Canadian Western Bank

TSX:CWB

Earnings Call Transcript 2022-Q3

[Operator]

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's Third Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions]. Mr. Patrick Gallagher, you may begin your conference.

[Patrick Gallagher, executive]

Thank you, Joanna. Good morning, and welcome to our Third Quarter 2022 Financial Results Conference Call. My name is Patrick Gallagher, and I'm the Vice President, leading our Strategy and Investor Relations team. I would like to remind listeners and webcast participants that statements about future events made in this call are forward-looking in nature and based on certain assumptions and analysis made by management. Actual results could differ materially from expectations due to various risks and uncertainties associated with CWB's business. Please refer to our forward-looking statement advisory on Slide #2.

The agenda for today's call is on the third slide. Presenting to you today are Chris Fowler, our President and Chief Executive Officer; and Matt Rudd, our Chief Financial Officer. Following their presentations, we'll open the lines for a question-and-answer session. I'll now turn the call over to Chris, who will begin his discussion on Slide 4.

[Christopher Fowler, executive]

Thank you, Patrick, and good morning. Our teams delivered very strong loan growth this quarter from clients within our risk appetite that met our strict underwriting and price of criteria. We also delivered very strong sequential branch-raised deposit growth supported by our focus on deepening customer relationships and winning new full-service clients. Our strategy remains focused on building the best full-service bank for business owners in Canada, and our teams made strong progress this quarter. We successfully launched our new personal and small business digital banking platforms that feature a rich user interface underpinned by enhanced security capabilities.

Our small business platform provides cash flow, predictive modeling and integration with third-party accounting platforms. Incremental features will be integrated into the platform as part of the full Virtual COO launch later this year, which includes the ability to perform simulations that enable small businesses to better understand and predict the cash flow needs and financial health of their operations. These expanded capabilities enhance our client experience and support efficient full-service client growth. We continue to build momentum in our ongoing expansion in Ontario.

Success of our Mississauga banking center established the business owner clients value the personalized service and specialized advice provided at CWB. We delivered 13% annual loan growth in Ontario. We expect even more momentum from the opening of our new Markham banking center this quarter. More Ontario business owners are choosing CWB for their full service needs, and our enhanced digital capabilities and the targeted expansion of our banking center footprint there supports further geographic diversification of our business. We're also making significant progress on our AIRB transition project to support our long-term growth and diversification aspirations with a sustainable and scalable operating model.

Our parallel run activities identified enhancements to support increased precision in the measurement of credit risk and drive efficiencies in the use of our AIRB tools and processes by our teams. We've made significant progress on the development of revised AIRB tools incorporating both the enhancements and the coming new CAR 2023 Capital Adequacy Requirements with the completion of the material portion targeted around the end of the current fiscal year. Upon completion, we'll implement and operate our revised AIRB tools across the business for a sufficient period of time to support a successful resubmission of our application.

While economic forecasts anticipate continued growth of the Canadian economy over the next year, expectations of potential recessionary conditions continue to evolve. We're in a strong credit position should a mild recession in Canada emerge over the next year. Our prudent approach to risk management, underpinned by our secured lending model and enhanced capabilities delivered by our strategic execution position us to continue to deliver strong growth of full-service clients and enhance our profitability.

I'll now turn the call over to Matt, who will provide greater detail on our third quarter performance and outlook.

[R. Rudd, executive]

Thanks, Chris. All right, good morning, everyone. We begin on Slide 5. Our branch-raised deposits are up 9% from last year, reflecting our franchise building strategy to expand our full-service client relationships. Branch-raised deposits represent 57% of our total funding, consistent with the same quarter last year.

On a sequential basis, our branch-raised deposits increased 3%, which reflected strong growth of branch-raised term deposits. Our branch-raised notice and demand deposits were flat to last quarter as very strong growth from new-to-bank deposits was offset by a decline in the deposit balance of existing clients during the quarter.

Sequentially, our broker deposit balance increased 12%. The broker deposit market is a deep liquid funding source, where we raised fixed term insured deposits at more favorable than usual pricing compared to the debt capital markets in the quarter. Our capital market deposits decreased by 8% from last quarter, primarily driven by senior deposit note maturity.

Turning to Slide 6. Our total loans were up 9% in the past year. Our focus to increase full-service client relationships across our national footprint supported 12% growth in the strategically targeted general commercial portfolio.

Ontario loans grew 13% over the last year, supported by our increased presence from the Mississauga banking center and now represent 24% of our total loans. 11% growth in BC reflected strong commercial mortgage and general commercial lending. Our total loans in Alberta grew 7% over the last year. This was supported by a 14% increase in the general commercial portfolio with mid-single-digit growth in both commercial and retail mortgages. As Chris mentioned, our very strong loan growth this quarter has been focused on full-service clients that met our risk-adjusted return criteria.

On a sequential basis, total loans were up 4% with 6% growth in our strategically targeted general commercial portfolio.

Our sequential performance is shown on Slide 7. Common shareholders' net income increased 9%, reflecting the impact of 5% revenue growth, partially offset by a 2 basis point increase in the total provision for credit losses as a percentage of average loans. Pretax, pre-provision income increased 10% as non-interest expenses were held flat to the previous quarter. Adjusted and diluted EPS both increased $0.06 compared to the prior quarter.

Higher net interest income contributed $0.12. Non-interest income reduced EPS by $0.01, primarily due to lower foreign exchange revenue and lower wealth management fees associated with lower assets under management due to market value declines. The provision for credit losses reduced EPS by $0.02 due to the increase we recognized this quarter in our performing loan allowance for credit losses. Other items reduced EPS by $0.03 in total, primarily related to the impact of a lower effective tax rate in the prior quarter. Lower LRCN distributions increased EPS by $0.01, and that was offset by a $0.01 isolated impact of the incremental shares issued under our ATM program.

Common equity raised under the ATM supported incremental loan growth this quarter with an income contribution that exceeds the dilutive impact of the incremental shares. Our performance compared to the same quarter last year is shown on Slide 8.

Our common shareholders' net income decreased 6% and pretax pre-provision income decreased 4% compared to last year. Adjusted and diluted EPS decreased $0.11 and $0.10, respectively, from the same quarter last year. Increased net interest income contributed $0.09. Lower non-interest income decreased EPS by $0.02, primarily due to higher net gains on security sales recognized last year.

Higher net interest expenses (sic) [ non-interest expenses ] reduced EPS by $0.12. This reflected our continued investment in our people, AIRB tools and processes, digital capabilities and product offering to optimize our business, deliver an unrivaled experience to our clients and accelerate full-service client growth. A higher total provision for credit losses as a percentage of average loans reduced EPS by $0.04 and reflects a 13 basis point increase in the performing loan provision as we recognized a performing loan recovery last year compared to a bill this year.

This was partially offset by an 8 basis point decline in the impaired loan provision. The net effect of lower preferred share dividends, partially offset by higher LRCN distributions increased EPS by $0.02. Other items reduced EPS by $0.03 primarily related to the isolated impact of the incremental shares issued under our ATM.

As shown on Slide 9, the 5% increase -- sequential increase in total revenue reflects a 6% increase in net interest income, partially offset by a 5% decline in non-interest income, due to lower foreign exchange revenue and lower wealth management fees.

The increase in net interest income from last quarter was driven by 4% loan growth, 3 additional interest-earning days and a 1% increase in net interest margin. Net interest income was 5% higher than the same quarter last year as 9% loan growth was partially offset by an 8 basis point decline in NIM. Non-interest income decreased 6%, primarily due to higher net gains on security sales recognized last year. Our net interest margin was 1 basis point higher than the previous quarter, with the drivers shown on Slide 10. The rapid increase in market interest rates this year has driven an increase in funding costs that have outpaced the growth in loan pricing so far with loan pricing remaining highly competitive in certain portfolios.

We expect these conditions to normalize with sustained stability in funding costs. To Bank of Canada policy interest rate increases totaled 150 basis points during the quarter and contributed 7 basis points to our net interest margin as expected. These rate changes increased floating rate loan yields, which were partially offset by the repricing of floating rate branch-raised deposits. The increase in non-floating rate loan yields net of the impact of lower loan-related fees contributed 13 basis points to NIM.

Higher funding costs had a negative impact of 15 basis points, primarily driven by higher rates on broker term and branch-raised fixed-term deposits. The proportion of higher cost broker deposits in our funding mix reduced NIM by 3 basis points. Our asset mix was relatively consistent with the previous quarter and did not impact our NIM.

Highlighted on Slide 11, our credit performance remained very strong. Our third quarter provision for credit losses on total loans was 16 basis points compared to 14 basis points last quarter. Our performing loan provision for credit losses was 4 basis points this quarter.

We recognized an impaired loan provision of 12 basis points compared to 14 basis points in the prior quarter, which remained well below our 5-year historical average of 19 basis points. Impaired loans of $187 million were consistent with the prior quarter and represent 53 basis points of gross loans, still well below pre-COVID levels. Quarterly write-offs of 4 basis points remained well below our historical average. We continue to generate timely resolutions of impaired loans and remain in a very strong credit position.

The sequential change in our CET1 ratio is shown on Slide 12. Calculated using the standardized approach at 8.9%, our CET1 ratio was consistent with last quarter. Risk-weighted asset growth during the quarter was mostly offset by the combination of retained earnings growth and ATM issuances. To support strong loan growth while prudently managing our capital, we issued common shares for net proceeds of $35 million at an average share price of $26.10 under our ATM program. Despite the downward pressure on our share price, the net earnings contributed by the incremental loan growth supported by the ATM issuances this quarter more than offsets the dilutive impact of the incremental common shares, driving an ongoing increase in EPS and ROE.

Looking forward, we'll continue to prudently manage our CET1 ratio to around 9%. Yesterday, our Board declared a common share dividend of $0.31 per share, which is consistent with the dividend declared last quarter.

Looking forward on Slide 13. As Chris mentioned, economic forecasts remain positive, but have softened over the last quarter. We now expect annual percentage loan growth in the high single digits for fiscal 2022 as we maintain our disciplined lending approach in the current environment.

We continue to expect double-digit annual growth of branch-raised deposits through deepening customer relationships and winning new full-service banking clients. Supported by the secured nature of our lending portfolio, a conservative loan-to-value ratios, we remain in a strong credit position to face continued volatility in economic conditions. For the fourth quarter of 2022, we expect a total provision for credit losses of approximately 20 basis points. We expect our quarterly net interest margin to expand sequentially in Q4 by 2 to 4 basis points. That reflects the benefit of rising Bank of Canada policy interest rates.

But the rapid increase in market interest rates this year has driven an increase in funding costs that outpaced the growth in competitive loan pricing, which we expect to continue to dampen a portion of the benefit of the higher Bank of Canada policy rates. Further expansion of net interest margin could occur with sustained stability in funding costs and strong growth of lower-cost notice and demand branch-raised deposits. Based on our expected loan branch-raised deposit growth and net interest margin assumptions, we anticipate annual revenue growth in fiscal 2022 of between 6% and 7%.

Reflecting the lower revenue expectations, we have prudently reduced expenditures from previously planned levels while continuing to focus on investing in our strategic priorities. Concurrent with the completion of a material portion of our revised AIRB tools targeted for around the end of the fiscal year, we expect to recognize approximately $13 million to $15 million of incremental noninterest expenses related to the accelerated depreciation of our legacy AIRB intangible assets. Excluding this accelerated depreciation, we expect annual growth of non-interest expenses to be in the low double digits, targeting an annual efficiency ratio of around 51% with annual percentage growth in pretax pre-provision income in the low single-digits.

With a prudent focus on our growth and our expenditures, we now project that fiscal 2022 adjusted EPS will remain in range of our previous expectations, but on the lower end with a mid-single-digit percentage decline from the prior year.

With that, Joanna, let's open the lines for Q&A.

[Operator]

[Operator Instructions] First question comes from Gabriel Dechaine at National Bank Financial.

[Gabriel Dechaine, analyst]

So on the margin, I just wanted to get a bit more detail on the expected increase in Q4. You mentioned Bank of Canada rate hikes. Is it really just a lagged effect of the mid-July hike on expenses? I get the sense that Q4, excluding that one-time is going to be similar to what we just saw this quarter. What about 2023? Is it likely to get back into the high single digits? Or is it going to be another [indiscernible] year of double-digit expense growth?

And lastly, the commentary on the front page of your press release there, you're making progress on the AIRB transition. Maybe you can add a little bit more to that comment just to kind of figure out what you mean.

[R. Rudd, executive]

Okay. Thanks, Gabe. I'll take your first 2, and then maybe Chris starts on the third. On the margin, you're right. In fourth quarter, most of the margin expansion from the Bank of Canada isolated impact comes from the July hike. It really didn't impact Q3 margin that much. We'll get the full quarter benefit of that in fourth quarter. That in itself likely drives in or around 5 basis points of margin expansion. We are expecting further hikes in Q4. One would be 50 basis points in September.

So I mean, that will have a modest impact on net interest margin in Q4. And then we had another 25 basis points at the end of October, which really won't impact NIM at all. So offsetting those Bank of Canada rate increases, we're expecting a bit further pressure on funding costs relative to asset yields, and that will eventually catch up and turn the other way. And we're making assumptions on our branch-raised deposit growth. This quarter, you saw it focused on term deposits. We think that growth continues.

One factor we saw this quarter, and we're being fairly conservative on our view in fourth quarter, was on the notice and demand side in commercial deposits, really strong new volume, but that was offset by a bit of churn. Some of that going into [ churn ], some of that being deployed into clients' businesses. So it really dampened that growth in third quarter. We expect that to continue in fourth quarter, but that could be room for some upside if we do see that abate a bit.

On expenses, so in fourth quarter, you're right, like we'll see something a little bit closer to third quarter, but I would expect a modest sequential increase in our expenses. It's not unusual for us to see seasonality in our expenses. A few items tick up a bit higher in the fourth quarter. We still have a big push on development costs on our new AIRB assets landing in fourth quarter. So that does push it up a bit compared to third quarter. On 2023, a bit too early to give you outlook. But I can tell you that as we're thinking about the budget, as we're charting out the next year, there are a few elements that will give us a bit of relief that could push that expense growth a bit lower.

The big push on AIRB this year, we did incur expenses related to the development, to the build and just normal course depreciation of our previous assets. We'll get some relief on that going into next year. I think if you chunk out our AIRB project in terms of build implementation and then into just running the models. The most intense activities and the most costly activities come in a build phase. Implementation, you see a step down, a bit of a moderation. And then in actually running the models in the business, you see that incremental expense kind of fall off for the most part.

So possible positive contribution there to lower expense growth. And then digital, we landed a couple of really big pieces this year in the retail and small business portion of those platforms. So those will look to scale off into the next year. So a few positive things that we -- have us thinking pretty constructively about our level of expenses next year. And I'll throw Chris to you to talk about AIRB and start there.

[Christopher Fowler, executive]

Yes. Thanks, Matt, and thanks for your questions, Gabe. Yes, AIRB, of course, is an important strategic part of how we're thinking about the long-term growth of the bank and sort of levering that on top of the other capabilities we put in place including the advancements we made in digital, which we see as a real strong way for us to generate more full service clients, really stabilize that ability to continue to increase branch-raised deposits. And as we think about our cost of funds. So really good progress.

AIRB, we did a lot of work in our parallel run that showed us ways that we could be more efficient both in the manner under which the process calculates credit risk, but also the implementation of how we manage and run the models. We've also incorporated the new CAR 2023 guidelines into the model. So we will have these all launched into fiscal '23 and have a period of time when we run them, just to confirm them prior to our resubmission. So we are very positive on the progress we've made. We've got good teams working on it and with external health. And we're looking forward to bringing those forward.

[Operator]

Next question comes from Nigel D'Souza at Veritas.

[Nigel D'Souza, analyst]

I wanted to just touch base on the margins again and just get a sense of the trends you're seeing on the funding side in [ churn ] versus demand deposits. You benefited in the pandemic with a shift towards demand and notice. But with rates are rising, are you seeing that trend reversed? And how do you think that will impact your margin over the next year?

[R. Rudd, executive]

Yes, you're right, Nigel. We did in this quarter. I called out that we did see a bit of a churn there. And customers moving from favoring liquidity to favoring term, and I think that makes sense. I'd say GIC rates were very attractive through the quarter. So that trend doesn't surprise me. So we have seen that. We've again seen some of these deposits be put to work by our clients as well. So that absolutely is a fact that we've seen occur. We expect that to continue into fourth quarter. Beyond I'm not sure this will be a persistent trend through much of 2023.

But of course, we'll monitor it closely. Our intent is to continue to grow new full-service clients, target clients that are lending-only today, get them over to full service, get new deposit money in. So really continue to grow new-to-bank deposits, focusing on notice and demand our view would be we can generate new growth that outruns what gets deployed into business what get's locked into term. But that's definitely a factor we've been seeing.

[Nigel D'Souza, analyst]

Right. And to clarify, even with shift back to term, you still expect margin expansion, right? So like, for example, in Q4, 2 to 4 basis points. There's some, I guess, shift towards certain high funding cost take in there? Or is that not the case?

[R. Rudd, executive]

No, that's absolutely the case. We expect further dampening of what you'd see otherwise in terms of contribution from Bank of Canada policy rates, That is being dampened by a bit of a shift into term.

[Nigel D'Souza, analyst]

Got it. And if I could shift to the credit loss picture. I just want to clarify, I'm not sure if you mentioned it or not, but the 20 basis points for Q4, was that expected to be driven primarily by provisions on performing loans?

[R. Rudd, executive]

No. We'd expect a majority of that to come from impaired loans. Maybe another slight build in performing, but that will depend on economic conditions when we run the models. But we're thinking most of that comes from impaired loans at this point. And that's really just a reversion of getting a little bit closer to back to normal. I mean 20 basis points would be right in the midrange of what we would typically target for gross impaired loans and PCL formations coming from them.

[Nigel D'Souza, analyst]

So it sounds like it's not something idiosyncratic there. I mean just getting a sense because we aren't quite seeing a pickup of impairment across [indiscernible] there any aspects of a portfolio, is it more rate-sensitive than your peer group or anything else you're seeing that would result in higher PCLs?

[Christopher Fowler, executive]

I wouldn't expect anything that we would be seeing would be different than our peer group. We've got a very solid approach to credit, very defined market that we zero in on. We're very well structured in how we do our underwriting. We don't really see anything that -- we're going -- to Matt's point, we're looking at -- we're still at a point where we're below the pre-pandemic levels of provisioning and gross impaired. So I think we're just saying that we're seeing some likelihood of return to normal.

We've got on the performing side, expectation that deteriorating macroeconomic conditions, it's prudent to look at how we would assess our performing loans. But looking at our portfolio and where we sit with impaired, we're very comfortable we feel that credit quality is strong and that we'll continue to manage it very closely.

[Nigel D'Souza, analyst]

And last question for me on this. When I look at your forward-looking indicators quarter-over-quarter, the only [ build ], I guess, variable that's been -- considerably are you outlook for house prices and interest rates for the 3-month treasury build. Just wondering if you could elaborate on the macroeconomic variables that you use as input. Is there one in particular that you think would have a more pronounced impact on your performing loan loss provisions? Any variable that I think it's more important in relative ways [indiscernible] credit risk for your loan book?

[R. Rudd, executive]

Yes. The ones that I'd call primary indicators relative to secondary, I mean GDP, obviously, when we think about our commercial portfolio. That's a key driver of that book. And then unemployment, when we think about residential mortgages as an example, that's a key driver of that book. So I think the other piece that shifted a little bit quarter-over-quarter was GDP outlook looking into the next year softened a bit. So that was one of the factors that drove the slight build.

[Operator]

Next question comes from Sohrab Movahedi at BMO.

[Sohrab Movahedi, analyst]

A couple of questions. In no particular order, but maybe we'll stay with the NIM. You've mentioned the higher funding costs. You've mentioned the more moderate asset yields. I'm just curious, just how is this comparing to what would have been your expectations? Where are there surprises here that you were not anticipating in the evolution of your margins? I'm not talking about just last quarter, but since the rate hike cycle starts, are the funding costs drifting higher than you expected?

[R. Rudd, executive]

Yes. So what we've seen, and I'd say it is not unusual. I'd say the movement has been a bit unusual compared to what we would have expected. GIC rates for them to front run Bank of Canada policy interest rates is not unusual. If you look at just bond yields through the quarter and GIC rates relative to those yields, you can see that well in advance of that 100 basis point move by Bank of Canada that rates went up pretty significantly. We find that loan pricing a bit stickier. It takes a bit more time for that to churn through, and that generally lags the Bank of Canada policy rate increases.

So that factor was not unexpected. I'd say the upward movement, how rapid it occurred when you look at just bond yields through the quarter, just how quickly they went up early in the quarter and front run that pretty large Bank of Canada increase, I'd say that was the piece that surprised us. Relative to the pricing dynamics. And then the other piece, when we just think NIM, what did we expect versus what did we deliver in third quarter. We delivered the strong commercial branch-raised deposit growth that we wanted to in terms of new-to-bank clients. We expected some churn, but we got a bit more there than we expected.

[Sohrab Movahedi, analyst]

I mean, Chris, on the whole -- or road map, I guess, both of you, I mean, on the competitive dynamics, like if we just go into a slower, but not a recession, we just begin to a slower economic growth environment, do you not expect competition to even get more intense? And maybe the asset yields stay kind of depressed kind of compared to, I guess, what would be needed to provide a bit of potency to the margins?

[Christopher Fowler, executive]

Yes. Well, obviously, we'll monitor that. And we'll look at the different areas of the market in which we really chose to work through. If we think about what we've seen this year and particularly in Q3 was very strong general commercial loan growth, which when we think about that in terms of rate and return is a very strongly performing book for us. The challenge would be in other rates -- sorry, other markets where the rates are more challenging, say, the general -- like the commercial mortgage market and the residential market.

Those are areas where I think we will be very focused on ensuring we're underwriting exactly the ones that provide us the risk-adjusted return that we're looking for. So being -- we're going to -- we pick and choose. We've got the opportunity here where we can provide differentiated product to the client. And the general commercial is one in particular that is of keen interest for us, and we're seeing great progress in that area, and it does deliver the full client to both sides of the balance sheet, which is one of our key focus areas.

[Sohrab Movahedi, analyst]

Chris, not to belabor the point too much, but aren't both of those -- you mentioned you will underwrite your risk-adjusted margins, and I appreciate that. But I mean, those are both relatively low risk-type products. Doesn't it basically mean then that your risk-adjusted margins are going to get squeezed because of the yields? And if that's the case, are you suggesting that you will trade-off growth to preserve the margins? Or are you suggesting no, I will -- we will continue to write even if it's lower margin as long as it's given us the growth?

[Christopher Fowler, executive]

Well, we're going to manage growth appropriately as we think about how we deploy our capital and think about the best return that we can drive from it. Clearly, we've got areas of this market, it's been very price competitive, and we are going to look at those ones that we know that we can deliver the appropriate returns along with the risk. And yes, we want to make sure we are prudently underwriting that we have a credit portfolio that reflects our history of strong growth and strong quality. So we're not going to undermine our yields or our quality just to grow. We're going to pick our spots and really hit the areas that we really can provide that difference to the -- and grow the client.

[Sohrab Movahedi, analyst]

Even if it's a dilutive margin?

[Christopher Fowler, executive]

Well, again, we always adjust with risk return based on how we are evaluating those. So we will -- we're not going to just take a loan because of return. We want to deploy capital appropriately.

[Sohrab Movahedi, analyst]

Okay. I appreciate the additional color you provided with the AIRB parallel runs and the like. And if I look at your Slide 12 here, Matt, where you're going to give us a common equity Tier 1 kind of progression. RWA growth consumed under the standardized approach, about 32 basis points this quarter. Just looking at this quarter, if you had been under AIRB, what would that RWA growth have looked like?

[R. Rudd, executive]

Very good question, Sohrab, and I'm not prepared to answer it. I'd say, you saw in our disclosure that we're progressing and nearing completion of development of revised models, but not complete. So look to share a bit more specifics on upside once we're ready to. But I think you've heard me say it before and I can repeat here, I feel confident enough in saying a statement like this, like with -- if we were an AIRB bank, having a tool like an ATM likely would not be required.

I mean that's why we're pursuing AIRB. It's to reduce the risk-weighted density of our lending. So based on the way we lend and the way we target lower exposures, we would get credit for that in such an approach. And I think what we've been putting on the books in the last quarter, we're talking high quality, low risk-type clients. We're not stretching in fact, probably going the other way. And we're very happy from a credit quality perspective with what we generated this quarter, but get absolutely no credit for that under a standardized approach. So I mean, that's the benefit.

[Sohrab Movahedi, analyst]

I mean I would still add on and say not only you don't get credit for it, you probably get penalized for issuing below book value, even though it might be for a limited period of time.

[Operator]

Next question comes from Meny Grauman at Scotiabank.

[Meny Grauman, analyst]

Chris, you outlined some of the steps that you'll need to take in your transition to AIRB. When you describe that, it sounds like it's not realistic to expect approval and official transition until maybe later in 2023 at the earliest. I'm just wondering if that's a correct sort of assumption based on the steps you've outlined?

[Christopher Fowler, executive]

So I mean, where we sit today is we are -- we have the revised approach for our tools. We are going to have them implemented, and we're going to run them to ensure that we are very comfortable with their operation. We see it providing more efficiency in the process of how we manage AIRB process, and it is an operating model, as you know, Meny. It's a way that you can operate your bank and run it in a very efficient way. And we really believe we've done a big upgrade in how we can deliver that with the revisions that we've put in place.

So we will give updates as we think about our progress in that, but we're not really setting a date today. We need to run them and see how they operate and provide us the kind of feedback from that operation to know that we're ready for a reapplication.

[Meny Grauman, analyst]

I guess maybe that's another way to ask it. In terms of that run time, are you talking about a few quarters? Or like what's kind of the order of magnitude in terms of time that's needed for that kind of process before you can actually resubmit?

[Christopher Fowler, executive]

Well, again, that will be dependent on the operation. We have our teams in our banking centers that are utilizing our AIRB tools. I mean, of course, they've been operating under this process for a few years. So we don't anticipate that to be a significant change in our operating environment. What we do believe is it'll improve their efficiency. But again, Meny, we're going to run it and make sure that we've got a -- it's working the way we expect it to work. It's providing the outputs and outcomes that we're looking for.

And so we're going to make sure that all the steps are in place that allow us to deliver that full submission that gives us all the elements that we're very satisfied that lead us to approval. And for the long-term running of the bank, as an AIRB operation model-based bank that gives us all of the opportunities that Matt just talked about with reducing our RWA density and all the ability for us to just manage our business in a very, much more efficient way. And again, level the playing field as we think about our larger peers. But lots of opportunities are coming. We're just going to make sure that we go forward with exactly the right processes and have the -- sort of that implementation structure such that we're extremely comfortable with the delivery.

[Meny Grauman, analyst]

Understood. And then I wanted to ask a question about cash management. In Q2, you talked about lead times, delays in lead times or long lead times, transitioning clients to the cash management platform. Wondering what that looks like now? Is there any change there? Or is that still sort of the challenge you're dealing with?

[Christopher Fowler, executive]

Well, I think that every bank would have that when they're looking at bringing a new full commercial client over, you need to create that -- you can -- it's easy to book loans. But when you're actually having them switch their full cash management and a whole sort of main banking relationship, it always takes a lead time. So for us, we have really invested in capabilities, and you've seen our wins that have come from our increase in branch-raised deposits. So we are still continuing to focus on that.

And as we look into fiscal '23, we will deliver banking side of our digital platform, which provides a single sign-on approach in ways that we can even further enhance the cash management offer to the clients. So we think that onboarding continues to improve. It is a key focus of us, and we are seeing that great growth in general commercial and that general commercial growth comes with that full-service banking opportunity, which, of course, is both sides of their balance sheets and both sides of ours. So that's our focus, and we're very happy with the progress there. And it will just continue to improve in the delivery of that digital platform that's coming in fiscal '23, we'll be a big part of that.

[R. Rudd, executive]

Yes. We are pretty happy, Meny, with the new volume we saw, just new-to-bank deposits from the commercial side of the book and branch-raised. Just to give you a sense of the volume, like the amount we put on of new deposit volume from new commercial deposit clients, it was about the same in third quarter as it was through the first half of the year. So we definitely saw the acceleration we were expecting and pretty encouraged by the new volume, and we just -- we think there's room for that to even grow further.

[Meny Grauman, analyst]

So just to clarify, the delays that you were talking about in Q2, I mean, obviously, we saw the sequential loan growth, but are they just not a factor going forward? And -- they were in a factor in Q3 not a factor going forward? Or are they still having some sort of slowing impact on your overall loan growth?

[R. Rudd, executive]

I think -- deposit growth, but I think the point is, it's variable. The timing of when clients ultimately decide to make this move. So we had a lot make that call and bring their deposit business over and drive really good new growth within the quarter. But that timing will be client dependent. And for us, it's about creating the volume of opportunities and just really getting that sales flow of new money coming in and prospects coming in. Where they ultimately land will be client dependent. So you build a big pipeline and then you work like how to close them and get the cash in the door.

[Operator]

Next question comes from Lemar Persaud at Cormark.

[Lemar Persaud, analyst]

I want to start off on the loan growth outlook. Would it be fair to suggest that because some of the loans that were supposed to be booked in Q2 got pushed into Q3? So the sequential loan growth was a little bit elevated in Q3, and that's kind of why you guys revised your year-over-year loan growth guidance down from the double digits to the high-single-digits? Because if I use -- there seems to be similar sequential loan growth next quarter, I get pretty comfortably into the double digits. Is that kind of the right way to think about it?

[R. Rudd, executive]

So I'll start on mechanics of Q2 to Q3, and then Chris can flesh out Q4. So Lemar, what we saw is exactly what we expected to see. We had growth that was slated for Q2, it drifted in the third quarter, and we closed that growth as expected. But then that elevated third quarter loan growth to the point where I would say that would not be what we'd expect. Just thinking near term about sustainable level of growth. We just had an unusual drift that we don't usually see happen to that magnitude and happen all at once.

You heard us characterize it as unusual last quarter, and I'd stick to that characterization. We -- it likely boosted third quarter loan growth to the point where I'd say that wouldn't be a sustainable run rate in the near-term, especially not looking into Q4 with some of the pricing dynamics we see in the market right now relative to risk. But I don't know Chris if you want to [indiscernible]

[Christopher Fowler, executive]

Yes. I would say the -- I mean, let's be clear, Q3 was our largest organic growth in any quarter in our history. So it was a very significant growth. So to your point, we did have a Q2 pipeline pushed into Q3. So as you think about Q4, again, we're looking at that risk return, making sure we're booking the right loans that make sense from us from a risk perspective, but also return. We want to be zeroing in on the clients that provide the best value to the bank, both sides of our balance sheet. So we're going to pick and choose the ones that are the ones that really support us for our growth.

So we are positive on growth. We are looking at high-single-digits for this year. But as we move into -- we'll be in Q4, talking about what 2023 will look like, we'll be focused on the areas of the market that we continue to have very strong underwriting in with our teams that are very attuned to how they can structure and build that solid portfolio with the correct underwriting that allows us to have that strong credit backdrop. So we are focused on credit. We're focused on client growth, and we're focused on that general commercial full service opportunity. So we'll continue to push forward on that.

[Lemar Persaud, analyst]

Okay. Sorry? Were you guys saying something?

[Christopher Fowler, executive]

No.

[Lemar Persaud, analyst]

Okay. And then my next question, I just want to go back to the financial outlook for 2022. The accelerated depreciation of the legacy AIRB intangibles. Is that going to be included in adjusted EPS? Or will it be treated as an item of note?

[R. Rudd, executive]

Yes. We'll treat that as an adjusting item. It's sufficiently unusual in nature and non-recurring that for us, when we think about our operating performance, we believe it should be excluded.

[Lemar Persaud, analyst]

Okay. And then more broadly, can you guys talk about what [indiscernible] last quarter versus this quarter to [indiscernible] the reduction in your [indiscernible] EPS growth targets?

[R. Rudd, executive]

Yes. I mean we've moved from, I'd say, within a range to now -- to the lower end of that range and just really a couple of key drivers, a little bit lower on loan growth expectations. And the NIM we're exiting this quarter with is a little lower than what we would have expected relative to last quarter. So those are drivers that are putting a little bit of a dampening on revenue outlook compared to what we would have expected last quarter. We're offsetting that by being really prudent in managing our expenses, but not to the full impact of it because we still do have a couple of strategic things we're looking to land, not the least of it AIRB, but a few other important things from a strategic priorities perspective.

We helped a bit on PCL, I'd say, despite us expecting a bit of a step-up from where we are and really just a get back to normal. I suppose we keep thinking we're going to have this return to normal and what would seem like a likely outcome, just impaired loan PCL kicking up. haven't really seen it yet. And I'd say our look at Q4 now compared to what we would have said at the end of last quarter is a bit lighter in terms of impaired loan PCL. We were thinking it might be a little bit higher than that. But we're just -- to Chris' point, not a lot of indicators in our current portfolio that point to something beyond what we're looking at in fourth quarter now in the revised guidance. So a few ins and outs, is the answer.

[Lemar Persaud, analyst]

Okay. My final question, I'm probably front running the 2023 outlook here, but I'm going to try it anyway. So just on the margin discussion, looking out beyond Q4 of 2022, would it be fair to suggest that based on what we know today, the lagged impact of higher asset yields and rate hike should drive higher sequential NIM increases in 2023, just given that we -- kind of the running a higher funding costs come through in 2022. Is that a fair statement or no?

[R. Rudd, executive]

Well, you are front-running our outlook, but I think I can give you a bit of color without doing that. So I'd say if current curves, current bond yields, like if you saw stability in curve, stability in market interest rates, what you would normally see and what we'd expect to see is that asset yields start ticking up to reflect those because they typically lag and it's our opinion, they've lagged. The big call will be on the speed of that factor and over what period and how quickly do you see it, how to competitive factors maybe continue to dampen that a bit.

But I just looking at normal pricing dynamics, that is what you would expect to occur in the normal course. Now how is competition? How do bond yields move from here? There's a lot of unresolved factors that you'll hear us talk a bit more about when we give you our 2023 outlook.

[Operator]

Next question comes from Doug Young at Desjardin Capital Markets.

[Doug Young, analyst]

Just hopefully, a few quick ones. But on the demand and notice deposit on the branch side, thanks for the color in terms of the new volumes coming in. Just wondering the churn side from the existing clients. Can you provide some context to that? And why like what -- is this just a normal evolution of liquidity being drawn down? Or just hoping to get a little color on why the churn has picked up?

[R. Rudd, executive]

Yes. So if we're just looking at notice and demand and isolating that as a component of branch-raised -- yes, there's the normal churn -- like what we expected to occur of bank -- of our clients taking a bit of excess liquidity, using it in their operations. So that's normal. The timing is always variable and tough to predict and will depend on individual businesses and their needs. But that occurring, it would not be unusual.

Part of it, though, is clients also taking a bit more term. So you saw strong growth in term deposits this quarter and a bit of churn out of notice and demanded into term supported that trend as well. And that's, I'd say, looking at the rates not unusual either.

[Doug Young, analyst]

So it's not like you're losing some of these clients that you've brought in more recently, like that's not what you're seeing?

[Christopher Fowler, executive]

No. No. I would -- yes. No, it's definitely people deploying cash into their business. And then that, obviously, we see that with loan growth, too. They're just expanding as they return to the recovery that we're in from COVID. We see definitely some redeployment of cash into the business. And then, of course, just to switch from being in the demand and notice side into term.

[Doug Young, analyst]

Okay. And then I think it was mentioned a few times, loan pricing competition has picked up a bit in certain portfolios. Can you talk a bit about what portfolios you're seeing more price competition in?

[Christopher Fowler, executive]

I think it's primarily, we're seeing it in the commercial mortgage and residential markets portfolio. So those are the 2 highest competition areas. We see some of it in equipment finance too. And those would be the biggest ones.

[Doug Young, analyst]

And that hasn't abated, that continues on as you've gone into Q4. Is that correct?

[Christopher Fowler, executive]

Well, we'll evaluate it. I mean commercial mortgages are the most competitive market because everybody is participating. You've got all the banks, you got credit unions, you've got pension funds, you got lifecos. You've got everybody in that market. So what we do is just pick the product be -- the rate and the return that -- and risk return that we are looking for there, but it's definitely price competitive.

[Doug Young, analyst]

Okay. And then on expenses, you've clearly done a good job scaling given the tougher revenue outlook. Can you provide some examples of where you're cutting back on expenses? Because it's a decent amount. And I'm just wondering how sustainable that is.

[R. Rudd, executive]

Yes. So where we haven't, I mean, we've been clear we're not going to cut for kind of key core strategic projects, we want to keep advancing those. I'd say there are other projects that will -- you look and they provide revenue benefit. There's a lag period between when you're making and incurring the expense to when that revenue benefit is coming. So you look at those and say, I mean, it will be helpful. But if you're in an environment, and for us, we want to prudently manage our expenses relative to our current growth as well. and just be really prudent about that, you can make a call on timing of some of those items.

So I'd say there's been a bit of that. Other discretionary expenses. I mean you look at marketing, there's -- that's always a likely culprit where there's elements of that, that you want to continue to build your brand. We're expanding in Ontario, big opportunity there, want to increase our brand profile and presence in that market. So we'll make those investments, but there's always an element of that spend that can be variable in terms of timing, can be variable in terms of whether you deploy it or not. And then you think about other discretionary costs within a corporate operation, the travel things like that.

There are elements you can do, especially with us being very comfortable working in a hybrid environment, very comfortable with our ability to get jobs done remotely, that's given us another lever to think about expenses like that and how to manage them. So no big items, just really focused across our P&L and just laser-focused on where we're spending our money.

[Doug Young, analyst]

And have you pulled that lever, Matt, the most you can pull it? Or is there still some -- if need be, is there still room for you to pull that lever even further?

[R. Rudd, executive]

Yes, I'd say we have not emptied the full bag of tricks. There's always things you can do and adjustments you can make if you need to. For us, we just really want to prudently manage expenses and manage in accordance with what we're seeing on the revenue front and just in terms of current performance as well as looking ahead. So we'll manage this very closely and adjust as needed.

[Doug Young, analyst]

All right. Might just -- you might tied on that. And then lastly, the -- I think you've made some investments recently in Portage funds on the fintech side. And I think they're more in the early stages committed, not maybe invested. There's another financial that took some write-downs on some of their investments. That wasn't the case, I don't think this quarter. But I'm just looking forward and wondering if there's anything unusual we should be expecting on the non-interest income from some of those investments.

[R. Rudd, executive]

Would not impact non-interest income. So for us, we look at that as a strategic investment. It's not one that we made to try to generate investment returns. And so our accounting for that investment has mirrored that view. We've recognized it. I mean we'll measure it to fair value each quarter, but those fair value changes would be recognized in other comprehensive income rather than non-interest income. And you're right, our actual outlay to Portage so far has been quite small.

[Operator]

Next question comes from Mike Rizvanovic at KBW.

[Mehmed Rizvanovic, analyst]

A question on the AIRB. Just as a quick follow-up. So when you make the comment that you've made significant progress in the quarter, is there any way you could quantify that? Like what does that actually mean? Have you cut the time line by 3 months, by 6 months? I'm just trying to get a better understanding of incrementally what the delta is, given what you've done during the current quarter?

[Christopher Fowler, executive]

Well, I would say significant, means that we are close to us having them ready to be implemented. So that's really the story.

[R. Rudd, executive]

The fact we -- Mike, we're accelerating the depreciation of what we had built before should tell you that our time line on the build phase has gone better than expected.

[Mehmed Rizvanovic, analyst]

Okay. Okay. Fair enough. And then maybe for Matt, I'm not sure if you provided guidance on this in the past, I don't recall hearing it, but just in terms of the ATM, as you use it here and your stock being below book value. So when you -- is there a cutoff point where it maybe becomes negligible or close to neutral on using your ATM to fund a loan in terms of EPS accretion? Like, how does the math work? I'm guessing it's still probably a pretty decent buffer. But at what point does it become a lot less favorable in using the ATM?

[R. Rudd, executive]

Yes. So if we just looked at spreads on new lending consistent with what we're seeing in current quarter and kind of projected outwards, yes, you're kind of the point where you get to neutral in terms of dilutive impact of the shares compared to the profit expansion coming from the new lending. You need to get into about the mid-teens before this starts to tip into being dilutive. But I think beyond just the math equation, like even if we can make the math work, we're still thinking about risk-adjusted returns, the right loans, right borrowers, right credit quality. So that's the other angle we're putting on this besides just the pure kind of math on the accretion.

[Mehmed Rizvanovic, analyst]

Okay. So fair to say the ATM is here to stay all the way through potentially, I guess, until your AIRB is well further along the process. Is that fair?

[R. Rudd, executive]

Yes. I mean it's a tool. It's a good capital flexibility. I think as we look into next year, think about adopting. It's not quite AIRB, but we adopt new CAR guidelines, which do introduce some risk sensitivity, not the same as we have if we could use our actual credit performance and credit quality. But that does give you pockets where you can attract lower risk weight densities for higher-quality lending in some pockets.

So a lower loan-to-value ratio at origination for a commercial mortgage or residential mortgages. Like anything that introduces risk sensitivity is generally favorable to us as we think about how we lend and who we lend to and the structures. So I mean that's something we're thinking about. For fiscal '23, vis-a-vis how much we grow and potential usage of an ATM and would it be required and at what level. So you'll hear a bit more from us on that as we present our full outlook for next year.

[Operator]

Next question comes from Paul Holden at CIBC.

[Paul Holden, analyst]

So just one liner question for me, and that's just to get better understanding of the reasons behind the revision to the loan growth guidance for this year. You mentioned competitive pricing at least a couple of times on this call. Is that the primary driver? Or I'd also know -- less robust growth in real estate project loans and equipment finance. Is there something particularly going on in either of those 2 buckets?

[Christopher Fowler, executive]

I would say there's nothing particularly going on in those 2 buckets. I mean we've had certainly good participation in the real estate project lending. We like that book of business, of course, and we like equipment finance. Equipment finance is our highest yielding book and real estate project loans are number 2. I think as we look at real estate project loans, I think we do have supply chain challenges that are happening there with the developers looking at cost of construction today and making sure that they can have a product that allows them to have the profit margins they're looking to, so there could be some pauses occurring in that market.

We'll just play that by year. We really focus on that Tier 1 builder that has all sorts of ways that they can get a well-managed, well structured development in place. So we'll continue to manage that and monitor it. Same on the equipment finance side. I think we've seen some pockets in there where we have more supply chain challenges than others, but it's a book that continues to grow. It's not growing at the level that -- as general commercials are about 3% whereas general commercial is at 13%. But these are books that we are going to continue to focus on. We like them. We think we have great counterparties that we deal with, and we'll continue to work on that.

But overall, from a growth for the whole year, we're just approaching our market in the -- in that approach, as I said before, it's that risk-adjusted return approach, making sure that we're underwriting to our risk appetite that we're comfortable with the return based on the risk we're taking on and zero in on those clients that continue to build the bank.

[R. Rudd, executive]

Yes. Whenever we give outlook on loan growth. It's accompanied by the words [ where ] prudent. And prudent we think about, obviously, from a credit perspective, but also pricing relative to the risk. And so I think what we've been seeing, there's lots of availability of lending opportunities out there. But we're looking at a good volume of deals that, frankly, the spreads look a bit skinny relative to the underlying risk. And to us, that doesn't feel prudent right now.

[Paul Holden, analyst]

That's very helpful. So then I guess the follow-up question would be based on what you've seen in the competitive cycle in the past, what do you think needs to take place to change that competitive dynamic to make those spreads more attractive?

[Christopher Fowler, executive]

Well, I think our -- well, I think that's a difficult question. I mean, certainly, competition in there. We've got players that are looking at the market differently that potentially are taking on more risk without the return. So I think from our perspective, we will then continue to evaluate those sections and sectors that we are quite comfortable with and from that risk -- starting with the risk, making sure that there's areas that we are comfortable, we can really manage the way that we are growing and have a very sound approach to. And to use the word Matt used like a very prudent approach to that risk we're taking on, and we want to make sure that the return is there. So we can't dictate what other people choose to accept for return, but we can certainly dictate what we choose to accept.

[Operator]

The last question comes from Joo Ho Kim at Credit Suisse.

[Joo Ho Kim, analyst]

Just a couple of quick ones here. On gross impaired loans, we saw some increase in the real estate project loans. And I wanted to ask if you could comment any significant formations there this quarter? And also wondering if this is a segment you will be concerned about from a credit perspective, just given some of the headlines for a slowdown in the residential construction sector.

[Christopher Fowler, executive]

So that portfolio, we've always had very strong success and we do focus on our Tier 1 clients. As we look at the book, we often have credit that can go into an impaired. But ultimately, then it comes back to how does that get resolved? And our history would show that gross impaired loans don't mean higher credit losses necessarily. So we will continue to focus on that from the outset, having a counterparty that we are really comfortable with. And then as we evaluate projects, we're choosing to participate on the financing for that we've validated depth of market on top of the ability of that developer to actually finish it.

Where we sit today, we haven't seen any significant recisions on projects as they've come to completion. So we've got no projects today that have a challenge on -- like both on the completing the building or completing sales at the termination of when it's ready for occupancy. So we still remain very comfortable with that portfolio and feel we've got a strong specialized team that is working for the very strong risk management of that book. So we remain very comfortable with our project lending book.

[R. Rudd, executive]

I'd only point out on real estate project loans, if you're looking at the sequential increase, I mean we're working off of a pretty low base relative to where it normally is. So I think that's just reversion back to something more closer to normal, whereas I'd say just looking at last quarter in the number, I mean that's quite a low number for that book.

[Joo Ho Kim, analyst]

Okay. And just last one for me. Just on loan growth and specifically equipment financing. We're seeing some nice sequential growth in that bucket this quarter. So wondering if you could comment on what you're seeing in terms of the supply chain side, whether there are -- the constraints that were out there are easing up and what you would expect in terms of the growth ahead?

[Christopher Fowler, executive]

Well, again, it's a portfolio we're very focused on. We've done a lot of work internally to sort of integrate how we deliver equipment finance. Again, that portfolio has seen supply chain challenges in it. And with that, there's been competition, too. So our goal is to make sure that we're focusing again in the areas that we're very comfortable from a risk perspective. And as we look forward, we do anticipate it to be a good participant in our growth of the bank, and we are putting the resources in to really support that.

[Operator]

Thank you. There are no further questions. You may proceed.

[Christopher Fowler, executive]

Thank you, Joanna. Execution of our strategic priorities continues to strengthen our organization. Our demonstrated history of prudent risk management positions us well to navigate through recessionary conditions should they arise. The progress we've made to transform our business provides a strong foundation to accelerate growth of full-service client relationships and enhance our profitability.

Thank you all very much for your continued interest in Canadian Western Bank. We'll be reporting our fourth quarter and our fiscal 2022 financial results on December 2 and are looking forward to hosting an Investor Day in Toronto on December 7. Additional details about that event will be released at a later date. With that, we wish you all a great day. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.