Equitable Group Inc

TSX:EQB

Earnings Call Analysis

Solid Start to Fiscal 2024 Despite Challenging Environment

The company kicked off fiscal 2024 on a positive note, with unanimous stakeholder support for recent changes that led to a record revenue of nearly $300 million and margin growth. The quarter's results were in line with key guidance measures, signaling a good start to the financial year. The company’s capital expanded, with a CET1 ratio of 14.2% and a total capital ratio of 15.4%. In light of robust capital levels, the board has scrapped the 2% discount on dividend reinvestment for common shares. Book value per share saw a 14% increase year-over-year, boosted by a nearly 17% average return on equity (ROE) over the past four quarters. These figures account for the issuance of additional shares for the acquisition of ACM and a book value adjustment reflecting the future option to acquire the remaining stake in ACM.

Margin Expansion and Increasing Net Interest Income

Net interest margin (NIM) edged up by 1 basis point to 2.01%, propelled by a strategic funding approach and higher yields on conventional commercial loans. Despite a dip in prepayment income, the company anticipates a revival linked to heightened housing market activity. This expansion, along with growth in conventional lending, contributed to a 17% jump in net interest income compared to the previous year. Asset yields benefited from rate hikes, a greater share of personal uninsured lending, and a contraction in on-balance sheet insured multi-unit residential loans which typically have lower yields. Uninsured personal lending grew by 7%, with decumulation climbing 55%, reflecting longer-term loans and a sub-40% loan-to-value (LTV) ratio. Meanwhile, the commercial portfolio, excluding CMHC insured residential loans, expanded by 10%, led by secured lending to sizeable borrowers.

Innovative Funding and Noninterest Revenue Growth

Efficient treasury management, coupled with diversified low-cost funding sources, has yielded results. A newly inaugurated funding stream, the Bearer Deposit Note program, rapidly reached almost $500 million, underscoring investor trust. The company is gearing up to roll out more funding programs, including European covered bonds and the expansion of the Bearer Deposit Note initiative in Canada. Furthermore, an incoming high-rate EQ Bank Challenger deposit product is expected to boost customer retention. Noninterest revenue rose to over 14% of total revenue, reflecting increased gains from multiunit residential lending, fee-based revenue from Concentra, enhanced payments revenue, and ACM's contribution to asset management revenue, which is reported under fees and other income.

Equipment Finance Performance Anticipated to Normalize

The company has been coping with above-average write-offs from the 2022 vintage in their Equipment Finance division, with expectations of a return to regular levels in the latter half of the year. They have taken proactive measures by strengthening underwriting standards since mid-2022 to address potential market over exuberance. The portfolio now places greater emphasis on prime business, with around 55% of new originations favoring stronger credit profiles, a strategy shift that has been in motion since the acquisition of Bennington. The idea is to mitigate risks and maintain yields that support high return on equity across various credit spectrums, suggesting that while yields are high, they are carefully balanced against credit loss provisions.

Loan-to-Value Ratios Indicating Resilient Mortgage Portfolios

The majority of the company's customers are weathering the impact of interest rate hikes well. Executives reported a rise in arrears primarily from self-employed borrowers of larger homes affected by macroeconomic trends and rate increases. Despite this, losses have been contained due to substantial home equity. The reported average loan-to-value (LTV) ratio is 68%, with less than 10% of the portfolio above 90% LTV, and negligible amounts exceeding 100%. This robustness reflects the portfolio's stability and the company's prudent lending practices. The new originations uphold a conservative stance, maintaining an LTV of around 70%, indicating a strong equity position amid housing price fluctuations.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to EQB's earnings call for the first quarter of 2024 on Thursday, February 29, 2024. [Operator Instructions].

It is now my pleasure to turn the call over to Sandie Douville, Vice President of Investor Relations and ESG strategy for EQB. Please go ahead.

[Sandie Douville, executive]

Thanks, Julie and good morning, everyone. Your host today are Andrew Moor, President and Chief Executive Officer; Chadwick Westlake, Chief Financial Officer; and Marlene Lenarduzzi, Chief Risk Officer. For those on the phone lines only, we encourage you to also log on to our webcast to view our accompanying presentation.

There, on Slide 2, you'll find EQB's caution regarding forward-looking statements as well as the use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted. Due to EQB change in fiscal year and the 4-month prior period for Q4 2023, commentary today will focus on year-over-year comparisons for income measures. Year-over-year measures compare this first quarter of 2024 ending January 31 and including ACM midway through the quarter to the closest applicable period, which is Q4 2022 ending December 31. As we review the MD&A, this period also includes the acquisition of Concentra Bank and its contribution for 2 or 3 months for that quarter. And it is now my pleasure to turn the call over to Andrew.

[Andrew Moor, executive]

Thanks, Sandie, and good morning, everyone. In the next few weeks, we will mark our 20th year as a publicly listed company. While we have not quite reached that milestone yet, it does appear that we will be able to celebrate the best 20-year total shareholder return of any bank on the TSX and on the S&P 500 when we opened the Toronto Stock Exchange that morning.

We achieved benchmark setting performance 1 quarter at a time. And you can see from our most recent results, Canada's Challenger Bank continues to work well for our customers while rewarding our investors. Our quarterly earnings per share increased 12% year-over-year, where again delivered more than 15% ROE.

Our Board of Directors authorized a dividend payment 20% higher than the prior year. These are good results achieved despite a slower housing market resulting from Bank of Canada tightening. This is also our first fiscal quarter to align with other publicly traded banks. We recognize that the fiscal year-end change adds complexity of interpreting results. And I hope you agree that the team has done a nice job in trying to cut through this noise.

In reaffirming our 2024 guidance today, we believe we have started the year well and we're set up to see stronger performance in the next few quarters. Sales activity in residential markets increases and based on our expectations for our securitization activities. We also expect provisions for credit losses will moderate in the second half of the year. Understanding this is a busy day of bank reporting, I will highlight just a couple of important developments, beginning with brand awareness and customer growth.

In January, we launched our "Second Chance" campaign, featuring Eugene and Dan Levy. And followed in Quebec [indiscernible] Diane Lavallée and Laurence Leboeuf. Both of these campaigns are rooted in a key insight that many Canadians still bank with a financial institution their parents led them to despite the downsides of high fees, little too no interest, a widespread dissatisfaction with financial incentives. A curious feature of banking compared to the choice and change in so many other aspects of life.

As Canada's challenging bank, we use these insights to create attention and encourage Canadians to ask whether they're being properly served by their first ever banks to look beyond what is familiar and to get a Second Chance to EQ Bank, where they can make more.

Many of you will have joined the 9 million Canadians who tuned into the Super Bowl this year, and so our campaign ads run throughout the game in English and French and continue to see our name pop up on screens, social media, TVs and billboards across the country. We are pleased with the approach of having recognizable Canadian celebrities and our advertising and are confident that our second chance campaign is dramatically enhancing brand recognition that will, in turn, have a positive impact on customer sign-ups and the cost of customer acquisition.

Of particular note is the exceptional positive reaction that Quebec all consumers have had to Second Chance, where search, web traffic and new account sign-ups are all up by significant margins. We launched Banque EQ in Quebec just over a year ago. We're excited about how many Quebec seem to agree with us the Banque EQ is a better way to bank. It's also time for something more. It's time for EQ Bank to enter the small business market, which we'll do later this spring. EQ Bank's small business will provide entrepreneurs with the opportunity to earn high daily interest on their hard-earned cash with great access to payment solutions, traditionally been pretty clunky for these customers.

As a longtime lender to a small business, we intimately understand the challenges faced by entrepreneurs. This no-fee product is all digital, meaning being available whenever and wherever a business client wants to use it. This launch is just a start as we continue to build new services for Canadian entrepreneurs. As a technology leader in the banking world, we're also making substantive gains in digital innovation with an embrace of automation and artificial intelligence.

Our technology team works in agile pods, allowing us to leverage our technology and talent to drive faster and better customer value. We're running a pilot project using generative AI agent assist tools in our customer care center. And we have a new partnership with Trulioo to enhance the EQ Bank customer onboarding experience using their AI tools to deliver advanced security and identity protection. Taken together, these advancements add to our challenge bank advantage.

Another development worthy of note is the 55% year-over-year growth in our decumulation business. We now have a $1.6 billion portfolio and continue to expect strong growth going forward, led by demand for reverse mortgages on the back of market-leading product value and consumer awareness. Courtesy of our talking house campaign. For our Personal Bank, more broadly, we expect to see a stronger market this year for single-family housing, buoyed up by pent-up demand and Bank of Canada easing, which will support our single-family mortgage origination activities. While expanding, we've been investing in risk management and compliance to ensure our bank is well prepared for the growth we see in the years ahead.

While you can see from our financial statements, that there has been increase in arrears. We are confident that we are well reserved, and we will maintain our low loss rates. The portfolio remains strong supported by conservative LTV and good credit scores. Our lending has always been prudent to fit the circumstances. Today, over 70% of our commercial loans under management are ensured through various CMHC programs, and we continue to prioritize lending secured by buildings where people live.

In order to help Canada close a significant housing supply gap and as a matter of strategy and risk management, we focus on multiunit residential lending in urban markets with loans under management growing 34% year-over-year. Now some brief comments on our credit book, which is standing up well. Our real estate lending business is using a consistent approach, and we essentially lend with the goal of not losing money.

Our equipment financing business, which accounts for just 2% on the bank's total loans under management is quite different. In that segment, we price loans at a wider spread, expecting that some of this spread will come at the cost of credit losses. [indiscernible], this is an area where we saw elevated losses representing over 80% of our net PCL for Q1 or $12.7 million. These losses were largely a result of a cyclical downturn in the long-haul transportation sector, which represents about 4% of our leasing business assets.

What we're seeing here is a trucking industry that has been negatively impacted as demand for transportation services has declined with shifts in consumer spending patterns since the high watermark of 2022. There is a big pressure on some of our customers, which has resulted in elevated default rates. The PCL is mostly due to lease originations from the 2022 vintages. More generally across the commercial book, but getting increasingly comfortable of our commercial portfolios impaired will start to normalize in the second half of this year as we reach resolution of larger commercial loans.

In fact, already in February, $55 million has been resolved or made current and we have a plan to exit the vast majority of these loans with full recovery on many of them. I'll wrap up my thoughts by acknowledging another important milestone. Partway through Q1, we completed our majority interest acquisition of ACM Advisors, bringing nearly $5 billion in assets under management into EQB and a very talented team.

We're excited about the potential of the ACM business and are working with management toward a goal of doubling this business over the next 5 years. While it's early days, ACM was performing to plan, and our partnership is focused on elevating performance for ACM and their fund investors across Canada.

To complete, EQB started the fiscal year with good results, and all our businesses are set up to see even stronger performance in the next few quarters.

Now over to Chadwick.

[Chadwick Westlake, executive]

Thanks, and good morning. Before I jump into the numbers, let me repeat how we're presenting our results to the fiscal year change, as Sandie outlined at the beginning of the call. With our fiscal year change and to October 31 for a year-over-year comparison, we were presenting Q1 2024 relative to Q4 2022, which is the closest period.

For quarter-over-quarter, as you would expect, we are comparing Q1 2024, Q4 2023. However, this is a 3-month to 4-month comparison. So we focused on our quarter-over-quarter commentary on primarily balance sheet measures. While this adds some complexity, we're very pleased to now be reporting on the same cycle as the Canadian banking industry. The feedback we have received from our stakeholders on this change is unanimously positive. As you reviewed on our results, despite a challenging macro environment, we're starting fiscal 2024 with a solid quarter, a record top line with nearly $300 million in revenue and margin expansion. We are trending well on all key guidance measures.

Capital continued to expand with CET1 increasing to 14.2% and our total capital ratio up to 15.4%. With continued strong capital levels, our Board of Directors has approved removing the 2% discount on our common share dividend reinvestment plan, while still maintaining this excellent program for our investors. Our book value per share increased 14% year-over-year, driven by an average ROE closer to 17% over the past 4 quarters. This performance also reflects growing weighted average diluted common shares outstanding, which increased further with shares we issued from treasury as part of our investment to acquire ACM in Q1. ACM book value per share this quarter reflects the downward adjustment to shareholders' equity to reflect the value of a future option to acquire the remaining 25% of ACM.

Without the adjustment for this option, book value per share would have increased 15% year-over-year and 3% quarter-over-quarter. This morning, I'll move right into additional context on a few key performance measures before opening the call to Q&A.

First, margin. NIM expanded 1 basis point from Q4 to 2.01%, mainly due to the ongoing benefits of our funding strategy and increasing yields on higher-margin conventional loans in the commercial portfolio as outlined in our Q1 MD&A. Margin is supported by the continued lower deposit beta contribution of EQ Bank deposits and diversification of funding. It expanded in the quarter despite lower prepayment income, which we expect to increase and normalize at a higher level with more housing market activity, especially policy rates move as markets expand in 2024.

This margin expansion and growth in conventional lending resulted in net interest income increasing 17% year-over-year. Overall increases in asset yields were driven by the combined effects of rising rates, a higher percentage of our personal lending book consisting of uninsured loans rising uninsured commercial yields and a reduction in on-balance sheet insured multi-unit residential loans that are lower yield.

Driving this shift in our personal lending portfolio was uninsured lending growing 7% year-over-year with decumulation growing 55% over the year. The accumulation lending yields are slightly higher than our typical uninsured single-family residential loans with longer terms and conservative weighted average LTV for the portfolio of less than 40%.

Our commercial portfolio, excluding CMHC insured multi-unit residential grew 10% year-over-year, led by our secured lending toward larger borrowers, including growth in our insured residential construction business.

Now on funding. Combined with expert treasury management, our long-term efforts to diversify and strengthen sources of low-cost funding are continuing to translate. Last quarter, I referenced the launch of another new funding source, our first Bearer Deposit Note program. In just 1 quarter, it's grown to nearly $500 million in funding, demonstrating investor conviction and our credit quality and ability to repay. You can expect to see more activity in our funding programs this year, including for covered bonds in Europe and Bearer Deposit Note program in Canada.

Also in the next couple of months, we expect to launch another exciting EQ Bank Challenger deposit product. We'll share detail soon, but the notice product design will enable customers that are in a higher rate and also reduce competitor attrition that we see at times.

Great for our EQ customers and our deposit momentum.

Now over to the important growth story of noninterest revenue, which increased to over 14% of total revenue in the first quarter, up from 12.5% last quarter. This growth is on strategy and driven by increased gain on sale and income from retained interest from our multiunit residential lending activities, fee-based revenue from Concentra and serving credit unions, increasing revenue from payments and about half a quarter of benefit from ACM.

ACM's asset management revenue is captured under fees and other income on a consolidated basis. For insured multi-unit residential, we now have $21.5 billion in loans under management, up 34% year-over-year, $16.1 billion of this amount has been derecognized through the CMHC, CMB and NHA-MBS programs. As these units are not prepayable or have their cash flows fixed, the assets are derecognized when securitized and sold. The corresponding event and spread differential results in upfront noninterest revenue in that reporting period. Gains on selling income from retained interest amounted to $19.4 million for Q1, representing a 110% increase year-over-year.

We expect to maintain this level of revenue in coming quarters. Now on to a few additional comments on credit in addition to the context Andrew provided. PCL was $15.5 million in Q1, reflecting the impacts of both future expected losses driven by macroeconomic forecasts and loss modeling. Phase III provisions and write-offs increased to $17.3 million with 2/3 associated with our equipment financing business. The net effect was a PCL ratio of 13 basis points in Q1 compared to 12 basis points last quarter, weighted to the PCL rate on equipment financing increasing to 3.76% compared to 2.67% in Q4.

Not surprising at this point in the credit cycle with these particular vintages, as Andrew outlined, and we do expect these to start to normalize later in 2024. The consumer lending PCL benefited from a new agreement with a consumer lending partner, increasing cash reserves to secure guest losses. This was part of our original guidance and plan for 2024. Based on our lending approach and business mix, our personal banking portfolios are performing well, higher than last quarter. Now about 85% of our single-family uninsured lending has already renewed since interest rates began to rise in the spring of 2022, a positive forward-looking indicator for our book.

Net allowance for credit loss ratio remained consistent sequentially at 22 basis points. And of the 25% increase in the impaired loans to $475 million from Q4. 57% was related to personal residential lending and 43% to commercial. The weighted average LTVs of these impaired residential and commercial mortgages are 68% and 47%, respectively. Mitigating expected future losses and considered in the allowances we hold against these loans. For the residential portfolio, based on our historic and stress scenarios for losses, we believe we are very appropriately reserved.

Recent indicators in Q2 so far are that early delinquencies are moderating and as housing market activity picks up, we expect delinquencies and arrears will continue to trend in a positive direction, particularly in the second half of 2024 and similarly, while overall impaired commercial loans increased in the quarter, we saw the rate of increase in impaired loans dropped 40% versus last quarter. As Andrew noted, we are beginning to see our resolution strategies mature and loans resolved.

Shifting to expenses. Noninterest expenses increased to $134 million as we continue to make important strategic investments in building EQB. Importantly, into EQ Bank innovation, next level brand awareness with an impact of millions of eyes on EQ Bank over the past month and investing in our enterprise support functions. Q1 expenses also increased with the half quarter of ACM. From a people perspective, our FT increased 4% over the quarter with our new colleagues at ACM accounting for over half of these positions.

The balance reflects growth in product, engineering, customer service as well as our enterprise risk management and finance teams. We are being measured about expense growth, leading with our pace of hiring, but are also excited to bring great talent to EQB in this market.

On the technology side, we've been continuing to expand our cloud capabilities, invest in cyber and fraud and accelerate innovation and data and AI solutions to support both customers and employees. We have the ability to move fast and smart in managing our expenses and investment dollars. We are investing through this cycle, making effective long-term trades that will benefit us in the years to come. Achieving our ROE guidance will remain paramount over achieving short-term positive operating leverage over the course of a few quarters.

To wrap up, this fourth quarter demonstrates that our strategy is translating. We have the ability to grow and manage credit across cycles and our diversification and sources of revenue and funding is paying off. We offered ambitious challenger guidance again for 2024 with the priority being 15% plus ROE, the center of our value creation model. With Q1 in the record books, we continue to believe we can achieve guidance, including 15% ROE with the leading consideration being the pattern of provisions for credit losses translating as we expect in the second half of 2024.

We're investing in our franchise for the long term, stories being heard and understood by more Canadians every day with a lot more innovation to come this year, we will continue to build on our momentum.

Now we'd be pleased to take your questions. Julie, if you can please open the line for analysts.

[Operator]

[Operator Instructions] Your first question comes from Geoff Kwan from RBC.

[Geoffrey Kwan, analyst]

Just on the impaired increase that we saw, particularly on the residential side, was there any trend or what was kind of driving it? Was it seeing incremental job loss? Was it ability to cope with higher payments geography? And then on the commercial side, the imperative that you had been -- that were driving the increase over the past few quarters. Do you have any update in terms of when you expect those to be resolved?

[Andrew Moor, executive]

Thanks, Jeff. I'd say sort of thematically, the compared in the single-family business, larger homes in sort of surrounding areas of the city. So this is where I think the payment shock has had the biggest impact, so larger loans, larger homes. The good news from our perspective is quite skewed to lower LTV. So I think the payment shock is causing people to have challenges actually paying, but we are fairly confident that the recoveries will be very good.

So we're not expecting much in the way of realized losses over the next couple of quarters. Although a slower housing market clearly is part of the people to sell their own homes, they run the financial difficulty. And to the extent we've got a few homes that we're trying to sell, not finding the same activity we'd normally expect. Hopefully, that will sort of start to resolve as spring market comes around.

Sorry, the question on commercial loans. Yes, I mean I think we're expecting good resolution here. So the cost of the commercial loans, what happens is it takes a bit of time even when you have got a good resolution in place, often you're going through a court process to actually sale, but we are making good progress. And as I mentioned, not expecting much in the way of losses. In fact, Darren and I have been on the risk teams have been drilling it to more deeply have been getting increasingly confident about up in the result, this was sort of minimal loss.

Do you want to add any color there, Marlene?

[Marlene Lenarduzzi, executive]

No, I would just add -- thanks for the question. We do know that when we look through our impaired loans or commercial impaired loans, about 38%-ish are current. So despite the impaired notation they are up to date.

[Chadwick Westlake, executive]

About $100 million got resolved in the quarter 2. So it's good momentum and these are pretty isolated maths like we talked about in past quarters in terms of the handful of them.

[Geoffrey Kwan, analyst]

Okay. And then just my other question was on the residential mortgage side. Thoughts on how the spring housing season is shaping up. But also 2 is on the Alt-A side of the market, are you seeing any divergence in terms of level of activity or other trends relative to what's happening in the prime part of the market?

[Andrew Moor, executive]

I mean, certainly, all the data is pointing to springs dining the spring a little bit. So we saw good data around kind of Toronto housing sales in January middle compared to an incredibly low activity level in the prior year. So that gives us reason for confidence. I would say that we're not seeing in our part of the market, we're not seeing quite the same pickup yet. But I think often sales activity, so contracts being entered to is a little bit of a leading indicator before you actually see the mortgage applications coming in.

So our teams are feeling pretty optimistic about it. I did meet with our sales team yesterday and they seem to be feeling pretty confident about our position in the market and how our brokers and distributor partners are thinking about the year ahead.

[Chadwick Westlake, executive]

That's part of my -- the comments I offered, Jeff, just in terms of the recent indicators in Q2, it's part of that activity, Andrew mentioned. And even in the last couple of weeks, to be honest and I were speaking with the teams recently just literally in the last couple of weeks, we're seeing a lot of activity pick up just for some of the resolution, too. So it's.

[Andrew Moor, executive]

Just to follow up with the comments. I think there was a lot of enthusiasm for is our ability to renew our customers and see good sort of loan growth in the books. That's generally been an area where we outperformed than others we observed in our space.

[Operator]

Your next question comes from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

I just wanted to follow up specifically on the subject of credit and specifically the equipment finance business, Andrew, I think you talked about expecting minimal losses. I'm just hoping you could provide a little bit more perspective on what's giving you that confidence? Is it just the market for equipment and you can realize good values? Or is there something else that you're seeing going on there? So that's the first question.

[Andrew Moor, executive]

Sorry, my comments about minimal losses didn't refer to the equipment financing business, we should, as I mentioned, is a business that we expect credit losses through the cycle. And clearly, we're seeing that as sort in one part of -- particularly focused in one part of the book, which is really the 2022 vintages of long haul tractors and trailers, which I think at quarter end, we had just under $100 million, $200 million of assets in that -- with that sort of character. And we're seeing our customers, as I mentioned, losing their roots, which is resulting in defaults and then we are seeing losses crystallize in that part of our book.

So we think it's a relatively sort of limited to that vintage -- 2022 vintage. I am expecting that through the next couple of few quarters, will continue to see write-offs coming from that part of the book.

[Meny Grauman, analyst]

And can you give us a perspective just in terms of average ticket sizes in that portfolio? And -- when you talk about...

[Andrew Moor, executive]

The route about -- as you can imagine, the tractors and trailers. So you can imagine they're sort of in the $70,000, $100,000 kind of range, not large ticket. So it's kind of diverse almost like a consumer lending portfolio and the way we think about it. We model it with kind of FICOs, equipment values and that kind of thing as opposed to -- I can talk with much more confidence about the commercial real estate because we can look at a list on the single page of paper of anything that's delinquent. And as you understand the underlying drivers of each individual loan and give you sort of confidence in that building, but if you might have alone with $10 million delinquency, for example, we know the asset is about $20 million, it's a matter of time to work through and get our money back.

[Meny Grauman, analyst]

And then just in terms of the outlook. So I just want to make sure that I have this correct I thought you were saying that you would expect performance in the Equipment Finance business to normalize in the second half of the year? Is that what you were referring to? Or is precisely.

[Andrew Moor, executive]

So second half of the year, I expect that this current quarter, Q2, we'll still continue to see these elevated defaults in this 2022 cohort. But beyond that, we're presuming that things will normalize.

[Meny Grauman, analyst]

And the rationale for that is just that you see a specific cohort you're going to resolve it and then you don't expect issues beyond this cohort? Or is there something else that you see in the second half of the year that's going to help improve the performance here?

[Andrew Moor, executive]

Yes. I don't think it's really an expectation around changes in the macro environment, particularly, but don't forget these are relatively shorter term leases typically written on 60 months. So they do amortize down fairly quickly. As I say, we've got a $200 billion cohort that we're concerned about. So we're expecting that as we've probably seen many of the customers with a weaker business models already default and the analysis we've done gives us that confidence, although, of course, anything -- anything predicted about the future, there's also kind of certainties to we're feeling good about it. Marlene, you've been deeper into and [indiscernible].

[Marlene Lenarduzzi, executive]

Yes. Thanks for the question, Meny. I think as we look at some of the newer originations, there's one cohort that we're concerned about from the past but the newer originations are skewing towards more of the prime business. And so as we look through those, we feel much more confident that the second half of the year is going to be returning towards those more normalized delinquencies and losses.

[Andrew Moor, executive]

And just as the way the local team did a good job in sort of middle of 2022 started tightening and changing credit criteria, making more demanding to get a loan as we were sort of concerned about potentially kind of over exuberance in that part of the market. So we've been improving the position over time.

[Meny Grauman, analyst]

So you've made changes their time writing -- that's great.

[Andrew Moor, executive]

We made changes back in 2022. Unfortunately, the peak defaults happen within sort of from 12 to 18 months after lease originations. So clearly, expecting to work through that hump, if you like, because that's the time frame work.

[Operator]

Your next question comes from Mike Rizvanovic from KBW Research.

[Mehmed Rizvanovic, analyst]

I wanted to go back to the impairments on resi mortgages. So the 54 basis points, it's obviously moved up quite a bit here, more than fourfold year-over-year. And -- it's more than doubled in 2 quarters. And so in the context of the big 6 banks, I'd like to compare you guys to -- it's not substantially higher than most of your big 6 peers. And my premise has always been that it's probably because you fully repriced your loan book for higher rates where the banks are certainly not there yet. Is that something you'd agree with?

[Andrew Moor, executive]

Certainly, the way we think about it. So actually, I'm to some extent, while obviously, these are -- as you point out, these are increased levels the fact that most of our customers already had their book repriced and we're facing that interest rate shock is in a sense a demonstration how resilient this group is. I think I would be concerned if I was saying this kind of level with repricing yet to come.

But unfortunately, I think what we're actually seeing is the areas forming as a result of the payment shock people having to deal with. And then I think that's consistent with the thesis I was talking about with Rick, I think with Jeff's earlier question around where are we seeing these delinquencies. It is the larger mortgage, just larger homes. So you think about a larger home with a self-employed borrower whose business might be somewhat impacted by kind of macro conditions as well as that payment shock. You can see how that could be leading to higher arrears but not to losses for us because, again, there's plenty of equity in these homes.

[Mehmed Rizvanovic, analyst]

That's super helpful. And then just in terms of the LTV, I think Chadwick mentioned 68% and I know it's a weighted average. I usually don't take much with that number because we just don't know the distribution, but what can you offer on your LTVs in terms of distribution, just based on HPI levels, I can't, for the life of me, imagine that you have anything that's anywhere near 100%, but what would be north of 80%. Is that something you could ballpark for us?

[Andrew Moor, executive]

So certainly less -- certainly greater than this. So first of all, that's a deep insight that we don't always get from that. So the average could use the data. But certainly well less than 10% is over 90%. And I think all actually say almost nothing over 100%. Where you do end up with the odd loss is kind of idiosyncratic, loss what we would call idiosyncratic loss but somebody hasn't looked off the house as well as they might have done. So you see the house is going to be a certain condition, but we put the loan out 3 or 4 years ago and somebody hasn't kind of kept in good repair.

So sometimes that can create this kind of slight leakage. The good news about that is really, really very small in the [indiscernible] of the book. So the vast majority of the stuff is below 90% LTV. And as I say, the average 68%. So we're in pretty good shape.

[Chadwick Westlake, executive]

And I was just on [indiscernible] we have in the setback, right, Mike. So 64% is the overall single-family uninsured for full year new originations remain about 70% LTV and it's literally -- if you can almost count on a hand anything even above that 80% mark. These are low -- those averages are very reflective of the portfolios.

[Mehmed Rizvanovic, analyst]

Okay. That's super helpful. And then just to sneak one more quick one in. Just in terms of the -- and for your case, like have you guys actively providing forbearance? I know the big banks don't like to talk about this. They do it in the background. How active are you on helping people manage that refi or renewal process when they're paying over on the mortgage. I'm just wondering the level of activity, the level of forbearance you've had to sort of help your clients with through the last few quarters?

[Andrew Moor, executive]

Yes. It's relatively few loans. I mean if you sort of very few loans where we have provided forbearance. Having said that, we already open to doing that and obviously trying to help our customers in an empathetic way and meeting the expectations of regulators in that regard. And really, what has to be what our customer has to be able to demonstrate there's a route forward through the forbearance to get to a place where the loan is in good shape for both them and us.

Unfortunately, in this kind of environment for some people, the best solution is actually sell the home, preserve the equity. So that's the dialogue we have. We feel we had it pretty well. But that -- there's a fair bit of kind of discipline on our part in how we think through that when it fell Barents makes any sense. And we'd have to have fairly good evidence that it's going to put the loan in a better position.

[Operator]

Your next question comes from Lemar Persaud from Cormark.

[Lemar Persaud, analyst]

I want to come back to this discussion on the equipment finance portfolio. Maybe I'm reading too much into your comments, but it sounds like there's an up-tiering of that portfolio. Is that a fair comment?

[Andrew Moor, executive]

That was -- I think for those of you that were around in 2019, which is many of you -- think you. I think that was our plan then and has been what we're executing on. So increasingly, we're migrating into what would be regardless prime space in the leasing equipment business, and that's the place we wanted to be. So we felt that the time we bought Bennington, we were buying a platform and that was the direction of travel. Marlene, do you want to give a bit of an update on where we are on that.

[Marlene Lenarduzzi, executive]

No, the portfolio is doing well in terms of our migration to the stronger credit profile of customers and looking at our average Beacon scores are looking at the underwriting changes that we've made since 2022. Certainly, we're seeing about 55% of our portfolio now in time. So it's really playing out through our numbers.

[Chadwick Westlake, executive]

And remember Lemar too, for the Concentra portfolio of nearly $300 million that we acquired, that was all Prime as well. So that also weighted the overall portfolio of $1.3 billion higher, too.

[Lemar Persaud, analyst]

I guess, yes, that's very helpful. But I guess where I'm going at is you've now seen rising impaired losses for the last couple of quarters throughout 2023 and into 2024. Is that -- like looking forward, should I expect the yield on that portfolio to move materially lower? Like I know it's not a massive portfolio in terms of size for you guys, but it is very accretive to your margins because the yield is so high. So I do care about it. And ultimately, I care about the impacts on all bank NIM. So that's kind of the approach I'm thinking, like is there going to be a very sharp shift in the mix of that portfolio over the next couple of years that would cause the yield on it to move materially lower?

[Andrew Moor, executive]

No, I wouldn't expect so. And really, there's a trade-off for kind of cost of credit, i.e., PCLs versus the rate charge. So any on the top line effectively comes back in provision to be we would expect. So no, we're pleased with the yields we're able to get on our prime book, frankly. So it appears to drive ROEs that wherever we're operating in the credit bands, the ROEs are pretty good across that book.

[Chadwick Westlake, executive]

And you saw that trend, right? So even as we talked about all this migration to prime right, when you saw that in the MD&A, right? So you can see versus the Q4 period versus last quarter to this quarter, our yields are actually still expanding?

[Lemar Persaud, analyst]

Okay. Yes. That's kind of where I was going at more so for number to put into my model. And then Chadwick, sticking with you, I'm going to go to a big picture question here. Do you think it's still plausible to come within your EPS guidance range? Can you go through why that's still a reasonable expectation given the softer Q1 results. I think it really does hinge on the back of better credit outlook for the back end of the year, but I'm assuming there's probably a little more to that.

So talk to me about whether that's still in play and your confidence level there? And what if loan growth doesn't come back as expected? Can we still get there?

[Chadwick Westlake, executive]

Top-down, the year is playing out exactly as we had expected from a guidance perspective, with the first anchor being that ROE. So that's really important. The portfolio measures right across the board as we expected. And we had signaled right this first half of the year particularly from a credit loss perspective and from an investment perspective in the bank was going to be a little bit more elevated.

So when you think through the fourth quarters based on the trends we're seeing so far and based on our updated forecast, we do still have conviction that, that range of EPS is absolutely still doable and achieving our ROE guidance is still doable. And to achieve that base case guidance, we didn't expect or build in that rates had to come down in this environment to achieve that. That was still our base case guidance too.

So if our guidance or if our expectations or the reality of PCLs, say, in the back half of the year, don't play out as expected, that's something we'll have to revisit. But right now, based on all the variables, all the forecast and the business momentum, which is very strong, like the margins, the portfolio growth, the customer awareness, it's very, very strong. We have an incredible team here.

So we have a lot of conviction in our team and our growing customer base and the stability of the margins and the funding costs. So add all those up, I think we're still on track for the guidance that we have reaffirmed today.

[Andrew Moor, executive]

Yes. If I could just again to add some color to what Chadwick had a couple of things. I mentioned in my script. One being the -- we are expecting to increase securitization activity in the current quarter and beyond. And that's helpful to obviously add to margins. And the other thing, just kind of your comment about housing market not coming back. Our earnings are actually not terribly sensitive in for a year to the origination volumes in year. In fact, as we originate loans, we take a provision for stage 1 right away. We've got cost of originating that loan. So you wouldn't expect earnings for this year to be terribly sensitive to kind of our assumptions about housing market volumes. You do, of course, have an impact on the longer-term earnings of the bank.

But I wouldn't think that we're particularly sensitive to that. And of course, as you're rightly pointing out, there's some uncertainty about how the housing market will work when the bank Canada will ease and when housing comes back to life as a result of that.

[Operator]

Your next question comes from Etienne Ricard from BMO Capital Markets.

[Etienne Ricard, analyst]

On EQ Bank as you get ready to launch the platform for small business owners, how meaningful do you believe commercial deposits could become over time?

[Andrew Moor, executive]

I believe they're very significant over time. I do think it's a sort of 3- to 5-year build or something to get excited about within your models might be a few hundred million dollars but we're really inspired when we look at Challenger Banks around the world about how well they've been able to service the small business market.

If you look at the U.K. market, for example, the individual challenger banks have captured 10% of the market from a standing start in a few years. And so we do think that, that same thing applies in Canada, there is a general dissatisfaction with small businesses who to the kind of existing options, if you like. And so we think we should be able to deal with that quite well. And don't forget -- many of our customers in EQ Bank are self-employed already.

So the ability for them to -- or small business customers. So the ability to open up a small business account that goes alongside their existing EQ account is going to be something that's really compelling to them. I think our vision is you see it have a single payment glass where you'll see both the balance and your small business accounts as well as your personal bank, personal account and the people operating in that kind of entrepreneurial world. They're often thinking about the money in the business as being kind of their money as much as the money in their own personal accounts. So we're really excited about that opportunity. And then, of course, the broader impact on brand awareness, customer acquisition generally we believe as we pick up small business accounts, some of those people may not have a personal account with us and we'll be able to accelerate the growth of our small business accounts.

So we think it's a very meaningful it's going to be very meaningful over the 3- to 5-year horizon.

[Etienne Ricard, analyst]

And as a follow-up, how do you think about the relative stability of small business deposits relative to personal deposits?

[Andrew Moor, executive]

Well, we think they're actually going to be fails. This is obviously a number of kind of architects within small business. I think one of the things that there's been a bit of a journey to get here. There are some small businesses, but you've got a high -- very high volumes of small value transactions. You got other small businesses are actually fairly stable cash amounts, relatively small amounts of cash flow. The small business there often with the kind of tax advantage structure to smart people leave money in the small business. And that's actually that more simple use case. Yes, it will be easy to move the money, but the money isn't moving that much in and out of these accounts. And those should provide a fairly stable platform where we think actually the kind of a good rate GIC offering, which we offer will be pretty interesting to those kinds of consumers.

They know they've got pay back tax bill 6 months from now, so buy a 6 month GIC. It's a pretty stable kind of asset for them or liability for us. So yes, that's very much the approach we're taking. And we're not trying to kind of boil the ocean in small business, but we are looking at segments and trying to be really good for individual segments as we feel we've kind of honed our view on individual segments. So we'll extend it to the next segment margin of our shareholders or transaction volume, that type of thing. But our starting offering is going to deal with many millions of small businesses actually have a much simpler need.

[Operator]

Your next question comes from Nigel D'Souza from Veritas.

[Nigel D'Souza, analyst]

I wanted to follow up on equipment financing. And I'm trying to get a handle on the potential tail risk for losses in that segment in a more stressed environment. So we're already close to 4% loss rate. But if we were in, let's say, a recessionary environment or something where the macroeconomic conditions deteriorate. Do you have a sense of what the range of potential losses could be for that portfolio?

[Andrew Moor, executive]

Marlene, do you want to try and handle?

[Marlene Lenarduzzi, executive]

Yes. I mean it really depends on a lot of factors, Nigel. When we look at our forecasting, we think about the one cohort we've talked about and how that's flowing through the system. There could be some increased losses beyond what we're expecting. But I think we're anticipating that at least next quarter, worst case 2 quarters, we'll see the losses around where they are right now and starting to come back down further. But all indicators are that with a more challenging environment that will encourage the Bank of Canada to cut rates sooner and perhaps more deeply. And that will bode well for those customers as well.

[Nigel D'Souza, analyst]

Yes. So if I could maybe talk about this more strategically. When I think about your business segments or your categories in terms of the risk-adjusted margin and the risk-adjusted margin for equipment financing, if you take the 10% yield to track 4% cost of funding and the close to 4% loss rate. You get a risk-adjusted margin a bit below 2% and your uninsured single-family book would be generating currently a risk-adjusted margin above 2%.

So that signals to me. I mean I would interpret as the pricing of that existing book isn't sufficient for the risk profile you're currently experiencing? And maybe you could expand on what do you think is a minimum acceptable risk-adjusted margin for that business? And how does it tie into how you're going to drive new business going forward?

[Andrew Moor, executive]

Yes. Thanks. So obviously, what you're dealing with there is a peak cycle off. So we would expect losses of something like 150 to 200 basis points through the cycle. In fact, a year or 2 ago, we were below that 150 basis point target. So that -- it is true that you're quite right, if we're expecting these level losses and our pricing doesn't -- over the longer term, our pricing doesn't make sense for this business. So that's something we'll obviously have to continue to tweak and play with. And I think the jury is still out on our longer-term position for this part of the -- this segment of that part of the business.

[Nigel D'Souza, analyst]

I wonder if you could just expand on sorry to harp on this, but the pricing of that existing business, why shouldn't it maybe just we set high for the entire industry? Was it just mispriced risk where competitive market where the yields were about 10% and maybe they should have been closer to the mid-teens? Or is it just an outlier on credit risk, unique environment specific to that segment in the transport sector and the pricing was appropriate.

Just trying to understand how you think about this business.

[Andrew Moor, executive]

Yes. I think you might see the industry reprice, frankly, because what we're hearing is that our competitors are seeing -- observing the same with us. It's not in the kind of idiosyncratic equitable only thing. So I think we'll have to kind of ask those questions and it may be in the whole industry prices of what kind of the criteria and these as the business reset.

[Operator]

Your next question comes from Graham Ryding from TD Securities.

[Graham Ryding, analyst]

I just wanted to drill down on the commercial areas a little bit more, just to make sure I'm getting your message correct. So it does look like those arrears are about 3x your recent average, but your allowance for credit losses are sort of in line with that historical range. So does it really come down to, are there some large sort of specific mortgages here that you've dug into and you don't see much credit risk? Is there sort of -- are there some outsized origins in there the sort of large in size, but you view as maybe low in potential loss, potential?

[Andrew Moor, executive]

Yes, absolutely. And I think actually, again, for those of you who followed the story for a while, remember we had an area a few years -- 2 or 3 years ago, where we were constantly expressing there will be no credit risk. It took 3 or 4 quarters to roll it off, and there wasn't any credit loss. I think that's what we're seeing here. One of the larger ones we have, for example, is a condo project that was under construction. The developer chose to start putting more structures on the same site and that caused some challenges with the project. So but we received a number of bids from potential -- people potentially interested in buying this project, and it's well in excess of our loan amount.

So unless a lot one, I think the largest loan actually in the impaired bucket. So as I mentioned, despite the fact we've got those bids, it might still take -- we probably won't actually get the money this quarter. It takes a while to go through the quarter and receive ship on the process but the bids are in hand and the solid bids from credible players. So we feel very confident about that. And I think that's what gives us confidence on the whole commercial book. We can actually sit around the room as we have and talk to each one and understand kind of what losses might come out of these and when they will resolve and we're feeling really good about that as a result of spending some time on it.

[Graham Ryding, analyst]

Okay. Great. And just for sort of context, is it like half a dozen type margins that you're digging through or 20% to 30%? Like what sort of size of margins here are you digging into?

[Andrew Moor, executive]

I've just got the right in front of me actually. So it's about 25% in total. One of them are quite small. So not really meaningful. There's a 10% or 11% something over [indiscernible].

I put on one spreadsheet, which tells you, you kind of know that load, remember that one kind of...

[Graham Ryding, analyst]

Right. Okay. So you do have some specific [indiscernible] here. Did you say that this portfolio had an average loan-to-value of 47%. Did I hear that correctly?

[Andrew Moor, executive]

Yes. Right.

[Graham Ryding, analyst]

Okay. And my last question, if I could, just noninterest expense. How should we think about how that's going to progress? I know there's some further ACM to flow in. This is a partial quarter. But beyond that throughout the rest of the year, how should we expect that to progress? Because I think you made a comment about maybe the second half expenses either being lower or the growth rate being lower than you could clear that up for me.

[Chadwick Westlake, executive]

Yes, I expect the sequential growth to slow down, Jeff, after yes, you account for ACM. We're going to continue to invest, but there was a little bit more loaded up into Q1 as well for some of the larger marketing investments. But I wouldn't expect that continued level of growth sequentially.

[Operator]

Your next question comes from Stephen Boland from Raymond James.

[Stephen Boland, analyst]

Just one question, obviously, on impairments. You mentioned the second half of the year on PCLs and impairments should kind of start to normalize? What about the shorter term. Can we assume that the impairment levels on an absolute basis have peaked or is it going to be similar in Q2?

[Andrew Moor, executive]

I think if you expect the impairments to go to [indiscernible] confident the commercial impairments, for example, will be down quarter-over-quarter when we report Q2. LCP sales and impairments are in some slightly different concepts. Are you still expecting reasonable PCLs flowing through from the equipment leasing business as we previously mentioned.

So -- and obviously, we believe we're well reserved and there's obviously some complexity about provisions as it relates to kind of modeling and how the economic scenarios look going forward in terms of Stage 1 and Stage 2 provisioning. So that's its very nature, hard to predict.

[Stephen Boland, analyst]

And then when -- basically, just a follow-up then on the residential. Like have you seen the bulk of you think impairments, even in your past due or like past due but not impaired. Are you seeing not kind of moderating heading into Q2 results as well?

[Andrew Moor, executive]

I think that's what we're expecting. And again, the story is that as I mentioned, just to one of the previous analysts, it's easier with the commercial ones because you can look on my loan. But I think in general, that's the broader expectation with our single-family modeling.

[Operator]

[Operator Instructions] Your next question comes from Gabriel Dechaine from National Bank.

[Gabriel Dechaine, analyst]

I just want to clarify some of the comments you were making earlier, just to make sure I understand them. It sounds like the pace of formations in the commercial portfolio will moderate in the second half. So we could see another uptick in Q2 or maybe not. I'm not quite sure I understand.

[Andrew Moor, executive]

To be clear, Gabriel, we do expect the impaired in commercial to be lower at the end of Q2 than they were in Q1.

[Gabriel Dechaine, analyst]

Okay. So you do expect a decline in Q2. And just related to the prior question there from Steve. The delinquencies in the mortgage portfolio, we saw an uptick quarter-over-quarter mostly in the early stage. Is that -- would you expect that increase to moderate or actually decline in Q2?

[Andrew Moor, executive]

I think -- let me just be sort of consistent with that said, Steve, I think we're expecting it to moderate, but it is harder to figure out because it is a sort of loan by it's a larger number of small loans.

[Operator]

And there are no further questions at this time. Mr. Moor, back to you for closing remarks.

[Andrew Moor, executive]

Thank you, Julie. And before we leave you today, we'll be celebrating our 20th anniversary by ringing the bell at TSX on Monday, March 18. There are shareholders who have been with us for these 20 years, and I thank them for their loyal support of EQB. I also congratulate them for buying into an IPO and turning their original investment into a 20-year return of about 1,000%, including reinvested dividends. For those who are new to our story and really want to learn about EQB as an investment opportunity to open an EQ Bank account, 4% interest every day. If you deposit your payroll, awaits as does a convenient no-fee banking experience. That potent combination will lead to 1,000 of extra dollars in your pocket over time. We'll speak to you soon as our annual and special meeting of shareholders is on April 10 at 10 a.m. This will be a virtual event, and we hope you will participate. Thank you, and have a great day.

[Operator]

That concludes today's call. You may disconnect your lines. Thank you.