Canadian Western Bank

TSX:CWB

Earnings Call Analysis

Bank Expects Increased Asset Yields & Stable Credit Performance

The bank projects asset yields to grow more significantly than funding costs, leading to an anticipated increase in net interest margin from the fourth quarter's 2.4%. Adjusted noninterest expenses rose 2% sequentially, reflecting higher capital taxes and seasonal expense increases, while a scientific research tax credit and cost-management efforts offset some increases. The bank reported a 30 basis point increase in its CET1 ratio to 9.7%, reflecting retained earnings and a reduction in risk-weighted assets, and increased the common share dividend to $0.34, citing confidence in earning power. Gross impaired loans decreased by 6% from the last quarter and are expected to remain within the historical normal range of 18 to 23 basis points despite higher interest rates potentially increasing borrower defaults next year. The bank's secure lending practices result in credit losses below historical averages, and it anticipates strong financial performance in 2024 despite anticipated weaker economic growth in the early part of the year.

CWB's Differentiated Client Experience and Operational Efficiency

CWB emphasizes its prowess in delivering specialized services and customized solutions with quick response times, which has won it recognition as having one of Canada's most admired corporate cultures. The company has undertaken operational restructuring, resulting in a team reduction of about 150 positions, with a focus on reinvesting savings to enhance the client experience and digital capabilities, while also aiming to grow its presence in Ontario.

Deposit and Loan Growth Amidst Strategic Adjustments

Branch-raised deposits experienced a marginal 1% decrease, overshadowed by a 9% rise in fixed-term deposits and countered by a 5% decrease in demand and notice deposits. This shift is part of CWB's intentional strategy to exit from higher-cost relationships, which aligns with its average deposit growth rate of 11% over five years — outpacing its average loan growth rate of 7% over the same period. Moving forward, the bank anticipates an uptick in branch-raised deposit growth following the full roll-out of its new commercial digital cash management and payment platforms.

Performance Indicators Showing Resilience and Growth

CWB demonstrated a 3% rise in total revenue sequentially, with net interest income up by 2% due to an improvement in net interest margin (NIM) of 3 basis points. Non-interest income increased by 13%, largely a result of higher foreign exchange revenue, even though wealth management fees declined due to a drop in assets under management. However, diluted earnings per share (EPS) decreased by $0.06 compared to last year, reflecting dynamic market conditions.

Forward-Looking Statements with a Positive Outlook

The expectation for a stable policy interest rate in fiscal 2024, potentially decreasing later in the year, contributes to the anticipation that NIM will gradually increase from the fourth quarter's 2.4%. CWB projects the NIM increase to reflect growth in asset yields surpassing funding costs. The bank also expects to leverage strategic loan growth aimed at optimizing risk-adjusted returns. With a CET1 ratio that has increased to 9.7%, bolstered by retained earnings and lower risk-weighted assets, CWB remains optimistic, as evidenced by a recently declared dividend of $0.34 per share.

Credit Quality and Provisions for Credit Losses

CWB registered a $16 million or 6% decrease in gross impaired loans from the previous quarter, indicating a return to more normal levels from the extremely low levels in the preceding year. The provision for credit losses on impaired loans was $7 million, or 8 basis points, still lower than the five-year average of 14 basis points. Despite a declining trend in impaired loans, the bank foresees potential future impacts due to sustained higher interest rates, which may result in increased borrowing difficulties and loan impairments next year.

Net Interest Margin and Future Earnings

The bank described various factors influencing NIM, including limited impaired loan interest recoveries and fees. The bank's reorganization is designed to grant flexibility in managing expenses while aiming to direct investment into growth drivers. Although not aiming for a sub-50% efficiency ratio, the bank plans to deliver positive operating leverage in the vicinity of that target. For fiscal 2024, despite potential rate cuts by the Bank of Canada, CWB doesn't see this as a significant risk to NIM, as long as spreads stay consistent and well-behaved.

Asset Liability Management and Yield Curve Expectations

Improvements in the asset liability pricing differential, driving positive NIM, are expected to continue into the first half of the year. The second half may see a more modest pace influenced by the repricing of the loan portfolio rather than the securities portfolio. CWB believes that changes in the Bank of Canada policy rate will have a lesser impact on NIM than before and anticipates that spreads will perform adequately to maintain a favorable NIM outlook for fiscal 2024.

Earnings Call Transcript 2023-Q4

[Operator]

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 and Fiscal 2023, Financial Results Conference Call and Webcast. [Operator Instructions]. Thank you. I will now turn the call over to Chris Williams, Assistant Vice President, Investor Relations. Please go ahead, Chris, go ahead, please.

[Chris Williams, executive]

Good morning, and welcome to our fourth quarter and fiscal 2023, financial Results Conference Call. We'll begin this morning's presentation with opening remarks from Chris Fowler, President and Chief Executive Officer; followed by Matt Rudd, Chief Financial Officer; and Carolina Parra, Chief Risk Officer.Also present today, are Stephen Murphy, Group Head and Commercial, Personal & Wealth; and Jeff Wright, Group Head: Client Solutions and Specialty Businesses. After our prepared remarks, they will all be available to take your questions.As noted on Slide 2, statements may be made on this call that are forward-looking in nature, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements.I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. I will now turn the call over to Chris Fowler, who will begin his discussion on Slide 4.

[Christopher Fowler, executive]

Thank you, Chris, and good morning, everyone. In the challenging economic backdrop of 2023, we delivered financial performance that confirmed the strength and resilience of our strategy as the best full-service bank for business owners in Canada.Our clients continue to choose CWB for a differentiated level of service through specialized expertise, customized solutions and faster response times. Our people take the time to understand our clients and their businesses and work as a united team to provide holistic solutions and advice.The unrivaled experiences that our teams provide for Canadian business owners is what separates us from the competition, and I'm thankful for our team members' continued efforts during a challenging environment.I'm proud that CWB placed in the top 25 of this year's best workplaces in Canada with the second year in a row, we were recognized as Waterstone Human Capital as having one of Canada's most admired corporate cultures for the fourth time. This recognition reflects our team's dedication to go above and beyond for our clients in challenging environments by rapidly adapting to changing conditions. During the quarter, we executed changes to reorganize our operations to drive priority activities that take full advantage of our investments in modernized technology, digital capabilities and further leverage our enhanced credit decisioning tools and policies.Through these changes, we realized efficiencies in our banking center footprint, operational and support functions and administrative processes, which has resulted in a reduction in the size of our team by approximately 150 people.We intend to reinvest most of these savings to support our differentiated client experience, the launch and growth of our new commercial digital cash management platform and enhanced payments capabilities and increase our client-facing presence in Ontario, all while delivering strong positive operating leverage. With these changes, I'm confident in our ability to deliver strong financial performance in a potentially volatile environment, while our teams continue to deliver an unrivaled experience to business owners and their families. As noted on Slide 5, while the external environment dampened financial results through the first half of the year, we successfully adapted by targeting lending opportunities to optimize returns within a prudent risk appetite and continue to enhance our client offering while prudently managing our discretionary expenses.With continued low levels of credit losses supported by a secured lending model on underwriting practices and proactive loan management, our financial performance improved as the year progressed.We exited the year with strong earnings momentum and increased capital ratios and a resilient balance sheet. We're well positioned to create value for our investors in the year ahead as we continue to win relationships with business owners and their families.Turning to Slide 6. Our targeted approach to lending opportunities provided strong growth in our strategically targeted portfolios and geographic locations. As we've noted before, general commercial lending represents a broad section of the Canadian economy that we believe is underserved by other banks. We had strong success across the country by targeting our loan growth in the strategically important segment.We delivered 10% general commercial loan growth in the last year, which produced strong risk-adjusted returns and supported an increase in net interest margin as the year progressed. We continue to enhance our offering through an expanded partnership with Brim Financial to offer new business credit cards, and we're preparing to launch a commercial digital cash management and payments platform for our commercial clients in the near future. These enhanced capabilities support our ongoing efforts to convert our clients from single product to broader full-service relationships and capitalize on the opportunity to increase our market share in the mid-market commercial segment.Our focus on risk-adjusted returns in the current environment, limited origination volumes across our commercial real estate portfolios. We saw a fewer new commercial mortgage opportunities this year that met our criteria and new origination volumes were more than offset by scheduled repayments.In our real estate project loans portfolio, we experienced a lower-than-usual volume of new project starts from top-tier borrowers, which were more than offset by payouts associated with the timing of successful project completions. Our disciplined risk appetite and our conservative approach over many years has developed loan portfolios with strong credit profiles. On a sequential basis, our total loans remained relatively consistent with last quarter and included 1% growth in general commercial loans, offset by a reduction in our real estate project loans and commercial mortgage portfolios.Consistent with the continued execution of our geographic diversification strategy, Ontario loans grew 10% annually, driven by very strong 17% growth in the general commercial portfolio supported by our Markham and Mississauga banking centers.In January, we'll cut the ribbon to open our new banking center in Toronto's Financial District, and we plan to open our Kitchener location later in the year to continue to build brand awareness in Ontario and capitalize on a significant growth opportunity in the province.I'll now turn the call over to Matt, who will provide greater detail on our fourth quarter financial performance.

[R. Rudd, executive]

Thanks, Chris. Good morning, everyone. I'm starting on Slide 9. Compared to the prior year, branch-raised deposits decreased 1% as a 9% increase in fixed-term deposits was more than offset by a 5% decline in demand in notice deposits.In addition to the continued shift from notice and demand to fixed-term deposits that we saw through the year, branch-raised demand and notice deposits also declined due to our intentional exit of select higher-cost non-full service client relationships earlier this year.Branch-raised deposits declined 1% during the quarter as an increase in term deposits was more than offset by lower demand in notice deposits. Overall, branch-raised deposits represent 56% of our total funding.Over the last 5 years, we've grown our branch-raised deposits by about 11% on average that's outpaced loan growth of about 7% on average over the same period. Growth in branch-raised deposits this year was muted in a disruptive and volatile environment.For next year, we expect gradual momentum in branch-raised deposit growth as the year progresses, following the full launch of our digital commercial cash management and payments platform. Our sequential earnings performance is shown on Slide 10. Common shareholders' net income decreased 7% and diluted EPS decreased $0.06. That's primarily due to the noninterest expenses we incurred related to a reorganization of our operations in the current quarter that had a $0.13 negative impact on diluted EPS. These costs have been removed from our adjusted performance metrics.Our focus performance delivered strong financial results this quarter. Pretax pre-provision income increased 4% and adjusted EPS increased $0.06. Higher net interest income increased EPS by $0.03, that was driven by a 3 basis point improvement in net interest margin and an increase in noninterest income benefited EPS by a further $0.03.Higher adjusted noninterest expenses reduced EPS by $0.02. Our provision for credit losses declined this quarter that contributed $0.04 to EPS and a higher effective tax rate reduced EPS by $0.01.Performance compared to the same quarter last year is shown on Slide 11. On shareholders' net income increased 14% and diluted EPS increased $0.08 primarily due to higher revenues and a lower provision for credit losses.Compared to the same quarter last year, pretax pre-provision income increased 8% and adjusted EPS increased $0.06. Higher net interest income increased EPS by $0.13, primarily due to 4% loan growth, a 7 basis point improvement in net interest margin. Lower noninterest income reduced EPS by $0.03. The lower provision for credit losses contributed $0.02 to EPS. Higher effective tax rate reduced EPS by $0.01 and the incremental shares issued under our ATM program earlier this year had an isolated impact of reducing EPS by $0.03.As shown on Slide 12, total revenue increased 3% on a sequential basis. Net interest income increased 2%, driven by a 3 basis point improvement in net interest margin. The 13% increase in noninterest income was primarily due to higher foreign exchange revenue that reflected a strengthening U.S. dollar in the quarter. That was partially offset by lower wealth management fees due to market value declines that reduced average assets under management.Slide 13 breaks down our NIM performance in the quarter. NIM benefited 6 basis points from the repricing of fixed rate assets at higher market interest rates, which more than offset the increase in deposit costs this quarter.Lower impaired loan interest recoveries reduced NIM by 2 basis points, and the remaining items impacting NIM was primarily related to lower loan-related fees reduced NIM by 1 basis point. Average liquidity levels were relatively consistent with the prior quarter and did not contribute to the sequential increase in NIM.We anticipate a relatively stable policy interest rate fiscal 2024 with the potential for policy interest rate reductions in the latter part of the year, that's on the assumption that core inflation continues to decline to reach Bank of Canada's target level.Based on the assumption of a more stable interest rate environment, our net interest margin is expected to gradually increase over the next year from our fourth quarter NIM of 2.4%, and we expect that to reflect the continued growth in asset yields that we expect to outpace the growth in funding costs, and we'll continue to target loan growth that optimizes our risk-adjusted returns.On Slide 14, we've provided a more detailed view of our adjusted expenses. Adjusted expenses exclude the costs incurred for the reorganization initiatives this quarter, which were recognized primarily in salaries and benefits, and the costs related to the accelerated amortization of AIRB assets recognized in the fourth quarter last year, which were recognized in premises and equipment costs.Adjusted noninterest expenses increased 2% sequentially and supported positive operating leverage of 3.3% this quarter. Adjusted noninterest expenses compared to the prior quarter reflected higher capital taxes and the impact of customary seasonal increases in certain expenses, partially offset by lower spending on strategic projects and our actions undertaken during the year to manage our staffing levels through natural attrition and limit our discretionary expenditures.We also benefited from a scientific research and experimental development, or SR&ED, investment tax credit realized in the quarter. Compared to the same quarter last year, we held the increase in adjusted NIEs to just 1%.Most of the planned reorganization activities that Chris referenced in his opening remarks have occurred to date. Further reorganization activity is expected to be limited within fiscal 2024 and costs incurred for these activities will continue to be excluded from adjusted financial results.Reorganization activity is undertaken provide us with optionality and agility and how we manage our operating expenses next year so we can invest in our organizational priorities, support our differentiated client experience and drive positive operating leverage.Our capital ratios and the drivers of our CET1 increase are shown on Slide 15. Our CET1 ratio increased 30 basis points to 9.7% this quarter, primarily reflecting retained earnings growth and a reduction in risk-weighted assets. No common shares were issued under the ATM program this quarter. With continued confidence in our earnings power, our Board declared a common share dividend yesterday of $0.34 per share, which is up $0.01 from the dividend declared last quarter and $0.02 from the dividend declared last year.I'll now turn the call over to Carolina who will speak further on our credit performance.

[Carolina Parra, executive]

Thank you, Matt, and good morning, everyone. Beginning on Slide 17. Total gross impaired loans decreased $16 million or 6% from last quarter and represented 71 basis points of gross logs, 4 basis points lower than prior quarter and 25 basis points higher than prior year.In line with expectations, our gross impaired loans are returning to more normal levels from a very benign conditions in the prior year. Despite the increase over the last year, grossing per loan still remain 13 basis points below pre-COVID-19 levels in the first quarter of 2020.Gross impaired loans were lower than last quarter, driven primarily by lower new formations, and we also continue to resolve impaired loans without incurring significant losses. We expect the total balance of gross impaired loans to continue to fluctuate as our overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends.The level of gross impaired loans does not directly reflect the dollar value of expected write-offs, even the tangible security held in support of lending exposures. Our strong credit risk management framework, including well-established underwriting standards, the secured nature of our lending portfolio with conservative loan-to-value ratios and a proactive approach to working with clients through difficult periods continues to be an effective in minimizing realized losses on the recognition of impaired loans. I would also note, we have minimal exposure to unsecured personal lending or credit cards. This is demonstrated by our history of low write-offs as a percentage of total loans, including from past periods of volatility count.As Chris and Matt have noted, we have taken a targeted approach to lending with a focus on strong risk-adjusted returns in the current environment, which has supported the resilience of our credit profile. Turning to Slide 18. The increase in the performance announced from last quarter primarily reflects continued prudent provisioning, recognizing the uncertainty in the macroeconomic forecast and drove a performing loan provision of credit losses of 3 basis points this quarter.Our commission for credit losses on impaired loans was $7 million, equivalent to 8 basis points this quarter, which remains below our 5-year average of 14 basis points. Looking forward, we expect that the sustained impact of higher interest rates will result in increased borrowing disposals and impaired loans next year.Consistent with our experience in prior periods of all the time, our prudent lending approach supports our expectation that our provision for credit losses will be within our historical normal range of 18 to 23 basis points next year. I will turn the call back to Chris Fowler for his closing remarks and outlook.

[Christopher Fowler, executive]

Thank you, Carolina. Turning to Slide 19. As the year has progressed, our teams drove improved financial results through targeted loan growth and disciplined expense management.Our secured lending model and disciplined underwriting continue to produce credit losses below historical averages. As we look forward in fiscal 2024, we expect the impact of elevated interest rates to continue to work through the economy.Economic growth is expected to be weaker in the first part of the year before expanding in the latter half of the year. Against this expected economic backdrop, we've taken action to support our expectation of continued strong financial performance delivered by more streamlined operations, while we continue to invest in organizational priorities and deliver a differentiated experience to Canadian business owners.Before we open the lines for our Q&A, I'd like to thank each of our team members for their efforts during a challenging environment. Through their efforts, we've built a strong resilient bank, and we're well positioned to create value for our investors in the year ahead. With that, Operator, let's open the lines for Q&A.

[Operator]

Thank you, sir. [Operator Instructions]. And your first question will be from Doug Young at Desjardins Capital Markets.

[Doug Young, analyst]

Maybe, Matt, just first on NIMs. I know you've kind of framed this in a certain way in the past in terms of increases and where you think about exiting the next year in terms of NIMs. And I know your guidance was exiting fiscal '23, but where we did exit. Is it fair to kind of read into your discussion around NIMs in fiscal '24 that we should expect, assuming no change in interest rates or anything that you could exit fiscal '24 around 2.5%? Is that a fair assumption?

[R. Rudd, executive]

Yes. I mean there's lots of embedded assumptions there. But if I take your worries, which is the primary one, that interest rates are relatively stable, yes, just the organic composition of our book and how it churns through. What you should see are gradual increases through the year, maybe a little more in the early half of the year, but I think the back half will still see some benefit.And, yes, I'll give you a similar guidance to last year in that in Q1, we'd expect to start within the 240s. And if everything works according to plan, we'd be exiting the fourth quarter somewhere in the 250s, all else being equal.

[Doug Young, analyst]

I mean, as I think of just some of the items this quarter, the asset liability repricing last quarter was 4 basis points. This quarter, it's 6 basis points. Obviously, it's moving in the right direction. Is that 6 basis points to like when I think about the evolution of the NIM that's kind of reasonable or is there upside to that? And there was 2 unusual items in there around impaired loan interest recoveries and loan related fees. I guess that's relative to last year, but I'm just trying to get a sense of what those are.

[R. Rudd, executive]

Yes. I'll unpack each of the pieces. So, on the reprice of assets versus liabilities, that 6 basis points is a little bit higher than I might have expected when we were chatting last quarter. The reason why we outperformed there really disciplined on deposit costs, not overly robust asset growth in the quarter.So, when we're thinking about the liability structure, we can be very choosy, very picky. We absolutely took a view to enhancing our net interest margin and really trying to get that maximum spread in the quarter. We have the optionality to do that, and we did so.We didn't put up as strong of a, call it, headline branch rate deposit growth numbers as we would have liked, and we had opportunities to do so. But when it came down to driving profitability, the broker market actually performed really well, costs were reasonable. So, we leveraged that and drove a bit of NIM.So that's probably a little bit higher at 6 basis points than I'd expect kind of on a run rate, but not by much. On the impaired loan interest recoveries, and that's compared to last quarter.Last quarter, I'd say maybe a little bit higher than usual in this quarter. We usually have some and we had virtually none this quarter. So, that's likely a bit of a drag to NIM this quarter that I wouldn't necessarily expect to continue.And then on the fees that was expected, I presume that was coming down. Last quarter, we had a bit of a one-off driving incremental fees. And this quarter, we didn't have that, and I'd expect that to continue just flat from here on the fee line.

[Doug Young, analyst]

And then just second, on costs. You did the restructuring costs, and it seems to be consistent across the banking world, but it's not the same things are going to hit the bottom line. So, I'm curious what actually can you quantify what the savings is. Maybe talk a little bit more about what you're planning to invest it in. But when I think of considering the NIM outlook, like is it reasonable to think of a noninterest expense ratio that falls below what you used to target is below 50%. Can we kind of put that together for fiscal '24 fiscal '25?

[R. Rudd, executive]

Yes. The reorganization, I mean it was just that. The primary intent wasn't necessarily to reduce the run rate of our costs. It was to give us capacity to make the investments we wanted to make through the next year.We have 2 branches opening in Ontario. We have a pretty robust outlook for growth in Ontario and want to support and grow that market. So, it's really investing in physical infrastructure and sales capacity in the province.We have a commercial cash management digital platform that we're launching and of course, want to support that when the time is right with sales capacity and sales effort. And the piece we really want to keep our foot on the gas because this is our competitive differentiation is the client experience we're providing. And we just absolutely wanted to make sure that continue to be top notch.So, this was less about reducing run rate of cost and more about taking the cost platform and allocating to highest and best use. But some of that reorganization, a modest percentage of that is ultimately falling to the bottom line. But if I quantify it, if you took that basket of cost overall, I probably estimated at 80% of it we're reinvesting, 20% of it were letting fall to the bottom line.It allows us to drive the level of earnings we want to drive next year on a pretax pre-provision basis, you've likely done the math and work backwards to it and see that's a pretty strong number we're targeting.And I'm not sure we quite get down to the sub-50% efficiency ratio we would have targeted but we'll deliver robust positive operating beverage that gets us maybe not quite to that level, but I'd say in the ballpark.

[Doug Young, analyst]

And then just lastly, on capital. Why did the RWA decline quarter-over-quarter? I mean I know the loan balances didn't move much, but is there something in the new Basel rules or was this just mix that went through there. And then if you can also quantify and I think there's some expert credit judgment in the management or in your performing loan ACL. Can you quantify what that would be?

[R. Rudd, executive]

Yes. So, on the first one on the RWAs, you're right. When you look at the loan growth quarter-over-quarter, you see a larger RWA decline if you assume kind of a similar mix in terms of what was on the book quarter-over-quarter. But for us, the growth we targeted in Q4, you would have seen stronger growth in the portfolios that happened to attract a lower risk-weighted asset density. Now that's strategic, that's intentional.We're looking at optimizing risk-adjusted returns. So you naturally target those portfolios with the lower risk-weighted asset density, and that's the general commercial would be the primary source of growth. Portfolios, we didn't grow. That actually strong quarter-over-quarter.Commercial mortgages, that's higher risk-weighted asset density. And especially the project lending and within their commercial real estate project development, that attracts a very high risk-weighted asset percentage.Having that portfolio decline was helpful to the decrease in RWA. It kind of amplified it compared to the reduction in loan growth. And then outside of just the composition of growth, we did take a fairly deep dive on that real estate project lending book. When we adopted the new CAR guidelines, a lot of it was reclassifying loans from a regulatory perspective in a different way than we had before, much more granular and more data points to look at. At transition if we had a loan and it was in that real estate project lending portfolio, we didn't have only solid data to support a lower risk weight. We aired on the side of a higher risk weight to be conservative. And then as the year progressed, we accumulated better data and supporting information from our clients. And ultimately, we're able to reclassify some of these from that higher 150% risk weight bucket down to the 100% because we have the data to support that classification. So, that caused a bit of the RWA decline from Q3 to Q4 as well.On the second one on expert credit judgment. So, last quarter, I believe someone asked me about this, and I gave the view that within our performing loan allowance, we have the expert judgment of relative to our base case, we thought the economy and therefore, our credit losses had more downside potential than upside potential.This quarter, we've maintained that view. We continue to believe the economy has more downside than upside relative to a pretty benign base case. So, we've maintained that judgment. That's why you've seen despite a small decline in our loan balance quarter-over-quarter. You've seen an increase in the performing loan allowance, we continue to be prudently provided on the performing loan side.

[Operator]

Thank you. Next question will be from Gabriel Dechaine at National Bank Financial.

[Gabriel Dechaine, analyst]

Sorry if I missed this, but a quick one on loan growth, did you give any targets or expectations for that in 2020 before?

[Christopher Fowler, executive]

Yes, we did. We're looking at sort of mid-single-digit percentage growth in loan growth. You expect similar to this year, much stronger growth in general commercial, that's one where we're looking at fairly robust growth there. It's strategically important, big opportunity. That's sort of we have the differentiated experience. We'll grow strong only there. It's the commercial real estate portfolios where you'll continue to see fairly low growth and in some quarters, perhaps continuing to go negative in some cases.

[Gabriel Dechaine, analyst]

Then on the expenses, and I'm in a similar line of questioning to what Doug was asking about there. And I'm trying to interpret your comments, I know you're reinvesting and it's not like we're cutting cost and it's all going to go to the bottom line. I get that. Can I simply assume that the restructuring will allow you to make the investments that you're planning on making, needing to make this year while also maintaining expense growth that your current trajectory, I mean, this quarter, it was pretty flat, but full year basis, you were the firmly in the mid-single digits. Is that more or less what we should expect?

[R. Rudd, executive]

Yes, that would be my expectation for next year. Assuming that our outlook on revenue holds, I mean that's about the level of expense growth we target. We have a lot of flexibility and some of what we're reinvesting, we have optionality on when we decide to do that, if we decide to do that. So, I think what you'll see from us is being pretty agile to what we see on the revenue side and making sure we drive the earnings and drive the positive operating leverage we're committing to. But the outlook that would be on the noninterest expense side, mid-single digits would be about a good kind of base case starting point.

[Gabriel Dechaine, analyst]

And then the last line of questioning is around the NIM and the outlook. One more granular question, I know you've seen most of it take place this year, but the securities portfolio, are there any maturities coming up? And which quarters would they be heaviest where we could notice that in the NIM? And then on the guidance, you're saying 240s in the first half or whatever and then exit in the 250s and then your overall guidance of gradually increasing, is that predicated on the Bank of Canada, not doing anything, just holding flat? What happens to that outlook if rate cuts are first half of the year as opposed to second half of the year or at all?

[R. Rudd, executive]

Yes. So, on the first one, the securities portfolio, we still see pretty good volume of repricing occurring in the first half of the year. And still quite a differential between the coupon of the maturing and even with some of the downward movement in bond yields, there's still quite a positive discrepancy and deal between what's rolling off and what we'll bring on.So that will, in the first half of the year, that will be a key driver of that asset liability pricing differential, that's positive to NIM. In the back half of the year, the momentum continues. It's less from the securities portfolio more just from the continued repricing of the loan portfolio, slightly longer duration in that loan book. So that's going to keep that momentum going, but maybe at a slightly more modest pace than the first half of the year.On Bank of Canada, it's less of an impact than it used to be. The way we're matched on variable rate assets and liabilities, it's not a perfect match. We do see some modest NIM drag just if the Bank of Canada policy rate declined, we would see a little bit of a NIM headwind but certainly not to the extent we would have seen in years past.And then it kind of depends on what the yield curve does. What we saw on the way up when interest rates were increasing its deposit costs reflecting bond yields, I mean, they shot up and basically front-run the Bank of Canada rate increases.If we see that on the way down, there's a scenario where bond yields go down, deposit costs follow, like GIC rates follow closely, that could actually be a temporary catalyst to NIM until it eventually churns all the way through. So, on the outlook for fiscal '24, even thinking about the possibility of Bank of Canada doing some earlier-than-expected rate cuts. It's not something I'd circle as a big risk to NIM in 2024. As long as spreads perform and behave, we'll be okay on the NIM.

[Gabriel Dechaine, analyst]

And thanks for rescheduling the call to accommodate the OSP folks. And yes, Merry Christmas.

[Operator]

Next question will be from Darko Mihelic at RBC Capital Markets.

[Darko Mihelic, analyst]

I actually just had one quick question, maybe an update on AIRB.

[Christopher Fowler, executive]

Yes. Well, so last year, we talked about the replacement of our models which we put in place and did some rescoring on our commercial real estate portfolio last year. So we're very happy with the outcome of that. So, in this year, we have the full deployment of the AIRB across our footprint and put them all in place.So, we're happy with the progress we're making and the improvement is giving us in how we can work on our loan management, risk-rating portfolio effectively. And we're obviously going to be tracking where the kind of the capital story goes, how the regulators are treating ARV versus standardized. And our focus in the scheme of this all is that we want to be able to issue alone with the same ROE for the same risk rating as the large banks. So that's our focus. We're happy with the progress we're making.

[Darko Mihelic, analyst]

So just to confirm, though, when I read, I mean, I'm an avid reader of your annual reports and I go through, the focus has changed. It's no longer seeking approval. It's just using the tools. Is that how I should interpret this, Chris?

[Christopher Fowler, executive]

That's where we are at this point, we are making sure the tools that we have in place are delivering exactly what we want them to deliver.

[Operator]

Next question will be from Sohrab Movahedi at BMO Capital Markets.

[Sohrab Movahedi, analyst]

I just wanted to talk a little bit about the restructuring initiatives. I'm just curious, Matt, Chris, can you just talk a little bit about how much experience you guys have with restructurings and what sort of disruption there could be here to some of the growth plans that you've kind of articulated for the bank next year.

[Christopher Fowler, executive]

Sure. Well, as we came into fiscal '23 and kind of looked at the expense revenue profile, and we zeroed in, of course, looking to maximize revenue in a challenging environment and then thinking of what the cost active had to be on that. So, during on our expenses very proactive in how we manage that. And with that, we kind of said, what's a sustainable model? Or how do we think about the future? And how do we deliver the bank to the clients in the way they were looking to from a branch footprint perspective, from how we look at our operational processes and how we deliver that.So, that was the framework that we have for thinking about a reorganization of how we deliver the bank and that's what we've done as we looked at how do we make sure that we've got the right responses, the right turnaround times and the right footprint that allow us to take advantage of the opportunity in Ontario and really support our ability to drive revenue and be the agile bank we're looking to be.

[Sohrab Movahedi, analyst]

Does it have like as you kind of emphasized maybe to Darko's answer, focused on more application of the tools as opposed to seeking approval? Like does reprioritizing those sorts of initiatives contribute to the restructuring charge?

[R. Rudd, executive]

I'd say it was an enabler of such, I wouldn't say it was a large enabler of the ability to reduce some of the headcount. But a lot of the tools we've implemented are allowing our teams to adjudicate and score credit and just doing things like evaluating risk ratings for borrowers in a more efficient manner, less manual processing there. I mean that was a lot of the focus was trying to make it simpler and easier for our teams to facilitate credit, and we saw good games from that.So, that's maybe less in the front lines more in that sort of middle office credit support function. It used to be in the branches. We pulled it out to regional hubs. And then we've now been able to reduce that to a central processing hub and so a lot of the tools we put in place are allowing that team to operate more efficiently. And so, we were able to harvest some of the savings there. So that's sort of the immediate benefit is it's not reducing the extent we use the tools. It's more just an elevated way we manage credit risk with more efficient tools to do so.

[Sohrab Movahedi, analyst]

So it doesn't necessarily suggest that maybe I'm willing to take another basis point of PCL because that will have a lower expense ratio, just kind of over the cycle, for example?

[R. Rudd, executive]

That's correct, yes.

[Operator]

Sohrab, did you have any further questions?

[Sohrab Movahedi, analyst]

Oh, no, sorry. Sorry about that. That's all for me. Thank you.

[Operator]

Thank you. Next question will be from Marcel McLean at TD Securities.

[Marcel Mclean, analyst]

I'm just wondering if you could help us out. You've given us the guidance on loan growth and NIM and on expenses with positive operating leverage. So probably back into it. But just on the noninterest income, I know it's been a little bit more volatile because of FX in there. Just wondering how we should be thinking about modeling that into 2024.

[R. Rudd, executive]

Yes, you're right. We definitely saw a bit of an uptick in that kind of other category of noninterest income within the fourth quarter. If I look at it on an annual basis, though, I mean, what you should see in that other noninterest income line, if you had completely stable foreign exchange between CAD and the USD, we are about $1 million a quarter or so, processing type fees for clients that is about the same as what you see on a full year basis in 2023.So, flattish there if you saw no big FX movements through the year, be like we have a good assumption. On the other pieces, I think you'd expect to see kind of in that mid-single-digit growth, sort of year-over-year percentage through the categories, wealth is one where there's an opportunity there, good platform we've built, good opportunity for cross-sell and referrals. So that's one we'd maybe look to push on and target for slightly higher growth, and that's a continued focus for us. So, in that mid-single-digit range is a good number likely.

[Marcel Mclean, analyst]

And then just to take this ARB point here. I just want to confirm, so we should not expect an OSFI approval even by 2025. Is that a fair statement?

[Christopher Fowler, executive]

Yes. As we work, we haven't set a time line. What we've done is put in place the models that we're comfortable that we could run. It improves our risk management processes internally, and we're ensuring that all the steps we're taking are positive to how we can run the bank.

[Marcel Mclean, analyst]

Then last one for me. Just any concerns on credit that maybe aren't showing up in the metrics yet that you want to highlight the commercial real estate or otherwise?

[Christopher Fowler, executive]

I think for credit, we are very focused on the macro prudential story that is unfolding and kind of looking to what the impact of higher rates will be on different parts of the book. I'll pass it over to Carolina, to just kind of comments to add on that.

[Carolina Parra, executive]

Thank you, Chris. Yes. No, as we mentioned, we are expecting some duration in our book. And we've been signaling that as well in the past quarters, we just haven't seen it translate into office. When we see what has been happening release this quarter is lower formations and really good resolutions of certain loans. So, as the economy continues to deteriorate, we might see some slowdown of some of those resolutions, but nothing in particular that would signal a significant impact besides where we're trending towards.

[Operator]

Next question will be from Meny Grauman at Scotiabank.

[Meny Grauman, analyst]

I wanted to ask about the PCL ratio guidance of 18 to 23 basis points in the context of what you delivered this past year and in Q4, specifically 11 basis points. Just wondering how you see the PCL ratio guidance playing out over the year in terms of -- is what's being contemplated sort of a gradual increase or something more dramatic? If you could sketch that out for me, that would be helpful.

[R. Rudd, executive]

Well, I'll start, and Carolina may have some things to add. But, yes we're looking at that guidance on a full year basis and trying to pin it down to basis points in a quarter is a bit tricky because our impaired loan PCL, I mean, we evaluate this loan by loan, file by file, and it depends on what loans become impaired in a quarter. So it's hard to pin down.So it's, I think, a good annual number. Can I point to one quarter being higher than another? Is it a gradual build? To be honest, I would have expected our PCL to be higher today than it has been. I think I've been talking on these calls about a return to our normal range of 18 to 23 basis points. And I think I've now been wrong 3 quarters in a row. It's a good direction to be wrong, I suppose.But just when we look at the underlying trends, we look at gross impaired loans, we look at defaults and delinquencies, like everything is returning back to a normal level, not necessarily elevated, but normal. And we would have expected normal credit loss performance, but we just haven't seen that level of losses in our portfolio. Things that are going impaired were resolving fairly quickly and without significant loss. So, that's good news so far.A lot of this, it's a little more art than science. It's on the basis of assuming what all of our other credit metrics going to normal, our losses should too. We'll see how the year progresses. But, I mean that's how we've done our guidance and we'll generally be prudent and have been prudent when we're thinking provisions for credit losses, perhaps some upside potential in our guidance if our credit losses continue to be benign.We've guided to low to mid-single-digit earnings per share growth. But that's on the assumption of going from, as you point out, sort of 7 basis points of total PCL for the year if we just get into the low end of our range, that's a $0.32 drag on EPS. We're absorbing that all and still delivering low to mid-single-digit EPS.If our credit losses remain benign, now we're talking about delivering a level of earnings growth that's well in excess of the peer set in this guidance. So, I'm not suggesting that's our base case, but that's, it's played out so far. So, we'll keep an eye and we'll update this as we go, obviously.

[Meny Grauman, analyst]

And then just going back to capital, just more broadly, obviously, the capital story for CWB changing very favorably. And I'm just curious if you could update us in terms of what you're targeting in terms of the CET1 ratio? Are you looking to move above 10% in 2024? How are you thinking about excess capital and where you're comfortable being right now, given your outlook for loan growth and RWA growth?

[R. Rudd, executive]

Yes. We're obviously very comfortable with our capital. We think the next year, and I just play out the guidance we've provided, if we're loan growth in mid-single digit, if it's strategically targeted as it has been. Just mathematically, you end up with a CET ratio exiting the year in that 10% range. We also have the added benefit of that securities portfolio, which, as a reminder, 100% of that unrealized loss counts against CET1 capital.So, as those bonds mature and reprice those losses come down through the year as well even if the yield curve doesn't shift downwards. So that adds a bit as well. So, coming out of the year, we're comfortably in the 10% range. That's obviously higher than we've been.Not bad to have that extra buffer right now with volatility in front of us. And if we found ourselves taking the view that we had excess capital, we've been clear on how we want to deploy that organic growth of the franchise, looking at strategic accretive acquisitions. And then if we don't have compelling opportunities there, then I mean there are other ways we could look at returning capital to shareholders. But right now, I'd say, not the right time to be talking about that, but perhaps that day will come, and that's how we look at it.

[Operator]

Next question will be from Paul Holden at CIBC.

[Paul Holden, analyst]

I want to go back to the discussion on AIRB, clear today that you're not applying with OSFI. But given your ultimate objective of being on a level playing field with the DSIB, it does suggest you will apply for approval at some point in the future. Am I interpreting this correctly?

[Christopher Fowler, executive]

Well, Paul, the approach that you're going to take make sure, number one, that we have the right internal processes to run the bank and support our risk management and being model-enabled absolutely helps there. So, we are investing in those model-enabled opportunities for us. And then we do see a change in kind of the regulatory view of how they're thinking about the nature of ARB versus standardized and sort of bigger influence of standardized.So, our focus is just to make sure that the steps we're taking are positive to how we can run the bank and give us all the right sort of pools to allow us to maximize our efficiencies.

[Paul Holden, analyst]

So, you won't be switching from a regulatory perspective, you'll be remaining on standardized going forward is what you're telling us?

[Christopher Fowler, executive]

That's where we're at today. Absolutely. We are a standardized bank today, and we are working on investing in making sure we have all the right process in place.

[Paul Holden, analyst]

Second question is just going back to this question on PCLs and maybe taking the opposite end of the argument. So, your PCL guidance is based on sort of the normal historical range, which, given today's conditions make sense, but the Canadian economy is not expected to perform in the normal range in 2024. And I think you've kind of alluded to that with some of your guidance. So, why shouldn't the PCL number be higher than the normal range, given the economic outlook?

[R. Rudd, executive]

A lot of the debate we've had and, of course, we run all sorts of stress tests, as you could imagine, thinking anywhere from soft landings to crash landings towards to really explore how volatile our credit losses could be. And, I mean, what we find is that our secured lending model and who we lend to gives us a great deal of protection to the downside.So, the other thing, and this is thinking through next year because next year, we believe there is some volatility from the higher interest rates that push us into what would normally have been that normal range. But how we've lent the last 3 years if we're kind of benchmarking to prepandemic levels. And I've talked about this on an orderly call in the past, I believe, but basically, is that 18 to 23 basis points, our historical normal range when you get through maybe some volatility on the horizon and you're back to a more stable, steady Canadian economy, do we reset to that 18 to 23 basis points. So are we now talking about a lower range.Evidence I provide that that could support that hypothesis. It's just if you look at the composition of our book 3 years ago to today, you've seen a pretty considerable decrease in commercial real estate lending and predominantly in that project lending portfolio. We like the portfolio we have, but we've really been upscaling it to our top-tier borrowers, and a lot of those lower tiers have turned off over the years.Projects performed well as expected. But kind of how for pound quality of the book today appears to be on an elevated level, and we could be talking about perhaps a lower normal range going forward, again, probably too early to make that sort of a prediction, but that seems to be what some of our modeling suggests. We just need to see how this next year plays out and how we exit that year before we make any definitive conclusion on that.

[Operator]

Thank you. With no further questions, I will now turn the call over to Chris Fowler for closing remarks.

[Christopher Fowler, executive]

Thank you, Sylvie, and thank you all for joining us today. I'd like to take this opportunity to thank our shareholders for their continued commitment and support. We wish you and your families a happy and healthy holiday season. Thanks very much. We look forward to reporting our first quarter financial results in February. Have a great day.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.