusing on the NIM in our conventional businesses where we're actually holding on our balance sheet and funding them with GIC. So I think that's trend to keep -- that's the spread to keep a much stronger beat on.

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

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I guess just in terms of where you see that portfolio growing. Is it going to continue to be a high growth engine just because it is primarily insured and low risk ROE generation, ROE…

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

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It's all in short, just to be clear. So it's all in short. So it takes no capital and to some extent, we've got a great team internally that are able to face the brokers and build our brand value with brokers makes a positive spread on that business. And we also are in the business of buying portfolios of prime mortgages -- prime and short mortgages from time to time, where our securitization capabilities allow us to make a positive spread on that business.

And that's a bit more lumpy to really predict for next year but I think our own team are running just close to CAD 1 billion a year, somewhere in the CAD 700 million a year origination next year. Expect that as a minimum and then to the extent that spreads are available in the market for third-party produced product, we will do that as well and use our securitization capabilities in that regard.

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

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Last one just on credit. The adverse changes in macro assumptions. Tim, can you just specify which changes drove the sequential increase? And then on the Ontario loans that resulted in gross impaired loans increase, whereabouts in Ontario are those loans?

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

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I'm going to give some color on that commentary. They're really around the GTA. So shouldn't expect any trouble there. Just take a little longer than we would expect. And the values look pretty good.

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [36]

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And then on the macro, James, these are forecasts that we get through a third party -- a very reputable third-party service. The main change that happened is they forecast the rate of house price growth to be less than they did last quarter. When we run that through that model, that obviously decreases the level of future home prices and increases loss given defaults that we calculate on the model.

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

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Which might seem slightly counterintuitive, frankly. But based on the way I see the world, it seems to me that the housing market is improving. But don't forget, we run 5 scenarios and then we calculate the loss under each of those scenarios. And then we provide a percentage outcome to each of those outcomes. So you have a more severe negative outcome. Even though it's a low probability, it can affect the overall reserves we're putting up and that's I think what we're seeing in this world.

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Operator [38]

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(Operator Instructions) Your next question comes from Rasib Bhanji with TD Securities.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [39]

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My first question was on guidance and...

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [40]

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We're having trouble hearing you. I wonder if you could get closer to the speaker.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [41]

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Sorry, is this better?

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

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That's better.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [43]

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Sorry. My first question was just on guidance and considering that we're near the end of the year, so I was just wondering, when could we expect an update on 2020. And if you would be willing to share any initial assessment at this time.

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

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I think our practice is -- unfortunately, we have our board meeting in December for our strategy session where we set the budget and obviously, we don't want to get too far ahead -- we cannot get ahead of the board. We have good governance procedures around here. And then really more formally, our practice is to come out in February with our year-end, giving you some pretty good guidance around there. I wouldn't expect that to change for this year. It's been a good practice. It's stood us well to have our board really look at the numbers and make sure we're all comfortable with what we're putting out to the public.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [45]

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And my second question was on the commercial default in Vancouver. I was wondering if you could give an update on where it is at right now. And you mentioned that it's -- you expect it to be resolved by mid of next year. I was wondering if you could share any thoughts on that -- on the timeline.

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

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Again, we continue to feel very comfortable that there's no losses to be observed. This is a building that we believe is worth over CAD 100 million and we've got a loan of less than CAD 40 million on it. But as you may be aware, the mortgage resolution rules in British Columbia don't -- can take longer than other parts of the country and that's what we're dealing with here, especially when there's an enormous amount of equity in the building, which is also the case. And just to recall, this primarily an apartment building with a little bit of commercial space at the basement and right across the street from one of Vancouver's major hospitals. So it's a great asset.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [47]

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And my third question was on originations, primarily retail originations of CAD 2.1 billion. I was wondering if you could break that down between alt mortgages and prime mortgages.

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

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Is that not in the--

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Tim Wilson, Equitable Group Inc. - Senior VP & CFO [49]

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So we don't provide any disclosure at that level. We haven't been starting at the beginning of this year. I'd say for your purposes, it's probably roughly half-and-half.

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Rasib Ali Bhanji, TD Securities Equity Research - Associate [50]

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And my last question was just on funding costs. So I was wondering if you could talk about how different the cost is for EQ Bank versus a broker deposit right now. And then going forward, as EQ Bank introduces more products, services, and you develop more stickier customer relationship, what would your expectations be for the cost differential between a bank deposit and a broker deposit?

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [51]

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So today, if you look at our rates in EQ Bank, you'll see that they're broadly speaking the same as brokered rates plus the commission, which runs 25 BPs in the term. Roughly speaking, that's where we try to stay. Our broader goal is as we add more products and more reasons to bank with EQ Bank, is that we should be able to get to about 30 basis points through the low GIC funding costs. That's what we're looking for over the next 4 to 5 years. But that's a long mission. But it's where we hope and expect to be.

And as we go forward there, we'll also layer in some other products that we believe will be capable of generating fee revenue in addition to that. So EQ Bank is certainly an important driver of shareholder value over time.

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Operator [52]

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Your next question comes from Edward Friedman with CWB McLean & Partners.

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Edward Friedman;McLean & Partners Wealth Management;Analyst, [53]

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My question was answered. Thank you very much.

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Operator [54]

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And there are no further questions at this time. I'll turn the call back over to Andrew Moor.

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Andrew R. G. Moor, Equitable Group Inc. - President, CEO & Director [55]

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Thanks, Denise. We look forward to reporting our fourth quarter at the end of February and thanks for listening and joining our call.

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Operator [56]

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