Canadian Western Bank
TSX:CWB
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Canadian Western Bank
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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 Financial Group Conference Call. [Operator Instructions]Thank you. Mr. Matt Evans, you may begin your conference.
Thank you, Joanna. Good morning and welcome to our fourth quarter and fiscal 2019 financial results conference call. As Joanna said, my name is Matt Evans, and I lead the Investor Relations team for CWB.Presenting to you today are Chris Fowler, CWB's President and Chief Executive Officer; and Carolyn Graham, our Executive Vice President and Chief Financial Officer.I'd like to remind listeners and webcast participants that statements about future events made on this call are forward-looking in nature and based on certain assumptions and analysis made by management. Actual results could differ materially from expectations due to various risks and uncertainties associated with our business. Please refer to our forward-looking statement advisory on Slide #18.I'll now turn the call over to Chris.
Thanks, Matt. The agenda for today's call is on the second slide. I'll comment on the continued execution of our transformational strategy, including this morning's announcement. And Carolyn will follow with detail on our financial results and fiscal 2020 outlook before we move to the question-and-answer session.Fiscal 2019 was an exciting year for CWB Financial Group. We continued to deliver against our strategic objectives and create value for the people who choose CWB every day, our clients, our people and our investors.We generated solid loan growth with further geographic and industry diversification. We supported that growth with a new record for annual branch-raised deposit growth of $1.5 billion, generating very strong 12% overall growth of branch-based deposits as we continue to invest in our deposit-gathering capabilities to strengthen our full-service client experience.With ongoing profitable growth and strong capital ratios, we were also pleased to provide shareholders with an 8% increase to the common share dividend. Our strategy for long-term value creation is to solve for the unmet banking needs of Canadian entrepreneurs.This year, we further enhanced our operating model, improved core business processes, advanced our digital strategy and invested in brand and culture. These initiatives will position us to deliver breakout growth and maximum value creation from our upcoming capital transformation. We're making strong progress on all fronts.The growing community of business owners we serve are benefiting from the fully integrated full-service approach we provide to meet their financial needs. We will continue to empower our business banking, personal banking, wealth management and Trust Services teams to create an increasingly integrated experience. The client-centric operating model we launched this year is designed to increase collaboration across our lines of business. Our complementary business process improvement projects are designed to enable our teams to deliver for our clients more seamlessly. And while proactive personal service and specialized expertise will remain at the core of our competitive advantage, digital capabilities will be an increasingly prominent feature of our differentiated client experience.The announcement we made this morning represents another bold step forward on this frontier. By deepening our partnership with Temenos, we are positioning ourselves to deliver seamless end-to-end digital banking experiences for our clients, the owners of small and medium-sized businesses. Temenos is the world's leader in banking software and our journey started with the successful launch of Temenos core banking in 2016.It now continues with implementation of the industry-leading Temenos Infinity platform. We were the first Canadian Schedule I bank to run on Temenos core banking and we will be the first Canadian bank to offer a differentiated digital banking experience powered by Temenos Data Lake and Explainable AI capabilities.We're excited to build a Temenos partnership to deliver a competitive, fully differentiated, highly personalized world-class digital experience to our business owner clients. This announcement provides the purposeful innovation we are fully committed to deliver to provide the proactive relationship-based client experience we're known for as we meet the rapidly changing needs of our valued clients across a full range of channels.This year, we also expect to successfully transition to the Advanced approach for regulatory capital and risk management. This accomplishment will represent the culmination of a multiyear enterprise-wide transformation effort with contributions from nearly every CWB team. It will enhance our capital allocation capabilities, provide a sharp review of portfolio risk and will make us more competitive on price and offering. The Advanced approach is a foundational capability for us to unleash our full potential to deliver more for clients and to grow across Canada.Our strategy is to translate these new capabilities from digital client experience to capital deployment into strong and scalable long-term growth. For 35 years, much of our growth has come from word-of-mouth recommendations through the confidence and trust of our loyal clients. It's remarkable to think how successful we've been with limited investment in marketing. And we're looking forward to our growth potential powered by a national brand driving increased visibility and familiarity with our target clients.We launched a new brand promise this year, Obsessed With Your Success, and we sharpened our visual identity with a contemporary new logo. We revamped our websites and brought in new expertise to engage business owners through digital and social media.Finally, we launched a new brand campaign, We come to you, to show business owners the length we'll go to help them succeed. We know that our clients see us as responsive, helpful and different from the other banks. The feedback we receive on a regular basis confirms that it's our people and our culture that sets us apart.We're proud to be recognized as a Great Place to Work Canada, and one of the best workplaces in Alberta this year. As our transformation continues to drive significant change across CWB Financial Group, we also know that our culture is evolving to support our ambitious strategic agenda.In 2019, we introduced new core values that ground us in the qualities our clients and staff love about CWB. I'm confident that our culture will continue to be competitive and help us attract diverse talent to drive our future growth. As we enter the new decade, there's no doubt in my mind that we are prepared well for the future.I'm proud to say that CWB is an increasingly disruptive force in the Canadian financial services. We are well positioned to take a greater share of our chosen markets and deliver long-term profitable growth in the years to come.I'll now turn the call over to Carolyn.
Thanks, Chris, and good morning, everyone. CWB delivered solid fourth quarter and fiscal 2019 financial performance. Fourth quarter common shareholders' net income and pretax preprovision income were up 5% and 3%, respectively, from the same quarter last year.Quarterly diluted and adjusted cash earnings per common share of $0.77 and $0.78 were up 7% and 0, respectively, with a higher growth rate of diluted EPS, primarily reflecting no acquisition-related fair value changes this quarter.Fourth quarter total revenue growth was 6%. Net interest income was 7% higher, with the benefit of 8% loan growth, slightly offset by lower net interest margin. Noninterest income was consistent with the fourth quarter last year, while credit quality was stable.Noninterest expenses were up 9%, while acquisition-related fair value changes were $5 million lower and preferred share dividends were $2 million higher. On a full year basis, common shareholders' net income and pretax preprovision income were up 7% and 6%, respectively. Solid earnings growth reflects a 7% increase in total revenue, stable credit quality, higher expenses from the continued investment in our strategic execution and lower acquisition-related fair value changes.Full year diluted and adjusted cash EPS of $3.04 and $3.15 were up 9% and 5%, respectively. Total revenue growth included 8% growth of net interest income, benefiting from 8% loan growth and stable full year net interest margin.Acquisition-related fair value changes were $12 million lower compared to 2018, while preferred share dividends were $6 million higher. As Chris mentioned, loan growth included continued execution against our balanced growth strategic objectives for further geographic and industry diversification. Central and Eastern Canada continued to lead growth by geographic market with a significant 13% increase, representing 42% of our overall loan growth this year.We expect growth in Ontario to continue to reflect ongoing contributions from our established businesses with a national footprint as well as the planned opening of our first CWB Ontario branch premises in Mississauga this year.Our growing business presence in Ontario will also continue to benefit from capabilities centralized in our Toronto regional corporate office at 150 King Street that we officially opened last quarter.That said, we expect progress towards our strategic goal for Ontario to represent 1/3 of the overall portfolio to moderate somewhat compared to the significant growth rate achieved over the past several years.We expect some very high growth within CWB Maxium and CWB Franchise Finance to normalize somewhat. Growth from CWB National Leasing will likely be moderate in view of strong competition, and we expect high single-digit growth within CWB Optimum.Looking at the rest of our footprint, growth was strong in Alberta this year at 8%, followed by 5% growth in British Columbia. Outstanding loans in Saskatchewan and Manitoba grew 4% and 7%, respectively.With respect to industry diversification, our strategically targeted general commercial category led the way with a 15% increase. Personal loans and mortgages increased 8%, primarily reflecting A mortgage growth to leverage our securitization capabilities. Total loans within CWB Optimum were relatively unchanged from last year.Coming into 2019, we expected growth in this business to slow compared to prior years, reflecting our choice to tighten our approach in the market in response to B20 changes and utilizing our AIRB capabilities. However, it's apparent that we tightened more than competing mortgage originators. With a new mortgage product for business owners launched late in fiscal 2019, we expect to resume growth consistent with the rest of our loan portfolio in 2020.Growth of equipment financing and leasing in 2019 was strong at 9% overall. Commercial mortgages increased 5%, while real estate project loans contracted $103 million.In the normal course, we aim to deliver double-digit overall loan growth where prudent. This year, along with stable CWB Optimum balances, contractions within our project lending portfolio was a key factor, constraining overall loan growth to the high single digits. The benefits of project lending growth in Alberta and Ontario were more than offset by the impact of successful completions and payouts in BC. While the pace of new project development in Greater Vancouver has moderated, authorizations related to well supported projects continue, and we have a strong pipeline of new lending opportunities.Sound overall credit quality continues to reflect our secured lending business model, disciplined underwriting practices and proactive loan management. We remain confident in the strength, diversity and underwriting structure of the overall loan portfolio.Under IFRS 9, the fourth quarter provision for credit losses as a percentage of average loans was 19 basis points, with 18 basis points for impaired loans and 1 basis point for performing loans.Under IAS 39, provisions for credit losses represented 19 basis points in the fourth quarter last year, entirely related to impaired loans. On a full year basis, under IFRS 9, the annual provision for credit losses of 21 basis points related primarily to impaired loans -- related entirely to impaired loans. This compares to 20 basis points last year under IAS 39, consisting of 19 basis points for impaired loans and 1 basis point for performing loans.We currently expect losses in 2020 to remain within our risk appetite and to be comparable to our historical experience. Gross impaired loans totaled $148 million compared to $138 million a year ago, with both amounts representing 52 basis points of gross loans. We continue to proactively manage both impaired formations and resolutions. As we've said before, the level of gross impaired loans fluctuates as new impairments are identified and existing impaired loans are either resolved or written off and does not directly reflect the dollar value of expected write-offs, given tangible security held in support of our lending exposures.Our business model remains focused on secured mid-market commercial lending, and we have no material exposure to unsecured personal borrowing, including credit cards.On October 31, 2019, our total allowance for credit losses was $115 million, compared to $111 million last quarter. The allowance for Stage 1 and 2 performing loans is unchanged from both last quarter and our IFRS 9 transition on November 1, 2018.Slide 12 demonstrates our success in executing on key strategic objectives to grow and diversify our funding sources. As Chris mentioned, we delivered very strong branch-raised deposit growth of 12% over the past year, including 14% growth of demand and notice deposits. This growth was comprised about half from our banking branches, 1/3 from Motive Financial and the remainder from CWB Trust Services. Our very strong branch-raised deposit growth contributed to a reduction in the total balance of broker deposits compared to both last year and last quarter.We also generated annual growth in our funding from debt capital markets with 3 successful senior deposit note issuances totaling $900 million and increased debt from securitization to support originations of both equipment loans and leases and residential mortgages.The next slide demonstrates our solid track record of net interest income and total revenue growth over the past 5 years, along with the changes in net interest margin. Despite a volatile competitive operating environment, we continue to win and expand client relationships, grow our business presence and deliver steady increases in earnings. For fiscal 2019, our net interest income was up 8% to a record $786 million, reflecting 8% loan growth and stable net interest margin of 2.60%. Expectations for increases in net interest margin were tempered in this past fiscal year, when it became apparent that an anticipated Bank of Canada rate increase would not materialize.In the end, stable net interest margin reflected the positive impacts of higher asset yields and lower average balances of cash and securities as a percentage of total average assets, offset by higher funding costs and changes in funding mix.Looking forward, we expect to deliver high single-digit growth of net interest income in fiscal 2020 from the benefits of stronger loan growth, partially offset by downward pressure on net interest margin. Our net interest margin has operated within a fairly tight range between 2.50% and 2.60% over the past several years, and we expect to remain around the midpoint of that range in fiscal 2020, with the potential for quarterly volatility.We also expect growth of noninterest income, with increases across most categories, reflecting our ability to extend and deepen relationships with both new and existing clients across all business lines. The efficiency ratio of 46.5% compares to 45.7% last year, as revenue growth was outpaced by growth of expenses, reflecting our continued investment in strategic execution.Operating leverage for the year was negative 1.8% compared to positive 1.9% last year. In 2018, revenue growth benefited from very strong loan growth, including 3% from a portfolio acquisition as well as a 4 basis point improvement in net interest margin and gains from the Trust Services strategic transactions.Our annual efficiency ratio over the past 3 years is approximately 46%, and we expect a consistent outcome in 2020 while delivering slightly positive operating leverage on a full year basis. This incorporates our expectations for strong business growth supported through investment and strategic execution along with effective control of noninterest expenses.Notwithstanding our commitment to prudently manage expenses based on expected revenue growth, quarterly volatility of operating leverage is expected based on the timing of expenditures. With very strong capital ratios of 9.1% common equity Tier 1, 10.7% Tier 1, and 12.8% total capital at October 31, 2019, we are well positioned to create value for shareholders through a range of capital deployment options. Our Basel III leverage ratio of 8.3% at October 31 remains very strong.This year, we repositioned CWB's capital structure to both optimize our cost of capital and support ongoing profitable growth and strategic execution. While our primary focus remains continued organic growth supported by strong capital ratios, the normal course issuer bid is a prudent tool to create value for shareholders when circumstances warrant as they have at various points in the past year.Yesterday, our Board declared a common share dividend of $0.28 per share, unchanged from last quarter and up $0.02 or 8% from the common share dividend declared in the same period last year. As Chris discussed, our steady execution on all fronts also includes progress towards our planned transition to the Advanced approach for capital risk management.As we've shared before, we expect to file our final application and receive approval in fiscal 2020. We anticipate a reduction in risk-weighted assets as calculated under the AIRB approach to increase our regulatory capital ratios. However, we do not expect any other material impacts to our financial results in fiscal 2020.In view of the planned capital transition later in fiscal 2020, we have discontinued our medium-term performance targets. We introduced these targets at the beginning of fiscal 2016 and designed them to be effective over a 3- to 5-year period under the standardized approach to calculating risk-weighted assets.We are confident our transition to the Advanced approach will support higher growth and profitability from our differentiated business model over the medium term. We expect to gain more certainty about the magnitude of capital available for deployment upon transition to the Advanced approach on approval of our final application. And we expect to establish revised multiyear performance expectations, incorporating benefits of the capital transition following formal regulatory approval.As we consider fiscal 2020 on a stand-alone basis, including our strategic priorities and the potential impacts of the key performance drivers I've already discussed this morning, we expect to deliver growth of adjusted cash EPS in the mid-single digits, adjusted return on common shareholders' equity at a similar level to 2019, slightly positive operating leverage with quarterly volatility, a strong CET1 capital ratio and growth of common share dividends in the high single-digit range.To conclude, we are very excited about the year ahead. We have executed our transformational strategy against the challenging backdrop over the past several years. We've created a larger addressable market and a more resilient business model to manage regional macroeconomic volatility. Going forward, we'll continue to leverage focused business transformation, investment in breakthrough digital capabilities and our inclusive and diverse teams to enhance our client experience.Our strategy is designed to create tremendous value for the business owners we serve, and we are confident CWB is well positioned for breakout growth as a model-enabled bank.And with that, I'll turn it back over to Matt.
Thank you, Carolyn. That concludes our formal presentation for today's call, and I'll ask Joanna to begin the question-and-answer period.
[Operator Instructions] And your first question is from Scott Chan from Canaccord Genuity.
Just looking at your 2020 targets, mid-single-digit EPS growth. You talk about stronger loan growth in your assumptions. Have you kind of backed away from that double-digit loan growth target? And maybe a right number would be what you did in fiscal Q4?
Well, Scott, we aspirationally will target low double digit. I mean that's absolutely what we focus on but prudently delivered.
And just on National Leasing, Carolyn, you talked about, I guess, one, what was the growth from that platform in '19? And you're talking about moderate growth, and does that mean kind of low mid-single digits?
I'm just going to -- let us circle back with you, Scott. I just don't have the numbers right up on top of my head. So we'll come back. It would probably be, yes -- mid-single digits, yes -- for 2020, yes.
The next question is from Meny Grauman from Cormark Securities.
Just a few questions on the transition to AIRB. First, just if you have a little bit more clarity on the timing of approval, can you narrow it to a specific quarter? And then as a follow-on, does transition happen right after that, as soon as you get approval? Is that -- does it just switch on right away or is there a lag?
So we plan to submit early in the -- early in the fiscal year so say, let's say, first half and probably approval in the second half of the year. So we can't really be more specific than that. The approval is not in our control. And then the day we are approved as a model-enabled AIRB bank, we recalculate our risk-weighted assets using the new models. So that happens binary, you are a standardized bank up until the day you are an AIRB bank. The availability of capital to be deployed is expected to be staged over time.
Okay. And how soon -- you talked about discussing with the market new medium-term targets. When do you expect that timing to -- when do you expect to unveil that?
We expect that to follow fairly closely after regulatory approval.
Okay. And in terms of just the expense drag coming from this transition, is there a falloff in terms of expenses right after approval? Is there a spike in the lead up? If you could just maybe highlight, is there anything notable in terms of how you see expenses flowing from this particular project in 2020 specifically?
Yes. So our -- it's a number of components. There is a capital component that we have been working on over the past several years, as we've discussed, that will begin amortizing with approval. There are also portions of preparing to be a model-enabled bank where we have changed processes and workflows and the like, and most of those costs have been expenses they've been occurred. So some of them will continue. Some of them will dissipate. Overall, you probably won't see anything that would represent a material spike or a material change in our overall NIE run rates.
And just on the subject of expenses, you talked about the new Temenos agreement relationship. How does that specifically impact expenses in 2020 and then beyond? What's the trajectory there in terms of the expense -- the incremental expense growth?
Yes. We -- it's sort of all factored into our total picture. So we target growth -- loan growth in the low double digits. We expect to be driving out total revenue growth in the high single digits, expenses to follow with slightly positive operating leverage for the year. So it will be all in the same package.
The next question is from Gabriel Dechaine from National Bank.
Based upon your supplement the GIL's balances there, did I -- is this -- the oil and gas production loans, there's nearly $20 million of impairments there. Is that a reclass? Or is that just a new impairment?
It's a 1 loan, Gabe, in a syndicated structure that we don't have any anticipated loss.
Okay. All right. Just want to talk about the real estate project loans that Ontario, Alberta had some advances, but those are more than offset by paydowns in BC. Then after, I'm not quite sure I made out what you're signaling there for the outlook on that particular portfolio. It's been declining for a number of quarters now, it's high margins. I just want to get a sense of your expectations.
So the BC market was very strong in 2015, '16, our portfolio increased very, very significantly with our strong Tier 1 developers there. Those projects have worked their way through and have been paying out over the last few quarters. So that's really pressured the balances in that market because also in that sort of in the '17, '18, '19 period, there was a slowdown of new developments. So replacement projects did slow down in -- particularly in '18, let's say, and into '19, though, with the kind of stabilization of the real estate market in the Lower Mainland that has started to come back. So we are seeing a good pipeline of new projects coming back into play for our Tier 1 developers there. So in terms of the book itself, minus 3% growth over the year, slight contraction, but looking for fairly solid pipeline for fiscal '20.
Do we see them grow?
Yes. We expect growth in that portfolio in fiscal '20.
All right. And my last question, the dumb one. What's the main reason to remove medium-term targets in relation to a change in your capital model? What -- is there a single factor? Like, is it really about how much excess capital this transition may or may not create for you and how you would invest that capital? Or what's the rationale?
I think primarily, Gabe, it's that we are -- we believe that the culmination of a number of major initiatives within our strategic execution culminate with the final application submission and approval and that resets our ability to grow in a fairly significant manner. So we just felt for us that we need more clarity around exactly what that will mean for us to be able to make medium forecast to share with the market about the 3- to 5-year medium-term potential from a financial perspective.
Is it really about the capital flexibility then?
I would say, absolutely. Yes.
The next question is from Sumit Malhotra from Scotiabank.
Just to maybe stay on those expectations for a minute. So ROE, you tell us, in 2020 should be similar. And look, I think the expectation for lower growth across the sector has been prevalent for some time. But how are you thinking about ROE after the transition occurs. It would seem like you're going to have to retain less of your earnings every quarter in order to fund your RWA growth. So is -- are you in a position to communicate how you're thinking about ROE going forward and what your investors can look forward to from that perspective?
I would say, at this point, we're comfortable sharing that we expect that one of the outcomes of the enhancements to capital and risk management that comes with AIRB approval will be the opportunity for capital deployment initially with the approval. Some of that benefit is expected to be staged. And the second part of it is that, as you mentioned, we will be able to grow either faster than we have in the past, using organic sources of capital generation, or we will be able to add to the CET1 capital ratio, which gives us more flexibility around potential capital deployment options. So we believe that both of those opportunities, both initially and over time, will be positive to ROE. But we don't have certainty yet that we're able to share about magnitude and timing of that.
All right. So this is something as 2020 goes forward and we get to the end of next year, you'll hopefully be in a position to update all of these numbers accordingly?
Absolutely.
And then for Chris, I think, most likely, the partnership with Temenos, I hope I was saying that correctly. I think one of the stronger aspects for the bank this year was the success that you had in building out the core deposit base. I know there's been periods of, let's call it, disruption in markets where your funding profile has been a source of consternation, but you did show some success in that regard in 2019. How -- I mean this is maybe a bit of a stretch, but could you talk to us about how you're looking at this partnership and the ability to further drive your deposit growth going forward? And maybe as you're rethinking those medium-term objectives to be reintroduced at some point, will deposit growth play a bigger role in how you communicate with the market?
Definitely, yes. And our focus, as you know, for a number of years has been that sort of generation of multiproduct clients. We've had a very strong history of solid loan growth and client generation through lending. Our goal and investment in our business processes, in our core technology, our elimination of all of our legacy software has been to ensure that we can provide full-service banking to our clients. Our next step into this Temenos Infinity process will digitize the front end of the bank, provide online banking tools that are fully digital. Now that will come in the next year. In this first year, what we will get is digital onboarding of clients. So starting with our Motive clients, for example, later in this year and ending with us being able to move small- and medium-sized businesses into digital onboarding and then providing from a cash management perspective, digital online banking. So again, that all supports our ability to have more multiproduct clients, which then supports our deposit and funding profile. So we're extremely happy with the progress we made this year. On our funding profile, we have a reduction in broker deposits, increase in demand and notice of 12%. So these are very positive outcomes, and it's entirely on strategy that we've been focusing.
Last question is maybe a little bit more here and now, and then I was a little late getting on, so I apologize if this came up. Not only for CWB, but from some of your larger peers as well, it does seem like commercial loan growth was somewhat less robust on a sequential basis. I don't want to focus too much on 1 quarter with the only caveat being, obviously, there's been a good deal of conversation on the economic outlook and whether businesses are perhaps tapping the brakes on some project activity in Canada. As you think about -- and I heard your expectations for the coming years. So maybe that's the answer. But are you seeing anything in your footprint in terms of your relationship with C&I lenders in -- or C&I borrowers in particular that leads you to believe that the economic backdrop is perhaps leading to less commercial loan demand than would have been the case for most of the past year?
So our best growth portfolio is our general commercial book, which is our key one because that's our multiproduct client opportunity. It gives us the -- kind of that range of client growth, and we had 8% growth in Alberta, 5% growth in BC and 12% growth in Ontario. So we feel we have good growth. We've got a -- our market share, we have an opportunity to expand. The definitely uncertainty about the economy in Alberta is an opportunity, we believe, for us to prudently look at our market share as we kind of see how the clients and other banks' relationships work. Often in the past, we've had the opportunity to pick up very strong clients in economically challenged times. If we have slower macroeconomic growth in fiscal 2020, we will continue to be very focused on those clients. We believe the target of our bank at that small- and medium-sized business does allow us to really specialize and kind of pick the winners in that area. And we've continued to do that over the years, and we have no change in our outlook for fiscal '20.
The next question is from Richard Roth from TD Securities.
First question on your guidance for 2020. Can you help me reconcile the difference between mid-single-digit EPS growth compared to top line growth in the high single digits and modestly positive operating leverage with flat credit losses? Like what's the offset?
So I think it's the just overall continued investment in the business, thinking about prudent conservative assumptions in our base. We are anticipating ongoing challenges in our -- in net interest margin. Both there is a 50-50 chance, I think, at this point of a Bank of Canada rate cut coming in, in 2020. There's a little bit of NIM pressure coming from the implementation of IFRS 16 on leases. And then we know we have continued investment. So operating leverage, we are targeting to positive, but slightly positive, so not significantly positive. And then again, thinking about the equity base, we saw a fairly significant movement in our -- in the amount of average equity this year coming from a recovery in unrealized losses in our security portfolio balance and accumulated other comprehensive income. So there are some factors that are not part of what factors into net earnings that then can impact ROE.
Okay. Yes, because I was just -- from the margin commentary, for example, that's already reflected in your NII guidance and I understand the investment component, but presumably, if you have positive operating leverage with, let's say, 9% -- 8%, 9% top line growth, that should pretty much flow to the bottom line unless there's something weird going on with taxes or something else. And that's sort of where I was getting at, at this, some offset that I didn't take into consideration there.
Probably not -- probably not material around taxes. We are getting a bit of benefit from the Alberta tax rate reductions, but it's probably not going to be more than $0.01 or something. I think the other factor might be consistent provisions for credit losses actually imply growth in the dollar amount of provisioning, given the expanding loan portfolio. So the metric's stable, but the dollar amount would be higher. We can certainly work off-line, Richard, and try to figure out the differences for you.
Yes, yes. And my other question, I guess, is related to credit losses, while we're on that topic. This year, cumulatively, it looks like your performing loan losses were almost negligible. That's in contrast to most of your peers that had pretty high bookings this year and, especially, this quarter. What are you guys seeing differently relative to your peers that's allowing you from a modeling perspective to not be forced or pushed to booking more Stage 1, Stage 2 reserves?
So if we start with macroeconomic factors, ours, I would -- we start with sort of an average of the large bank's public assumptions. So we are relatively consistent with them. So I wouldn't say that there are differences in the macroeconomic forecast that we start with. We use a different scenario. We don't use sort of a set weighted average small number of scenarios. But again, that probably is not materially different. And then we look at our portfolio, the allocation between Stage 1 and Stage 2, both comes from finite factors. So any client, for example, who is 30 days in arrears, automatically moves to Stage 2 and has lifetime credit losses estimated against it. So then I think the only underlying part of it has to be our historic credit losses and the composition of our portfolio compared to our peers.
Yes, that's what I'm get at. So basically, it sounds like, in your modeling, when you look at your historical results, they've been better than some of the other banks. Certainly, I don't know -- exactly know what behind the scenes was going on in the risk departments in other banks, but it seems to imply that your experience in downturns is better. Is that fair to conclude, given the difference in Stage 1, Stage 2 reserving?
Well, given that CWB is my only bank, I think I can't compare to what goes on in the other banks or risk departments. But I think one of the other factors if we think about our portfolio and how it might be different, I think another factor is likely the duration. So our book has an average duration of about 3 years. We have a number of portfolios that amortized to 0 in that time period. And so that means that for many of our portfolios, the difference between a 12-month loss and a lifetime loss is not that material. So even the cliff effect of moving from Stage 1 to Stage 2, the dollar impact is not that material.
The next question is from Marco Giurleo from CIBC.
I had a couple of funding-related questions for Carolyn. Firstly, on the branch-raised deposits. We've seen 2 quarters of pretty strong growth there. I'm just curious how the funding costs compare to broker deposits and notably on the Motive Financial side.
So I'd say, we've had 3 quarters of really strong deposit growth, but I won't quibble too much over that one. Overall, our branch-raised deposit funding overall has somewhere in and around about a 35 basis point -- they're 35 basis points cheaper than broker on average. Motive, we have held our rate on our savvy savings account at 2.8 for quite a while now and have had really good growth in that portfolio. That's one where we are still absolutely comfortable that the pricing of that product, the client acquisition costs, we are learning a lot about that channel. Those clients are sticky, and so we're really pleased with that. And so it fits well into the overall branch-raised deposit funding bucket that we have.
So as the funding mix shifts more to broker -- branch-raised deposits, do you expect to see a bit of an offset there for the NIM? Or is that...
Certainly, that is absolutely one of the key planks in our strategic priorities because not only are the over -- do the overall rates of that pool of branch-raised funding are they more attractive than the broker rates, they are also relationship deposits, which allow us to move to multiproducts and have the opportunity to broaden our client experience with those clients. They also tend to be more operational in nature and so there may be liquidity benefits as well to the amount of liquidity that we have to hold against them. So there are a number of both strategic and operational benefits that come from increase in the branch-raised deposit proportion of funding.
All right. And just sticking on that topic with respect to funding mix, given the recent changes in the covered bond rule limits, just wondering how you guys view potentially tapping that market from a funding perspective?
Yes. So we are actively watching the activity of some of our peers around covered bonds and RMBS as well. At this point, our view is that we're not currently originating enough volume of assets that are eligible for those vehicles to make them cost-effective for us as a funding channel at this point. But certainly, it's something that's in our radar that we're watching develop and thinking about our business model.
I see. Okay. And lastly, and I apologize if you answered this already. Just with respect to your NII guidance and your net interest margin guidance, are you embedding any rate cuts into those expectations?
So the current impression there's a 50-50 chance of 1 rate cut. So that's what's built into our assumptions.
The next question is from Darko Mihelic from RBC Capital Markets.
And a very sincere apology for asking the next set of questions if you've already answered them in some shape or form or fashion, but I want to run through a couple of really quick questions here so I can get to the real crux of my question. So the first question is the magnitude of capital available for deployment once you transition to the AIRB approach is uncertain. Can you speak to the level of uncertainty and what's causing the uncertainty? Is it purely that OSFI, you have no clue how much they will grant? Or how much will be approved? And then I have some follow-ups.
So I'm going to start. The -- we've talked in the past that the models and the process and everything that goes into submitting the models for approval to use as a model-enabled bank are around the quantitative calculation of the Pillar 1 risk-weighted asset calculation. So working our way through that to the finalization of that with submission of our final application. The second part is Pillar 2, which includes economic capital, things about concentration of the portfolio, includes our internal -- our ICAAP, our internal capital adequacy assessment process. We continue to work our way through that, and that includes the establishment of what we believe are appropriate capital operating targets for us as a model-enabled bank. And then we discuss and -- discuss that with the regulator as part of the approval process. So we expect that -- we've talked in the past that we expect there to be a transition to the full benefit. So we know that the maximum differential between AIRB risk-weighted assets and the standardized approach to the maximum today is 75% of standardized, but we do expect the benefit of that to be phased in over time.
Okay. That's very helpful. And then the follow-up to that is what your intentions are. And the reason why I ask that is, let's suppose that -- I don't know, we'll pick a number, half -- get halfway there. What would your intentions be? And the reason why I ask this is it really will have an impact on how I model 2021 and beyond? Because the way you guys write, and the way I understand it is it will free up a lot of capital. Sounds like you intend to use it for organic growth. And -- but your intention for organic growth really matters with respect to how I'm going to view margin and so on. So can you give me some -- is there any way you can actually answer that question?
Well, it's a difficult question to answer, Darko. Of course, our -- what we said is our -- with the -- as we look at capital, so number one, it does -- it changes the speed limit on the bank, right? So as we think about having, say, a 10% reduction RWA. In today's world, 10% growth rate starts to consume capital. 10% reduction RWA would actually move that growth rate to 12% and at 10% growth, we would be generating positive capital. If we think about a 25% reduction RWA, the current limit, that would change our growth rate to 18% before we would start to consume capital. And if we still grew at 10% we would generate about 50 basis points of capital. So it changes our -- the -- our flexibility quite dramatically, both for organic growth, acquisition, buyback or dividend increase. So that would be kind of the order of operations with the number one being organic growth. We would like more clients. We'd like more full-service clients. We want to improve our deposit base. We want a broader geographic footprint. So we're really focused on how we can deploy and more effectively manage capital to increase our addressable market in a broader geography.
Absolutely. So I guess where I'm going with that is if you get significant reduction, the implication there is that you're on a more equal footing with the big 6 banks, let's say.
Yes.
In which case, you can grow faster, but you would be competing in a much more competitive environment, so I should expect your NIM over time to actually decline. But it's still probably a higher ROE loan. Is that an appropriate way to think about modeling 2021 and dare I say, 2022?
I think that is a more appropriate way to think about it, Darko. It could mean that loans where the yield doesn't meet our hurdles today could meet our hurdles and our return on capital hurdles at threshold rates going forward. So you're right, that might have an impact on NIM, but would benefit interest income, would benefit ROE. Yes.
Yes. Okay, precisely. That's great. One last question, though, on credit. Despite the nonbuild of Stage 1 and Stage 2. I run a calculation that appears to suggest that your coverage of your LTM or your last 12 months losses is still higher than the midpoint of the big 6 banks. So suggest that at least on the surface, there might be some conservatism in your reserves. So I guess the question then is, if I look back at the last 12 months, is there anything you would call out that suggests there were some one-offs in the provision. And that, in fact, your conservatism is actually even higher? Or do you think that, that's just a -- the last 12 months of losses is a fair representation and your coverage of that, you're kind of where you want to be?
Great question. I think if we look at our actual -- our specific provisions and write-offs through fiscal 2019, we did have a handful of larger single write-offs in the first half of the year and it normalized in the second half of the year. So not really anything I would call out on that. Our provisioning is -- our provisioning around impaired loans is absolutely consistent and unchanged from what we've always done, where we look at every individual loan and we assess and determine the appropriate provision, if any, to take against them. So that absolutely hasn't changed. The method that we take regarding the collective allowance is absolutely materially correct within the IFRS 9 accounting framework with our traditional conservative viewpoint, right? We know our portfolio. We understand that we are a commercial portfolio as opposed to a largely residential portfolio. So our exposures tend to be a bit larger. So we are comfortable with the level of the models that we've built and how they are functioning. And then we ask ourselves, how do we determine if the level of coverage is appropriate. And one of the things we look at is how many years of losses do we have in the performing loan allowance. And so right now, at the end of the year, that about $90 million represents over 2.5 years of losses using the last 5 years actual losses. So that includes the 2016 energy losses in that calculation. And again, another factor that makes us very comfortable.
The next question is from Doug Young from Desjardins Capital Markets.
I'll try to keep this quick. Just back to the guidance, and maybe this is going to go towards the capital and the AIRB conversion as well. But you're signaling mid-single-digit EPS growth, but you're looking for high single-digit dividend growth in fiscal '20. Your payout ratio, 35% in 2019. You've been targeting 30%. Are we moving towards more what the big 6 bank payout ratios are, between 40% to 50%? Is that where we're moving towards for CWB? And does the AIRB conversion let you move there a little bit easier?
I would say we've not yet thought about really thinking about formal guidance around the dividend rate in an AIRB world because we're just not -- we don't have clarity yet on what it means. So I can't really look out that far and comment on it. The expectation on 2020 dividend increase really assumes our same practice, right? It assumes that we will continue to evaluate dividends every quarter. All else being equal, we have the historic practice of every other quarter having an increase. So it's really, I would say, it's based on a no change consistent with the past at this point.
You're running above the 30% target and you have been for, I think, some time. So you're comfortable running there...
Yes. We're absolutely comfortable with the level that we're at currently. An AIRB approval, this is one of the options that's available for us. On the other side of AIRB approval is to think about the common share dividend increase or common share dividends, in general, okay?
And then -- and I know I've asked this question before, and I don't know if we can size the addressable market that the AIRB conversion provides to you. So clearly, you can go after more business, less capital intensive, like what is the size of that market that would fit within your threshold? Is there any way to think of that?
Well, I think it's very large. We've got a very small market share. And it's also in that lower-risk rated, so higher-quality borrower that today we have trouble competing with the big banks on just given the capital. So they -- today, as you well know, have about half the capital as we do. So from a return on capital perspective, as we price out loan opportunities, we're not competing for those larger clients. So we have the opportunity to really generate many more clients, increase our market share in all the markets in which we operate.
Is there any one segment or any one region where you see a greater opportunity?
Well, I would say Ontario has got tremendous opportunity for us. It's the largest economy in the country. We're just opening our first branch there in the spring. We've got strong established businesses there with National Leasing, Maxium, Franchise Finance, our Optimum Mortgage team is there. So we think Ontario has got a very good opportunity for growth. BC has a solid economy. And in Alberta, we had 8% growth this year. So we will continue to be very focused on our strong client base in Alberta as well. So we believe that all of the work we've done to transform our offer to our clients to improve their client experience with us is to generate better funding, better lending structures, better processes internally, really increase the scalability of our bank. And our next step into digital with Temenos, with Temenos Infinity, just is the next point that allows us to just deliver more to all of those clients. And combined with AIRB and all of our internal process improvement, we do see lots of opportunity to gain market share.
Okay. And just lastly, Carolyn, I missed your NIM outlook. So can you just repeat that for me?
So we've been at 2.60% full year for 2018 and 2019. When we look back over the past several years, we've been operating in a range between 2.50% and 2.60%, and we expect in 2020 to be kind of around the midpoint of that range.
The next question is from Steve Theriault from Eight Capital.
Just a couple -- one cleanup thing. Just again, on the margin, that 2.50% to 2.60% you said, it's a -- is it fair to say it's more of the lower end of that range if we do get a rate cut in 2020, Carolyn?
So our guidance around midpoint of that range assumes one rate cut.
Okay. And then I want to ask just around the Temenos. The digital offering you've been offering, the piloting and then offering for a while to commercial customers, a, how has that been going? And b, is that affected or enhanced by the Temenos agreement?
So we don't have digital right now. So this is a new offer. What we've delivered was a new online banking product for small business that has generated the growth of branch-raised deposits. So what we will be doing with digital is actually replacing that with a full digital offer that includes all the cash management services and the opportunities for us to provide even more insight into a clients' business operations, and it will provide better data and better ways for us to assist clients in their cash management processes.
So that very much enhances that initiative ultimately?
It actually -- it's a step change. It's a much bigger opportunity.
And that's a 2021 conversion for -- in -- do you have a sense that's really 2021 or...
Yes. Onboarding -- yes, 2020 is the -- getting the foundation in place that allows us to digitally onboard clients, 2021 is the delivery of the online banking products.
And the next question is from Nigel D'Souza from Veritas Investment Research.
I just had 2 quick follow-ups for you. The first on margins and capital just keeping with the theme. And Carolyn, you mentioned on capital on the AIRB transition that the availability of that capital is expected to be staged over time. Is there any insight you can provide us on the cadence and timing of that capital release? So in other words, does the bulk of that become available upon transition and then incremental availability past that? Or is it more evenly spread out in over what time period?
That is -- we are working on gaining certainty on that through the period between now and approval. So there's nothing specific that I can share on that today.
Okay. And then the last quick question I have is on your margins. You mentioned, Carolyn, as well, an impact from IFRS 16, I believe. Is it possible for you to quantify what that impact might be on your margins?
So it's 1 basis point, no more than 2. So a factor but not the whole story, certainly.
There are no further questions. And you may proceed.
Thank you, Joanna. Thank you all very much for your continued interest in CWB Financial Group. We look forward to reporting our first quarter 2020 financial results on February 27. And with that, we wish you all a good day and all the best for this holiday season.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.