Canadian Western Bank
TSX:CWB
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Canadian Western Bank
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Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's Fourth Quarter 2021 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. Mr. Patrick Gallagher, you may begin your conference.
Good morning, and welcome to our fourth quarter 2021 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 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 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 Executive Vice President and Chief Financial Officer. Following their presentations, we'll open the lines for the question-and-answer session. I'll now turn the call over to Chris, who will begin his discussion on Slide 4.
Thank you, Patrick, and good morning. With strong execution of our unique winning strategy, our momentum continued to build through the year and will grow further in 2022 and beyond. We delivered enhanced products and capabilities to our teams that are using them to win more full-service client relationships and drive sustainable returns for our shareholders. This year, we delivered 10% growth in annual pretax pre-provision income and our revenue surpassed $1 billion for the first time. This level of performance reflects the multiyear improvements we've made to strengthen our balance sheet, which supported annual net interest margin improvement this year in a challenging operating environment. In addition, we're enhancing our revenue mix by growing our boutique wealth management offering that we provide to business owners and their families. Our proactive brand of personalized, specialized service clearly resonates with the current and prospective clients. And our team's relentless client-centric focus drove strong growth again this year. We delivered a 3% increase in branch-raised deposits and 2% growth in loans sequentially. And Ontario accounted for approximately 45% of our total loan growth. For the full year, branch-raised deposits grew 16%, loans grew 9% and Ontario accounted for approximately 26% of our total loan growth. Our strong credit quality results reflect the secured nature of our lending portfolio, disciplined underwriting practices and proactive loan management. We finished the year with impaired loans and payment delinquencies below pretax pre-COVID -- sorry, below pre-COVID-19 levels. On an annual basis, our gross impaired loans decreased 21% from last year and our write-offs as a percentage of average loans in 2021 were below our 5-year average. This strong credit performance assisted a 32% increase in our full year net income to common shareholders. Turning to Slide 5. Our strategic priorities for fiscal 2022 will build on our strong momentum and position us to deliver continued growth of full-service relationships for years to come. As the pace of digital transformation accelerates, we continue to add to our capabilities to offer a superior client experience through a complete range of in-person and digital channels to grow our full-service client base. Following the completion of the limited initial rollouts, we'll compete full-scale launches of our digital banking platform for personal and small business clients, the Virtual Chief Operating Officer solution and our new commercial banking digital platform that enhances our cash management capabilities. Our enhanced digital offering supports our brand and market share growth in Ontario. Building on the success of our existing full-service banking center in Mississauga, we're excited to open a new banking center in Markham in fiscal 2022. As we look forward, we believe that sustainability presents an opportunity for long-term value creation for those who choose CWB today: our people, our clients and our investors. We're developing an approach to sustainability with these 3 groups in mind, and our focus over the next year will be to integrate our sustainability approach within our overarching strategic direction and drive engagement with our teams to accelerate our execution against key priorities. Our culture is core to our future success and is key to developing and attracting top talent from across our industry. I'm excited to welcome [ Carolina Cara ] to our executive leadership team. [ Carolina ] joined CWB with extensive risk management experience and has assumed the role of Executive Vice President and Chief Risk Officer. Carolyn Graham will retire in June 2022 and will continue to report directly to me and will support [ Carolina's ] integration into the CRO role. Carolyn will continue to provide executive leadership and oversight of our AIRB program before transitioning responsibilities to [ Carolina ] in June. Our performance reflects the dedication of our teams who continue to execute on our strategy. As more of our people look to return to the workplace in the New Year, we'll support and engage our employees by enhancing our flexible work arrangements, talent development and retention programs. We'll continue to support and expand our employee represented groups focused on inclusion, diversity and mental health. Our momentum is creating strong full-service growth opportunities for CWB in strategically targeted segments that will drive double-digit growth of loans and branch-raised deposits. We'll look to support our stable capital ratios by targeted use of our at-the-market distribution program to deliver strong levels of loan growth to drive incremental shareholder returns. Before I turn it over to Matt, I'd like to say that our thoughts are with those affected by the floods in BC. Our top priority is to take care of members of our local CWB team, as they focus on supporting the clients and communities we serve. With that, I'll turn the call over to Matt, who'll provide greater detail on our fourth quarter performance and outlook for fiscal 2022.
Thanks, Chris, and good morning, everyone. I'll start on Slide 6. Our focus to expand full-service relationships with existing and new clients supported a 16% increase in branch-raised deposits compared to last year. Branch-raised deposits now represent 59% of our total funding, and that's up from 56% last year and 50% 2 years ago. Our efforts to grow and diversify our funding sources, including a very strong year in the debt capital markets, drove a reduction in the outstanding balance of broker deposits, which now represent only 19% of our total funding and that compares to 24% last year. Looking at Slide 7. On a full year basis, our total loans were up 9%. The 12% growth in our general commercial portfolio included 16% growth in Ontario, and this reflected our focus to increase full-service client relationships across our national footprint. We also delivered 24% growth in commercial mortgages that reflected strong new lending to high-quality borrowers and with underlying assets consistent with our risk appetite. Oil and gas production loans increased primarily due to participation in syndicated facilities with high-quality borrowers. Our exposure to oil and gas production and service businesses each continue to represent about 1% of our total loans. Total loans in Ontario grew 10% compared to last year and now represent 23% of our total loans. On a sequential basis, in addition to the very strong growth in commercial mortgages this quarter, our general commercial loans grew 2%, including 4% growth in Ontario, sequentially. We delivered 4% sequential growth of personal loans and mortgages as strong origination volume outpaced payouts, which have moderated over the last quarters, but included a significant moderation this past quarter. As Slide 8 shows, we delivered another very strong quarter of profitability. Pretax pre-provision income increased 6% compared to the same quarter last year and reflects the benefit of 9% annual loan growth and a 2 basis point increase in net interest margin. Common shareholders' net income increased 42% and adjusted and diluted EPS each increased by $0.28 from the same quarter last year. A lower total provision for credit losses contributed $0.26 to EPS and was primarily driven by a net performing loan recovery of $7 million compared to a charge of $12 million last year. Higher net interest income contributed $0.20 and reflects strong loan growth and higher net interest margin. Higher noninterest income contributed $0.01. Higher noninterest expenses reduced EPS by $0.15, which reflected investments in our teams and technology infrastructure to support growth and strategic execution, including additional costs associated with implementing enhancements to our AIRB tools and processes. This quarter also included a $0.02 reduction to EPS from the semiannual coupon payment on our Series 1 LRCNs, which was offset by lower preferred dividends due to the redemption of our Series 7 preferred shares last quarter. Our sequential performance is shown on Slide 9, and reflects relatively stable revenue against a very strong third quarter. We incurred a 10% increase in noninterest expenses, reflecting incremental investments in our teams and strategic projects, including digital and AIRB, in addition to the usual seasonal increases in certain expenditures. As a result, pretax pre-provision income decreased 11% compared to last quarter. Common shareholders' net income increased 4% and diluted EPS increased $0.03, primarily due to a lower provision for credit losses which contributed $0.16. Net interest income was consistent to the prior quarter and lower noninterest income reduced EPS by $0.02. Higher noninterest expenses reduced EPS by $0.11. Turning to Slide 10. As Chris mentioned, we had a very strong year against a challenging operating environment. Against that environment, though, we delivered record revenues of over $1 billion and drove a 10% annual increase in pretax pre-provision income. For the full year, our common shareholders' net income was up 32%. Diluted EPS increased $0.87 with $0.79 of the increase contributed through a higher net interest income. A decrease in the total provision for credit losses contributed a further $0.56. A full year of results from our wealth acquisition contributed an additional $0.03 to diluted EPS or $0.04 to adjusted EPS. EPS was reduced by $0.44 by higher NIEs, primarily reflecting continued investment in our teams and technology infrastructure to support higher growth. And within the impact of higher NIEs, approximately $0.10 of that related to cost of operating and the continued investment in our AIRB tools and processes. The coupon payments for Series 1 and Series 2 LRCNs began in fiscal 2021 and net of the lower annual preferred dividend reflecting the redemption of Series 7 shares, drove a $0.09 decrease in EPS this year. As shown on Slide 11, on a sequential basis, our total revenue decreased 1%, primarily due to a decline in noninterest income and that was driven by a $2 million decline in net gains on securities. Net interest income was consistent with last quarter as 2% sequential loan growth was offset by the impact of a 4 basis point decline in net interest margin. Our net interest margin in the fourth quarter primarily reflected lower yields in our fixed rate portfolios, driven by very strong residential mortgage growth and lower fee income recognized in loan yields compared to the prior quarter. Net interest income on a full year basis was up 12% due to strong 9% loan growth and a 4 basis point expansion in net interest margin. Noninterest income was up 26%, primarily due to increased revenue from the wealth acquisition, which has exceeded our expectations this year. This was offset by lower net gains on securities as the portfolio rebalancing activities we undertook last year drove some onetime gains. Overall, for the year, we're very pleased with the 13% annual revenue growth we delivered against a challenging economic backdrop. Highlighted on Slide 12, our fourth quarter provision for credit losses on total loans was negative 12 basis points. We realized an 8 basis point recovery on performing loans and that reflected a continued improvement in the macroeconomic outlook and a continued decline in realized default rates. We recognized an impaired loan provision recovery of 4 basis points this quarter, which reflected the partial reversal of pre-provisions previously recognized combined with lower new impaired loan formations. Our impaired loans of $202 million are down 27% from last quarter and now represent 61 basis points of gross loans. We continue to generate strong resolutions, while our annual write-offs of 19 basis points remain below our 5-year average of 20 basis points. We concluded the year in a very strong credit quality position and our total unsatisfactory loans as a percentage of total loans are now below pre-pandemic levels. On an annual basis, our total provision for credit losses of 9 basis points is well below our historically normal range of 18 to 23 basis points. The low provision for credit losses this year was driven by an 8 basis point recovery in the performing loan provision for credit losses. As we look forward to next year, as government support programs conclude and the economy continues its gradual recovery with some choppiness, we expect that our provision for credit losses may increase gradually over the year and may finish in the mid-teens and basis points on a full year basis, but we acknowledge there is significant uncertainty in that estimate. Our capital ratios are shown on Slide 13, calculated using the standardized approach. Our common equity Tier 1 ratio at 8.8% was consistent with last year and last quarter as the benefit of earnings net of dividends and common shares issued under our ATM program were offset by the combined impact of strong risk-weighted asset growth and a reduction in accumulated other comprehensive income. Our ATM program has been an effective tool to dynamically manage our capital ratios. We expect to continue to use it to issue common shares to support strong loan growth and to ensure our capital levels appropriately reflect the potential for near-term volatility. Under Carolyn's leadership, we have continued to advance our AIRB transition program, including the continued work to implement enhancements to our AIRB tools. We continue to believe approval will make us more competitive, support higher growth and achieve a further diversification with an enhanced view of risk. Yesterday, our Board declared a common share dividend of $0.30 per share, which is up $0.01 or 3% from the dividend declared last quarter and 1 year ago. With the end of regulatory moratorium on dividend increases, we expect to resume our pre-pandemic practice of modest and regular increases to our common share dividend. As we look forward on Slide 14, and as Chris noted, we continue to work through a strategic planning phase to determine how best we can address sustainability, which includes climate risk. We expect to achieve a core building block over the next year by engaging with an external expert to measure our Scope 1 and Scope 2 greenhouse gas emissions, and we'll look to set fiscal 2022 as our baseline year. Our next steps beyond that will include the exploration of a greenhouse gas emission reduction management strategy and establishing credible reduction targets. We'll also look at the development of an approach to measure our Scope 3 emissions and explore a path to net 0 emissions. As you'll see from our materials, we have also initiated a phased approach to enhance our climate-related disclosures in alignment with the TCFD recommendations. We'll look to provide clear and transparent external disclosure as we progress along our climate journey and determine how best to support the transition to a lower carbon economy for us and our clients. Continuing to look ahead to fiscal 2022 on Slide 15, we expect to deliver another year of strong growth within our risk appetite. Our performance expectations are underpinned with an assumption that the Canadian economy continues its gradual recovery, and we don't see any significant curtailment of economic growth or large increases in the unemployment rate due to future waves of COVID-19 or other factors. Against this economic backdrop, we expect our teams will continue to deliver strong full-service client growth in strategically targeted segments and within our risk appetite by leveraging our continued enhancing of capabilities. We are targeting double-digit annual percentage loan growth where prudent and double-digit annual percentage growth of branch-raised deposits. With a continued focus on broadening our other funding sources, we expect that we'll continue to reduce broker deposits as a proportion of our total funding. We expect annual revenue growth to reach double digits with an annual NIM around 250 basis points. This is underpinned by the assumption of either no Bank of Canada policy rate increases or rate increases that occur later on in the fiscal year. If we see policy rate increases that commence in the first half of the fiscal year, we see upside in our NIM to the tune of 2 to 4 basis points of higher net interest margin. On an annual basis, we expect noninterest expense growth in the low teens. This includes continued planned investments in our strategic priorities, which includes certain nonrecurring expenses to implement enhancements to our AIRB tools and processes. We also expect higher expenses related to the development and rollout of our enhanced digital offering to clients and the opening of our new banking center in Markham. With an expected return to a more normal operating environment, we also expect growth in expenses like business development and travel, which have been suppressed in the current operating environment. We expect to deliver annual pretax pre-provision income growth within a range of mid- to high-single digits. Our annual growth in earnings per share will depend on our provision for credit losses, which could be volatile compared to the current year. Based on a base case estimate, we expect an annual provision for credit losses in the mid-teens compared to 9 basis points in 2021. This assumption would result in annual percentage growth of adjusted earnings per share that could finish in the range of the low- to mid-single digits. Of course, there's downside to this estimate of provisions for credit losses returned to within or above our normal historical range of 18 to 23 basis points. But on the other hand, we have further upside to our earnings if policy interest rate increases occur earlier in 2022 than we're expecting or our provision for credit losses holds relatively consistent with the very low 2021 levels. With that, Sylvie, we're ready for the Q&A so let's go ahead and open the lines.
[Operator Instructions] And your first question will be from Meny Grauman at Scotiabank.
The first question I have is just on AIRB. Just wondering if there's any updated information, especially in terms of time line there. Obviously, OSFI is signaling a more normal environment. So I'm just wondering if there's any new development?
No. We are continuing to work on our parallel run and really getting a lot of good information on how we think we can really deliver this very well. So Carolyn will continue to work on the projects until she retires at the end of June. And we look to continue to move this forward. We still see it as a great enhancement to our capabilities.
So the previous timelines we've talked about basically are still what you're working towards? Is that it?
Yes. Yes.
Okay. And then just in terms of the guidance, just wondering on operating leverage specifically, it sounds like the guidance is for negative operating leverage in 2022. So I just wanted to confirm that. And I wanted to see if you think that we could get back to positive operating leverage in 2023. Obviously, a lot of investment is happening, but how do you see that evolving over -- beyond this sort of current fiscal year?
Yes, you're right, Meny. On a full year basis, it would be negative operating leverage. I think that's a story though that you'll see change as the year progresses even. And the opportunity to deliver positive operating leverage, I might circle Q4 as a potentially credible point of where you might see that and a couple of factors driving it. Obviously, if we see Bank of Canada policy rate increases and we would -- if we do see them, expect them later in the year. That gives us some NIM expansion opportunities later in the year and especially within Q4. And then some of what's driving the increased expenses in next year, I mean, that's going to be investments in our AIRB enhancements. And that's work that we expect the heavy lifting to occur predominantly in the first half of the year, maybe spilling into Q3. But by Q4, we might see a bit of a tapering of those costs. So it sets up the fourth quarter to maybe see a bit of torque on operating leverage and sets us up quite well going into the next year.
And then just 2 more clarifications regarding the outlook. In terms of the PTPP growth outlook, are you signaling that if we get rate hikes maybe sooner than expected that, that PTPP growth could be in the low-double digits potentially? Is there upside to that PTPP estimate if the rate environment starts to increase sooner?
Yes. When we were setting the guidance, we had in our mind 2 Bank of Canada rate increases and thinking about whether those occur in the back half or front half of the year. And I'd say that, that would put you at the low or high end of our guidance. If we saw more hikes than that and especially if we saw them occur earlier in the year, we would have the potential to break into the double digits, all else held equal.
Next question will be from Doug Young at Desjardins.
Just on the guidance as well. Thanks for the color. I guess there's 2 things that I just wanted to kind of -- and I think you may have answered them. But one is just on the noninterest expense ratio. It seems like a 50% to 51% level seems reasonable for next year. But -- and then on the NIM and loan growth, just wondering what your assumption is in terms of loan mix because it does seem like the loan mix shift this quarter did have implications for your NIM. So what are you thinking in terms of loan mix more on the commercial side? Any color on that?
Yes. So I guess, first, to confirm your math, Doug. Yes, we would be looking at an efficiency in or around 50%, maybe just slightly above that on balance for the full year. But consistent with my comments on operating leverage, that's a number that you could see finishing a good chunk below 50% coming out of the year. On the NIM outlook, you're right. Loan growth mix was a driver this quarter. We saw a bit of a shift in mix this quarter, and it's kind of been building through this year to higher growth in our commercial mortgage portfolio as well as our retail mortgage portfolio. Those are our 2 lowest yielding books but give us excellent credit quality. So it's a good trade there from an ROE perspective and especially thinking about life as an AIRB bank, we'd be pretty happy with that trade. But it does put a bit of pressure on the NIM, which gives us confidence in the NIM for next year and why we think it builds from these Q4 levels, as we're making the expectation that the 2 portfolios that were a bit sluggish this year, which are some of our higher-yielding portfolios. Equipment finance, we expect a strong rebound. And we've said this for a couple of quarters, but we see a really strong pipeline ahead of us in the real estate construction lending portfolio with good borrowers, great projects. But we just haven't seen them start yet. We expect them to start moving in fiscal 2022. And with that, we'll bring some yield expansion and some NIM expansion. Funding costs, we'll continue to take those down as we continue to grow branch-raised deposits.
And just to clarify, you're not assuming in your guidance any Bank of Canada rate increases. Is that right?
Yes. We're assuming basically the effect of either none or late year Bank of Canada rate hikes, which on a full year basis has nearly the impact of almost none. You might -- and that's why we're saying relatively consistent. I think about late in the year Bank of Canada rate hikes, even if you had a couple, say, one in Q3, one in Q4, you might be looking at a basis point to 2 basis points of NIM expansion opportunities. So if we were at 2.49% this year, you're still in that range of around 2.50% next year, which would be our outlook.
Makes sense. And then just on the branch-raised deposit, strong once again. I guess my question is how much of this was from new clients that are new to CWB? And do you have any stats that you're willing to share how you've successfully deepened these relationships? So additional products that you're selling, maybe loans or wealth has become a big part of your strategy. So first, I guess, is like how much of this deposit growth in the branch side is new clients? And how much of that is being -- are you converting to multiproduct clients?
It's been a pretty consistent trend over these last couple of years where the majority of that deposit growth is coming from either new-to-bank clients or existing clients that we're converting from lending only to full service. Most of what we're seeing in terms of product mix or what they're adding, it's cash management has been our big opportunity. I mean those are the capabilities we've been investing in to deliver this to our clients. That's how we're winning a lot of these full-service relationships as they like dealing with us, but we just haven't had the capabilities to effectively do cash management as well as our peers. But we've started to close that gap and effectively have come out with a competitive offer and are starting to see the wins. That's really good news for our funding cost as well because the deposits that come with those wins on the cash management side, there are lower cost of funds compared to other sources as well. So we're just very happy with that. Chris, I don't know if you want to give an update on wealth and how that's been going?
Yes. No -- and just to add on the cash management side, the 2022 add to our capabilities will be the digital online platform, which we -- enhances our payments program as well. So we see more gain to occur in this area, which we're very, very positive on. So very happy with the growth in branch-raised and really, it's a reflection of the investment we've made. And again, wealth has been a tremendous add. We onboarded the teams in June of 2020. We retained all the advisers, which has been a fantastic win, and we see tremendous integration as we've really worked on what internally we call One Wealth and just the integration of our wealth teams but also the referral branch business into the wealth advisers, and that's gone very well. So we're just happy with the kind of the business execution of our strategic direction.
And Chris, are you willing to give any stats in terms of cross-sell number of clients with multiple products? It's -- I mean the branch-raised deposits is fantastic for your funding. But obviously, the long goal is to kind of deepen these relationships, and that's what I'm curious in seeing if there's been progress?
Yes, there is progress there. We're not publishing any stats on that, but we definitely have -- we do track it internally, and we're very happy with the progress we've made on that conversion to full-service clients.
Next question will be from Marcel Mclean at TD Securities.
Just going back to the AIRB, what was the most recent guidance you might -- you guys planning to submit for approval in the second half of 2022 with implementation in 2023? Or is it uncertain at this point?
So our -- we're looking -- what we said is we're taking our application to the regulator when we're fully ready with it. So that was the message that we provided. And so what we've done is we've worked the parallel run and what that's providing us is good insight into how we're best to deliver this. So we're working on it through 2022, and we will focus on it. As soon as we feel absolutely confident that the processes are in place, then we'll move forward with our application. So there's work to go, but we're positive on the progress we're making so far.
Okay. So no specific timeline. Okay. Then just on AIRB as well, when we think about this and when the transition eventually does happen, how do you see that translating into your ROE in possibly year 1 and beyond once you guys do get that completed?
Well, we think it's positive. What we don't see reflected in our capital today is just the underlying strength of our borrowers. Under the standardized approach, borrower strength doesn't factor into that equation, it's loan type. And so there is an embedded amount of excess capital being carried under a standardized approach that, when we convert over, we know we'll be free. How much will depend on our post-approval condition. And those are things that will be worked on as we get a little closer to the finish line. So it's early days to provide a calibrated answer, but directionally, I would say positive.
Okay. Okay. That's good. And then last one on capital for me. The ATM, you achieved a little bit more than you had sort of guided to on the last quarter conference call, and that might have just been reflective of the loan growth we saw this quarter. But -- so it seems like you guys are managing to this about 8.8% capital ratio. Is that the right way to think about it? You guys will sort of continue to issue as much as you need to maintain that level of capital? Or what do you guys consider an adequate level of capital when you say that?
Yes. And so what I've talked about since launching the ATM is using it as a flexible and dynamic tool to manage capital levels to the right level in the moment. If we end up making a call on just looking ahead, looking at loan growth actually realized, what's in the imminent pipeline and then things out there that could introduce volatility to our capital, it's making sure we're calibrated to that right level. And if we need to pivot, either we have a little bit extra or we feel like we could put a little bit more in our back pocket.We have an ATM we can use to pivot and issue a bit more and do that pretty rapidly. Conversely, we have strong enough loan growth as a standardized bank that we can soak up capital in a hurry as well, if we feel like it's prudent to do so. So far, where we sit right now and the capital ratio we're holding, it was the right level in the moment. And this is something we'll dynamically assess as we go forward. I mean this is part of a parallel run to be in an AIRB bank with risk-sensitive capital. We don't have overly risk-sensitive capital today, but we're establishing our credibility as an operator who can prudently and proactively manage capital levels based on risks in the external environment and what we're seeing internally. So that's a long-winded way of me saying each quarter, we'll assess this very carefully. Related to this quarter, it was strong loan growth. That was the pipeline through the whole quarter. We also had a bit of grind on CET1 capital from accumulated other comprehensive income. We have a bond portfolio on our liquidity book. It gets fair value each quarter. There were some unrealized losses measured at October 31, which reduced our capital levels that would have otherwise been higher. So few moving parts, but the right capital in the moment.
Next question will be from Nigel D'Souza at Veritas Investment Research.
I had a question for you on your performing loan allowance released this quarter. Correct me if I'm wrong, but I think this quarter marks the first in that ECL reversal for you since the onset of the pandemic. So I'm just trying to get a sense of what drove the release? I know you cited lower default rates and an improvement in your oil price forecast. But when I look at your disclosures, your oil price forecast went up from WTI of $61 to WTI of $67. So is the delta to that forecast really that material? Or can you just shed some light on what's driving that outlook?
Yes. Our models start with our current realized levels of defaults as the starting point and then the macroeconomic forecast predicts the trajectory from there. So the lower your starting point, the lower your potential projection of expected losses if your macro forecast was consistent quarter-to-quarter. So this quarter, we had kind of a double benefit of actual realized default rates being lower quarter-over-quarter. You'll see that, and obviously, our gross impaired loan formations as well as our delinquency levels, which just continue to drop and are now well below what they would have been pre-pandemic in a pretty benign economy. So that's the beneficial starting point. And then layered on top of that would be the more favorable, and I call it slightly more favorable macroeconomic outlook, because oil price is not a material driver of our ECL. It's a secondary factor and oil price going up is helpful, but it would not explain the majority of our performing loan release this quarter. The majority of it related to just very, very strong levels of realized defaults as a starting point.
So do I interpret that as you had higher migration from Stage 2 back into Stage 1 this quarter?
Not necessarily. What we saw actually was a couple of things. So within the personal lending side of things, that being the mortgage book, that's a very low-duration portfolio. And we originated predominantly most of our loan growth within the last year, and that was in an environment with a combination of very low rates of default as well as a very robust outlook for housing prices and a very low interest rate environment. What our models would predict for that portfolio is now moving ahead a year later, default rate environment still very low, but outlook for housing price is a little bit softer than it would have been when those loans were originated and certainly a higher outlook for interest rates. So we actually saw an increase in Stage 2 quarter-over-quarter, but that's predominantly from that personal lending book. And as we talked about earlier in the pandemic when we saw the migration into Stage 2 of that portfolio, it didn't cause a significant increase in our ECL for 2 reasons: one, short duration, so moving from 1 year of expected losses to 2 years and going to full lifetime, not a material impact. And that loan book is very secured, very reasonable LTVs. So actual predicted credit losses would be very, very low, and that compares well to realized credit losses, too. So quite a few moving parts, but on balance, low default rates, more beneficial outlook on macro was driving the decline despite some movement within staging.
Great. And just last question on this from me real quickly. So when I look at your allowance levels, it looks like there's a substantial amount of excess allowances on your performing loans relative to the pre-pandemic level. So is there any risk to the upside here that with the new variant and macroeconomic risk that you could see a rebuild of performing loan loss provisions in the upcoming quarters and maybe your PCL ratio running a bit higher than forecast?
Yes. Where we're sitting today, our current level of performing loan allowance does predict an increase in the rate of default progressing through the next year. That's an embedded assumption. Now there could be many drivers of that increase in default rates. You could pin it back to government support and stimulus running off, variants of concern, other factors swirling in the economy that could lead to elevated rates of default and delinquency. We have factored an element of that into our model. So we're not expecting current low rates of default to just continue as normal. We think it's reasonable those tick up, and that's embedded in our estimate. There is some risk of performing loan allowances building from these levels if we saw a very severe outcome. We're expecting a tick up, but we're certainly not expecting a significant curtailment of economic growth or anything like that or a significant increase in the unemployment rate. But we are thinking from here as a starting point, it's reasonable to expect that we do see slightly elevated levels of default and delinquency.
[Operator Instructions] And your next question will be from Gabriel Dechaine at National Bank.
[Foreign Language] NIM outlook. One question here. What's your underlying assumption for loan growth versus deposit growth? I know your loan growth, but maybe I missed it, but your expectation for deposit growth?
Yes. We've guided to double-digit on both. We think they'll be similar, but the opportunity for branch-raised deposits to finish slightly above loan growth would be our expectation.
Okay. So you wouldn't have any downward pressure on margin from suddenly needing to rely on broker deposits because of loan growth?
That would be our base case assumption. Yes, we think funding continues to be a strength for us through next year.
And the -- if the Bank of Canada hikes rates early in the year, you could see 2 to 4 basis points of upside to your NIM expectation? I want to tie that back to comments made, I think on Q2 or Q3, I forget the rate sensitivity versus spread sensitivity. You're more of a spread-sensitive bank. So it's more like the competitive environment affect your NIM. I know these aren't huge numbers, but clearly, there's still some leverage to what the Central Bank does. Can you edify me a bit on why there's still upside? I think that's a good thing and that normal thing, logical thing, but I just want to get a better understanding of your rate sensitivity.
Yes, we're pretty well matched when you look at floating rate assets versus floating rate liabilities, but that's a very broad category. Within floating assets, you have assets that do float directly to prime, which then ties directly to Bank of Canada rates. You then have assets that are linked to SEDAR, which doesn't always follow prime at exactly in lockstep. There's timing differentials. And I think we've seen SEDAR curve perhaps front run things a bit at times, sometimes it lags. So there's a bit of a mix factor within that broad category of floating. Same thing can be said for our deposit mix. We would have a smaller proportion of those floating rate deposits linked to prime directly. A big chunk of our deposits float, but they float on what we call administered rates and administered rates are where we have discretion at setting the pricing and so where you could see some embedded torque actually in our NIM. In our outlook, we have presumed that we pass on the majority of the Bank of Canada rate increases, if they occur, to our depositors. If we have the sort of funding strength that would allow us to take the position to pass on something less than the Bank of Canada rate increases we saw, that could give us some torque. But if we found ourselves in a competitive dog fight for deposits, the risk becomes that you have to pass on a little bit more to try to stimulate branch-raised deposit growth. But that's the risk we mitigate by having a bunch of other sources of funding available where we can just look at what's in front of us, look at competitive dynamics and decide if we have a need for funding, are we dialing up deposit pricing, are we okay to leave it, can we reduce it, and that depends on strength and pricing available in other channels.
So your -- if I understand the -- your -- lots to chew on there, but not a full amount of your floating rate loan book will move -- will see a yield move higher when -- if and when the Bank of Canada hikes rates? And then you're also making, I'd say, a fairly conservative assumption that you're -- where you have pricing power in your deposits, you're assuming full pass-through or close to it, which may be -- may not be the case?
Yes. And our ability to over-deliver on that will be directly linked to our branch-raised deposit strength. If we're seeing very good strength as we saw kind of through late last year and into this year, we were able to enact pricing actions that reflected that strength and allowed us to pocket a bit more NIM.
Then on the AIRB thing, I seem to recall you have given a number, like a quarterly number of these costs. Is that implementation or whatever? Is that going to be a bigger cost in the first half of the year than what it's been running at lately? And then looking, let's say, to 2023 because it sounds like in Q4, it could be dropping off, at 2023, would those costs go away or -- which it sounds like it might? Or are you going to look at reinvesting those savings, opening more branches in Ontario, hiring more risk people as the bank grows, stuff like that?
Yes. So we have been pretty transparent about exactly what we're spending on AIRB, both just in the normal recurring cost of operating as an AIRB bank. And that really was -- we had a bunch of assets capitalized on the balance sheet when we started the parallel run. We turned on the switch to start depreciating those assets. And so that impact has been running through. In addition to the team responsible for originally building and developing those processes, they moved from being capitalized to then hitting NIEs. And then the uptick in those expenses, you would have seen from Q3 to Q4 reflect the incremental cost and effort with developing the enhancements to those tools and starting to implement them. So that level of expense you're seeing in Q4 would reflect ongoing sustainment as well as implementing the enhancements. And that's a pretty good run rate going in for, I'd say, the first 3 quarters of next year and then starting to taper off in Q4. To maybe help give you a better sense of the magnitude on next year, the investments we're looking at making within AIRB, and it's driving over 2% of our year-over-year NIE growth, and that would be a fiscal 2022 outcome. To your point and where you're leading here, our intention is that in fiscal 2023, those costs dramatically reduce and go back closer to ongoing sustainment with perhaps some incremental cost. And in terms of what we spend those savings on, do we allow it to reduce our efficiency? Or is there a big digital push to be made? That's a budgeting decision we haven't made yet. But it definitely sets the table for some more earnings torque into fiscal '23, when you think about full year impacts of Bank of Canada rate increases that might get enacted this year, combined with this incremental expense we're incurring in 2022 that we may not need to incur in 2023.
[Operator Instructions] And at this time, Mr. Fowler, we have no further questions. Please proceed.
Thank you, Sylvie. I'd like to say thank you to all our team members for their tireless efforts this year. Together, we've built excellent momentum going to 2022, and I believe the execution of our strategic objectives will provide even more upside for the years to come. I'd also like to take a moment to say thank you to our investors for their continued support. Despite the challenging operating environment that persisted this year, we've delivered very strong financial performance and executed on our differentiated strategy. Continued strong growth of our franchise will be supported by the combination of our investments in digital capabilities, our focus on delivering a lower-cost funding model and the transition from a standardized to a model-enabled AIRB bank. CWB's capabilities will be more competitive, support higher growth and achieve further diversification. We're firmly committed to the responsible creation of value for all our stakeholders and our approach to sustainability will support our continued success. We appreciate your commitment and confidence in CWB and look forward to reporting our first quarter financial results in February. With that, we wish you all a good morning and a happy and healthy holiday season. Thank you very much.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a good weekend.