Home Capital Group Inc

TSX:HCG

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Home Capital Group First Quarter 2018 Financial Results Conference Call. [Operator Instructions] I'd now like to introduce Laura Lepore, Investor Relations.

[Laura Lepore, Assistant Vice President of Investor Relations]

Thank you, operator, and good morning, everyone. Thank you for joining us today to hear about our financial results for the first quarter of 2018. I'm very pleased to introduce with me on the call today Yousry Bissada, President and Chief Executive Officer; and Brad Kotush, Chief Financial Officer. We have also several members of our management on the call this morning: David Cluff, our Chief Risk Officer; Ed Karthaus, Executive Vice President of Sales; and Benjy Katchen, Executive Vice President of Deposits and Consumer Lending.So before we begin, I'd like to caution listeners that this conference call may provide management the opportunity to discuss financial performance and conditions of Home Capital, and as such, comments may contain forward-looking information about strategies and expected financial results. Various factors, many difficult to project or control, could cause actual results to differ materially from results projected in forward-looking statements. Accordingly, the audience is cautioned against undue reliance on these remarks. Finally, a link to slides accompanying this live webcast is available on our website at homecapital.com.With that, I'll now turn it over to Yousry Bissada.

[Yousry Bissada, President, CEO & Director]

Thank you, Laura, and thank you, everyone, for joining us today. This morning, I'm going to speak you about our progress, and Brad will then provide some detail on our financial results. There are 3 main areas I'd like to share with you. First, we started the year with good progress on our quarterly results. Home has taken another positive step forward toward our goal of establishing Home as the #1 Alt-A lender in Canada. And I'm very pleased to say Home is back in every aspect of our business. The momentum we achieved over the last 6 months is showing results. There is still work to do, however, we remain optimistic that our business model and our focus on our service will enable us to grow volumes sustainably going forward. Second, we ended the quarter with a robust balance sheet and strong liquidity position. And third, we made progress on our top near-term strategic priorities. Turning to the first quarter results. For second stage quarter, we saw meaningful increase in total residential and commercial originations to nearly $1.2 billion. We had good momentum helping drive 33% of origination growth over Q4 2017. We saw strong demand for our core residential uninsured classic products as well as our insured prime accelerator product. In addition to our originations, we saw higher levels of renewal helping to boost our loan balance this quarter. We expected to see these renewal improvements following the many initiatives we've put in place over the past few months to better serve our renewing customers. B-20, as we have discussed in the past is expected to make it more difficult for certain customers to requalify elsewhere. It's soon to be determined the effect of B-20 alone on our renewals as much of the renewals in Q1 were offered in the prior quarter pre-B-20 implementation. We expect to have a better sense of its effects over the next few quarters. In terms of our commercial business, we continue to make progress on building our pipeline and our team. We are seeing strong market fundamentals and demand. However, we are seeing increased competition, which could result in near-term pressure on rates and spreads. We remain optimistic we'll be able to win our share of business given our strong track record and knowledge in the commercial financing business.We're confident that the progress we're making in service will continue to drive growth in residential and commercial originations. For example, mortgage applications are matching better with our product offerings as brokers are including more complete documentation upfront, helping to reduce the turnaround times. We continue to invest in educating our broker on what fits our profile so underwriting teams are able to focus on the right applications rather than the applications that don't meet the most rigorous risk profile. This improves turnaround times to brokers resulting in better service to the broker and their client. We've also continued to invest in our people by enhancing internal training initiatives as part of our journey of continuously improving our service. We have grown our headcount in our real estate secured lending relative to the prior quarter and have also created a dedicated team to manage our prime A and equity line of business. This helps to streamline our process for our customers creating efficiencies and capacities for all our underwriting teams and the various products they review. We are pleased with the quality of new business we're generating as well as the overall performance of our loan book, which continues to perform stronger. Now looking at our capital base. We ended the quarter with a robust balance sheet, and our liquidity and leverage ratios remain strong. We maintained one of the highest levels of CET1 capital among alternative mortgage lenders in large Canadian banks at 23.64%. Our capital base provides an extra layer of security for any future market headwinds for many years to come as well as providing the flexibility to be very competitive in our markets by investing in technology and capital to develop our products and service. In terms of the bigger picture and our short-term strategic priorities. While our focus remains on near-term priorities needed to get the business back on track, we've also been working diligently on the longer-term strategy. The strategy is about driving responsible growth for the next decade. We undertook a deep examination across all of our businesses to access -- to assess our capabilities, the viability in growth potential of our business model and product offerings. After this work, we concluded our underlying core business is sound and that the Alt-A segment must continue to drive profitability and will remain a main area for growth going forward. Other products and services will be added in opportune times. We believe that customers are demanding different ways of dealing with financial institutions, and we want to have options for them on whether they prefer mobile, online, face-to-face service or over-the-phone service. We believe there are several opportunities to introduce digital solutions at home. Over the coming months and years, we're looking to transform the way our brokers and customers who wish to deal with us digitally so they can interact with us. This transformation will not only improve their experiences with us, but also improve the scalability of our business model and provides us with better data to help us start using AI and to make better decisions, including the management of risk across our businesses. Our digital initiatives will allow us to innovate more quickly and to better respond to market opportunities in the future. Our long-term strategy is a continually evolving journey that allows us to respond and adapt to market opportunities and challenges as they arise until [ our home ] to best serve its clients and brokers now and into the future. We believe we have the expertise to be the best operators in our markets, and we're equipped with capital, the funding, the relationship and the right team to be the dominant player in the Canadian Alt-A market. With this assessment, maintaining and growing our core business, is what must drive and prioritize our operating and capital planning, risk management and strategic decisions. Finally on B-20. On January 1, 2018, we fully implemented the key changes outlined in OSFI B-20 guidelines, which included a new stress test on all of our uninsured mortgage applications. As prudent lenders, we are actively monitoring possible impacts to our business from regulatory changes and emerging real estate trends in the housing market. We're also monitoring these trends to ensure we continue to apply a conservative approach to our residential lending business. We will continue to communicate with you as we learn more on the trends and our clients. We expect to have a better sense of the full impact of the new B-20 guidelines rules later this year on borrower behavior as well as the impact of first-time homebuyers. In February, we highlighted that we're seeing early indication of an uptick in new borrowers with higher Beacon scores. So that trend has continued. Since the beginning of this year, we have seen further signs of a cooling housing market, particularly in our 2 largest markets, Toronto and Vancouver, which posted lower sales activity and muted real estate price appreciation. The impact on volumes during the busier spring and summer month remains to be seen, while we are pleased to see strong employment rates and immigration levels, which help maintain a healthy demand for Canadian real estate. The fundamental for housing and therefore, mortgage demand remains strong. Moving forward, we remain optimistic we will continue to see growth in our business and expect to get our fair market share given the strength of our franchise across our footprint and our focus on 2 of the fastest growing borrower demographics: Self-employed and new immigrants to Canada. To recap, we ended the first quarter with good growth and on track to regain our #1 market share position this year. Our balance sheet and CET1 ratio positions us strongly to be flexible and competitive in our markets. Near term, we're focused on improving operational excellence, including people, process and technology to drive increased profitability, productivity and cost efficiency. The journey of our digital transformation will begin this year. Most importantly, Home is back. With that, I'll turn it over to Brad.

[Bradley William Kotush, Executive VP & CFO]

Thank you, Yousry, and good morning, everyone. [indiscernible] we are pleased with a strong progress we made during the quarter on many fronts. We delivered growth and originations at our single-family loan balances. Our portfolio continued to perform well with low losses and our liquidity and deposit position are very stable. Turning to Slide 8 of our presentation. We reported net income of $34.6 million. Sequentially, net income improved 13%. On a year-over-year basis, net income declined 40.4% mainly due to reduced revenue from the lower loan balances taking into account loan sales and reduced market originations in 2017. A reminder that lower mortgage loan balances combined with some elevated expenses will continue to be a headwind when comparing to results prior to the liquidity event. Sequentially, diluted earnings per share grew a step to $0.43. However, it's around 52.2% year-over-year as a result of both lower net income and a higher share count. Noninterest expenses were down $14.1 million to $51.4 million in the first quarter compared to Q4 2017, a 21.5% improvement. Q4 noninterest expenses included $11.4 million of expenses related to intangible asset impairment charge and cost related to the exit of the PSiGate business and litigation. Compared to the prior year, Q1 expenses were down $13.1 million, a 20.3% improvement mainly on lower salaries and benefit expense due to reduced staff levels and Q1 last year included a $7.4 million provision related to Project EXPO restructuring cost. As our volume of business has increased, we have been increasing our staffing levels. And as a result, we expect expenses related to salaries and benefits to increase between $5 million to $6 million over Q1 2018 levels at subsequent quarters this year. Due to the lingering impact in certain costs stemming from the liquidity events, other operating costs will remain at the current level and increase modestly in connection with new initiatives. Discussing NIM and net interest margin. NIM in Q1 was 2.02%, 42 basis points lower on a year-over-year basis and flat sequentially, lower than interest income generated from our core single-family residential portfolio and higher interest expense and standby fees on the credit facility, reduced total net interest income and put pressure on NIM compared to Q1 '17. This was partially offset by a decrease in the relative proportion of lower-yielding cash resources and securities. Looking forward, we expect net interest income to continue to improve as we execute on our plans to grow loan originations and improve retention to grow our loan book. We are active in discussions through replace our existing standby facility that expired near the end of June. As we do so, we are looking to ensure that the facility is of the size and is in line with our current liquidity profile of the company. That means the's smaller facility reflecting our much lower level of demand deposits compared to the same period last year. Loans under administration totaled $22.5 million at the end of Q1, flat from the end of 2017. Lower origination level in asset sales during 2017 resulted in a 17% decline in loans under administration on a year-over-year basis. Total loans on balance sheet, which drive our core results saw positive growth of 1% to $15.2 billion toward from the end of Q4 2017. However, they remain significantly lower than $18.6 billion held on balance sheet year ago. We are pleased to see our nonsecuritized single-family residential loan balance has started to increase this quarter by 2.3% to $10.3 billion from year-end, thanks to increased originations and higher renewal levels. We remain cautiously optimistic that loan growth will improve as we continue to take market share and focus on retention efforts. Turning to originations on Slide 9. In Q1, we advanced $1.16 billion in total mortgages across all product lines as we continue to build on good momentum within our business and focus on providing better service. While originations remain well below historical levels, total originations were up for second straight quarter from $872.1 million in Q4 2017 and from $385.1 million in Q3 2017. Our single-family residential mortgage lending contributed to the bulk of total Q1 origination growth, totaling $869.7 million compared to $556 million in Q4 2017. Multiunit residential contributed originations of $104.9 million while nonresidential commercial mortgage originations, which includes store and apartment mortgages increased to $184.7 million compared to $111.2 million in Q4 2017. Turning to Slides 10, 11 and 12, highlighting our credit performance. I will note that effective January 1, 2018, the company adopted IFRS 9 financial instrument accounting. Our mortgage portfolio continues to perform well during the first quarter. Provision for credit losses or PCL totaled $6 million in Q1 2018 as calculated after IFRS 9. We have not restating it for prior periods so the results are not directly comparable to the prior periods when we use IFRS 9 accounting. Provision for credit losses for the quarter primarily related to the single-family residential mortgage portfolio, reflecting portfolio growth and the impact of forward-looking macroeconomic information. Q1 PCL also includes a $3 million charge for a single nonresidential commercial property. The full balance on this loan has now been provided for. So this was -- As this our first quarter reporting under IFRS 9, certain requirements were made to our methodology and risk parameters during the quarter. This impact was reflected in the PCL that is nonmaterial. We expect our PCL more volatile going forward under IFRS 9. Provision as a percentage of growth on insured loans remained low at 20 basis points compared to 12 basis points in Q4 2017 and 15 basis points in Q1 2017. We continue to observe strong credit profiles and stable loan to value ratios across our portfolio, which continues to support low delinquency and nonperforming rate and ultimately loan net write-offs. Net write-offs were $1.1 million and represented 0.03% of gross loans compared to 0.11% in Q4 2017 and unchanged from Q1 2017. Net nonperforming loans represented by Stage 3 loans under IFRS 9, as a percentage of gross loans, remained low at 0.29% at the end of Q1 2018 compared to 0.3% at Q4 2017 and 0.24% at Q1 2017. Turning to liquidity and deposits on Slide 13. We reported liquid assets of $1.45 billion at the end of Q1 compared to $1.65 billion at the end of 2017 and $2.1 billion at the end of Q1 2017. Total deposits were $12.08 billion, slightly lower than $12.17 billion at the end of 2017 and $16.25 billion a year ago. The year-over-year reduction in deposit balances reflect elevated redemptions of the company's high-interest savings account offering through Q2 2017 and lower funding requirements due to lower originations. Of the total deposit balances at the end of Q1 2018, demand deposits totaled $476 million compared to $11.61 billion of deposit that are payable at fixed dates, including $300 million in institutional deposit loans. Finally, looking at our capital on Slide 14. Our capital ratios remain well above internal targets of regulatory minimums. At the end of Q1 2018, our CET1 capital ratio increased to 23.64% compared to 23.17% last quarter from net income generation. With that, I will now turn it to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Stephen Boland from GMP securities.

[Stephen Boland, MD & Equity Research Analyst]

Just a question on B-20 and certainly you're not alone in giving some, I guess, guidance, that it's early days in terms of the impact on your portfolio, especially and obviously, in the single-family business. But we are 5.5 months into the year. I'm trying to get a sense of what you're seeing in terms of renewals under what you would consider due to B-20? And what kind of originations you're seeing or commitments that you're giving just to get an idea where the portfolio was going for 2018?

[Yousry Bissada, President, CEO & Director]

This is Yousry. On renewals, I mentioned in my opening comments. In the first quarter, we had very good success with renewals, but we're not sure how much of this relates to B-20 because we -- you offer renewals the quarter before. So somebody whose mortgage is coming up in January or February and even March will -- could get an offer in a quarter before. So we haven't been able to isolate how much of the renewal book is because of B-20. No doubt that we think it will help retain some of the book some of these mortgage source may not be able to qualify elsewhere. Growing further ahead -- I mean, our renewals percentages have been increasing over the last 6 months every single month. We've taken some very good initiatives to help us do that. So as I -- I will very much share as we learn ourselves -- as again this is a little bit too early. On the front end, there is a whole series of things in the market. I think myself and the other leaders that are affected by B-20 are having difficulty pinning the number because there is a lot of change in the marketplace. Private lenders are getting some business because, a, they don't have that stress test, and b, sometimes they don't have the same documentation requirements for instance. But private lenders have limited capital. And at some point, there had to be more particular about what they can lend or they're going to simply run out and people are going to have to find alternatives like us, again. They come and look at what we can do for them. There are also some large financial institutions that are not under B-20, but has said they will go under B-20 sometime this year. Some of the credit unions, for example, in Québec, some of the [ corporate ] credit unions in Ontario, and some of the credit unions out of B.C. But they needed to go live on Jan 1 on B-20. Some of them would say they will do it sometime this year without announcing when. Others have said April and so and so. We don't have the full effect of that because we could be more competitive if more people are under B-20, so that we'll all have the same rulebook. So that's where we are. Does that answer your question, Steve?

[Stephen Boland, MD & Equity Research Analyst]

Yes. I just -- I guess the follow-up to that would just be, when I look at your maturity schedule and certainly on the single-family, I think it's $6 billion to $8 billion of mortgages that are renewing. Is that a fair assumption that and is the management assumption that, is that going to stabilize? Or would you expect that amount to shrink?

[Yousry Bissada, President, CEO & Director]

I hope I'm answering your question. We expect to get better renewal rates than the company has ever had in the 30-year history. A, we have a lot of smart initiatives to help us with renewals and B-20 will also help. So a combination of those things, we think, we will have better renewals than any time. Not just last year, but any time in the 30-year history of this company.

[Operator]

Your next question comes from the line of Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

First question I had was, when I take a look at your GIC rates, you guys have been for the last several months, I would say, kind of at the high -- offering the high rates or near the high across the curve. And at the same time, you've obviously got a lot of capital at play. I'm just wondering how to think about how you balance that of which you might need to raise in deposits to fund the loan book relative to the excess equity cap we've gotten. And whether or not, there's maybe some sort of regulatory capital compliance requirement angled that we need to think about?

[Bradley William Kotush, Executive VP & CFO]

Jeff, it's Brad. The mortgages are generally funded through GICs now. We are looking for some alternative financing the capital ratios generally have relatively little to do with the funding requirements on originations. So you've seen over the course of the past few months, we raised quite a lot of deposits in Q3. And we had to [indiscernible] deliver the strategy around those option after origination profile so to the extent that we're required to raise GICs to fund mortgage originations that's what we will do. We've maintained a relatively stable level of deposits, and we've lowered our overall liquid assets to utilize fund mortgage originations. And we have said that we will be aggressive to regain market share. So we're willing to take a bit of spread compression. And we don't see us becoming -- we are a leader in the areas where we want to raise money because that's how we fund our mortgage originations. And we have deliberately stayed away from a lot of demand deposits and therefore, we always will be a leader on the GICs.

[Benjamin Katchen]

It's Benjy Katchen. I would also add that, we have a rate strategy that differs between our deposit broker channel as well as our open channel. In the deposit broker channel, our rates are set in line with our historic competitors. So -- while those rates may have risen over the last quarter, interest rates generally have also risen, and we are in line with our historic competitors in that channel. And open on the other hand, the rates are slightly higher. However, we don't pay a broker commission in that channel. And those rates are set in line with the retail competitors, which are different competitors in the broker channel.

[Geoffrey Kwan, Analyst]

Yes. Sorry. I mean, what I was getting at was just, obviously, with the issues that were happening last year, the pricing on the GICs wasn't as competitive. But I think it was about last November or December on the deposit broker side. I kind of notice on a daily basis you guys have been pretty much at or near the top across the curve that was kind of my comment there? Okay. So that's fine. Just my other question I had was the specific commercial loan provision that you booked in the quarter, I think that was the same loan that you had to provision last quarter. So wondering if you can kind of give some color around in terms of like what type of commercial loan is it? Any sort of details you can give on the geography, the history of kind of what's been going on here?

[Yousry Bissada, President, CEO & Director]

Geoff, I think in relation to history, it was a trauma-based loan and it's not been fully provided for.

[Geoffrey Kwan, Analyst]

Okay. And is it -- was it -- is it traditional commercial loan? And what's the reason for another provision because I think you guys talked about it being -- you thought you made an adequate provision last quarter. Was it just a value of the property had gone down and hence you needed to take a further provision or...

[Yousry Bissada, President, CEO & Director]

The short answer is yes.

[Operator]

Your next question comes from the line of Nick Priebe from BMO Capital Markets.

[Nikolaus Priebe, Analyst]

Just wondered if you can provide a bit of additional color on efforts to replace the Berkshire facility when that comes due midyear. I'm just wondering would you be looking to right-size that to match a lower level of demand deposits going forward? Or will you be principally looking for relief on the standby fees? Just what sort of terms would you be looking for in terms of improvement on that when it matures?

[Bradley William Kotush, Executive VP & CFO]

Nick, the easiest way to answer that is it would be in line with our level of demand deposits. So, therefore, it will be a much smaller facility than we're currently carrying.

[Nikolaus Priebe, Analyst]

Okay. Got it. And then, still very well capitalized, clearly carrying an excess amount of capital. I'm just wondering, what sort of time line should investors think about for the deployment of that excess capital. Is that going to be a bit of a gradual process over the next few years?

[Yousry Bissada, President, CEO & Director]

Yes.

[Operator]

Your next question comes from the line of Dylan Steuart from Industrial Alliance.

[Dylan Steuart, Equity Research Analyst]

Question on the expected noninterest expense growth, $5 million to $6 million. I guess, it sounds like hiring has been pretty substantial subsequent to the quarter if we're expecting that to increase that much. Just wondering what the area of focus is on the hiring increase.

[Yousry Bissada, President, CEO & Director]

It's Yousry here. I'll answer that. Even after hiring the individuals that we want or need to hire, we will be well below, about 130 people below than we would have been a year ago. We are just got openings in certain areas as we grow in technology, in certain areas as we grow in underwriting and ramping up for higher volumes. But I just want to make it very clear, we're still be well below where we were historically just that we have not fulfilled all our approved number of FTE right now.

[Dylan Steuart, Equity Research Analyst]

Okay. And just on the technology front, it sounds like a fairly ambitious strategy to improve the digital profile. Is that one of the main focuses, I guess, of the hiring that you've done subsequent to the quarter?

[Yousry Bissada, President, CEO & Director]

It's not one of the main, just one of. And then, I don't -- having run a digital company, I don't think we're being very ambitious. We're being slow and methodical and doing it in pieces, first we're going to, as I mentioned in my comments. First we're going to improve. For those people that wish to be served digitally, we're going to have them access Home to find out about their products and services digitally. That will be the first step. Once we accomplish that we'll look at what other areas we need to grow, but it is not a major part of the hiring. It's just it's part of the hire.

[Dylan Steuart, Equity Research Analyst]

All right. Great. And just one more quickly, if I can, just on the Stage 3 loans. It looks like the risk parameters for both the single-family and commercial mortgages added about $6.5 million to the provisioning in the quarter. Just wondering what changed from January 1 to, I guess, March 31 that caused that uptick in the model and the risk parameters?

[Bradley William Kotush, Executive VP & CFO]

When we step [indiscernible] through some of this, we subscribed to the third party for economic details and as we add through some stress testing, we have increased some of the risks related to that. So that was one of the bigger went through. But as you can imagine, we have spent a lot of time [indiscernible] now that it's live, we had put through a number of changes to our model. And again, the same -- one of the things that we do know is because of this forward-looking, you can expect to see more volatility in that provision as appose to your previous methodology.

[Operator]

Your next question comes from the line of Marco Giurleo from CIBC.

[Marco Giurleo, Associate]

My first question is for Brad on the net interest margin, sort of following Geoff's question. I noticed the margin was flat sequentially. However when I look at loan yields on Page 7 of your subs, it looks like they were down across most of your products. While the funding cost remained relatively stable. So the one offset was the lower cash balances. So a 2-part question. One, what's driving the yields lower. And two, how much further are you willing to take down your liquid assets going forward?

[Bradley William Kotush, Executive VP & CFO]

The -- to answer your -- in reverse order, Marco, the general -- what we've seen in the marketplace is lot of price competition on mortgages. So we have been and have maintained a competitive posture there. As we said that we wanted to increase originations and rebuild our loan book and that we have made some programs, but there's a lot more work to be done. And as we go through, we'll see how aggressive we can get on pricing, but it is competitive. And in the past few calls, we talked about new market entrants, B-20. There's all kinds of different factors that are going into how we're pricing our products. And in terms of overall liquid assets, if we take a look at our liquidity portfolio, and our number of days that we have in terms of that profile and taking all that into account, we're comfortable where we are now. And to the extent that we would either need to raise more deposits as we increase originations, so we'll go ahead and do that. But we're very comfortable with our liquidity right now.

[Yousry Bissada, President, CEO & Director]

Marco, and maybe -- it's Yousry here. Maybe I can just add a tiny little bit. As government Canada rates have been going up, you see a natural effect on GIC rates. They slowly go up as well. That's wind up compressing NIM to mortgages. So mortgages eventually also will move. There is a mean reversion of the relationship between government of Canada, GICs and mortgages. But as rates go up, it's a little bit slower to react. When rates go down, the NIMs go wider quickly. So it's a market issue, I think, happening to anyone in this space right now as we adjust to normal NIM loans.

[Marco Giurleo, Associate]

All right, so going forward, then if you're going to maintain your liquid assets stable-ish, you're going to funding your loan book with the GICs. So is it safe to assume that we should see some NIM compression or...?

[Bradley William Kotush, Executive VP & CFO]

We're -- well, we don't think so. I mean, we'll have to see what happens in a competitive environment. And we are looking for alternative funding sources as oppose to GICs. We're just trying to do things in a natural process. And as the year goes on, we hope to find alternative funding sources besides the GICs, depending on the circumstances and what works best for our business. So you've seen we've held our NIM's been consistent for 2 quarters. And that we will do our best to make sure that it doesn't decline.

[Marco Giurleo, Associate]

Okay. And on B-20, Yousry, you mentioned, I guess, a high grading of the portfolio or just like trickle down of business from the big banks. When I look at your, I guess, your lower risk residential mortgage products. Is it -- I believe that's the ACE Plus and Accelerator products. Is that really what's driving the rapid growth in those products?

[Yousry Bissada, President, CEO & Director]

No, it's across the board. We're getting growth in what we call classic, which is our [indiscernible]. The ACE Plus and Accelerator we're seeing across the board.

[Marco Giurleo, Associate]

Okay. But when I compare the growth rates, Your traditional mortgage balances are up like 0.1%, whereas, your ACE Plus -- or ACE Plus and Accelerator are in high double digits?

[Yousry Bissada, President, CEO & Director]

Ed Karthaus is going to respond to it.

[Edward P. Karthaus, Executive Vice President of Sales]

We've seen an increase over the quarter in the Beacon scores of the borrowers in general. So there is a tendency moving upscale in our product -- in our product mix and in our product range. And I think that's what you're seeing those numbers coming from.

[Yousry Bissada, President, CEO & Director]

What I don't know, yet, Marco is if this is new normal. We're going to get higher Beacon scores and higher Beacon scores from what they're used to. None of us know yet if this is normal or just things are taking a lot to sort out with B-20's impact.

[Marco Giurleo, Associate]

Okay. And then lastly, just on IFRS 9, a follow-on to the last question. So there were changes in model assumptions, there was a Stage 3, the credit impaired bucket that saw the most of the provisions. So are these changes, changes in macro assumptions like say around employment or home prices? Or are these really, I guess, loan-specific assumption changes?

[Bradley William Kotush, Executive VP & CFO]

The latter -- the former not the latter, mostly modeled on assumption changes.

[Marco Giurleo, Associate]

So what is the most -- what economic assumptions then are more sensitive to your loan losses. It just seems like the, I mean the employment picture was pretty good in Ontario. And I think home prices for the most parts of January have been stable to rising depending on what you look at. So what was that assumption that you guys were looking at?

[Bradley William Kotush, Executive VP & CFO]

It was largely unemployment [indiscernible] one of stress tests remembering it Stage 3 is lifetime as opposed to, say, one which is 12 months. So it is quite a long forecasted as opposed to what we see currently.

[Operator]

[Operator Instructions] Your next question comes from the line of Graham Ryding from TD securities.

[Graham Ryding, Research Analyst of Financial Services]

Brad, Maybe just start with you. You're talking about alternative funding besides GICs? Can maybe give us some specifics of what you're looking at or ideally what you would like to secure?

[Bradley William Kotush, Executive VP & CFO]

Sure. We had -- we've previously had a warehouse line for our insured mortgages. So we would prefer to reinstate that. And we are looking -- we have, as you know, we would very much like to get our investment-grade credit rating back and that would enable us to explore renewing our deposit program at the appropriate time. For now, we have been able to fund our growth through GICs. And that's -- one of our current strategies that should enable us to fund whatever originations we have. In addition, we have talked previously about a RMBS market. There really isn't one that's active in Canada, but there may be potential for some as investors search for yield.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then, Yousry, just can you elaborate on the renewal initiatives that you've put in place that you feel are having some impact on the higher retention levels of your renewals?

[Yousry Bissada, President, CEO & Director]

Yes, happy to. So some of these are proprietary because we don't want to be copied too quickly. But just in general, it's about looking at in advance what's coming up, what's the risk profile against it is, and improving the quality of how we communicate, when we communicate and ensuring that we're full service [indiscernible] all the options. We do have many products in our arsenal that we can offer assuming we look at our clients and say the highest probability what they want without regard to Home is this type of product, can we customize that and we go to them.

[Graham Ryding, Research Analyst of Financial Services]

I know you -- are you actively being competitive on the rates that you're offering at renewal? Or is this similar approach to?

[Yousry Bissada, President, CEO & Director]

Yes. No, we have to be because if you're not they will find someone else. So we're being as competitive as we can be.

[Operator]

Your next question comes from the line of Jaeme Gloyn from National Bank.

[Jaeme Gloyn, Analyst]

First question is, I just want to rephrase the net interest margin compression story here. When we talk about uninsured single-family mortgages, there was $870 million in new single-family, give or take. What was the net interest spread on those mortgages? And how does that compare to the net interest spread on the 800-or-so mortgages that were discharged during the quarter.

[Bradley William Kotush, Executive VP & CFO]

I don't have those numbers, Jaeme. We'll get back to you.

[Jaeme Gloyn, Analyst]

Okay. For the -- just a follow-on for the standby credit facility. You talked about it, I guess, resizing it to in line with demand deposits. What -- do you expect any rate release as well on the standby fee.

[Bradley William Kotush, Executive VP & CFO]

No. I wouldn't expect that. I think it's just really one of size as oppose to rate. There is a very limited market for these. There likely won't be a lot of price competition.

[Jaeme Gloyn, Analyst]

Okay. So safe to assume it will stay with Berkshire as opposed to moving to, I guess, more traditional lenders in the Canadian market?

[Bradley William Kotush, Executive VP & CFO]

I would not make that assumption.

[Jaeme Gloyn, Analyst]

You would not make that assumption?

[Bradley William Kotush, Executive VP & CFO]

I would not make that assumption.

[Jaeme Gloyn, Analyst]

Okay. Shifting gears to the credit risk exposure by internal risk rating. And if I'm looking at the single-family residential mortgages and the buckets from very low to high, comparing that to the Big Six, where would you put the probability of default on mortgages in the "high bucket"? If I look at the Big Six, they're generally in the as low as 7%, probability of default to north of 10% probability of default. I'm wondering how Home Capital goes about breaking that out?

[Bradley William Kotush, Executive VP & CFO]

It's high. It's greater than roughly 5%.

[Jaeme Gloyn, Analyst]

Probability of default is greater than 5%?

[Bradley William Kotush, Executive VP & CFO]

Yes.

[Operator]

[Operator Instructions] Your next question comes from the line of Brenna Phelan from Raymond James.

[Brenna Phelan, Equity Analyst]

Can you just give us some details on the important inputs to your IFRS 9 models? To what variables is the model more sensitive to? And what sort of volatility do you see if these stress test input to the most bearish assumptions?

[Bradley William Kotush, Executive VP & CFO]

That's a really long answer to that question, Brenna. We have a number of inputs that we take. We have moderate and high stress. We combine them all to come up with an overall provision. We use house prices, unemployment. It is a very complicated model. These interest rates are -- and certainly, I don't have a really simple answer to give you on the phone. We have used. We engaged a third party for economic forecasting. We have outsourced the actual performance of the model, and we use that data. And there is a whole bunch of -- I'm sorry. I'm just going to stop talking about it because I have no easy way to answer your question in such safe terms out of -- we take a variety of forecasting metrics to project the future loss.

[Brenna Phelan, Equity Analyst]

Okay. And renewal volumes, are they -- are the actions that you're taking to renew the ACE Plus versus the traditional product is -- or can you talk about any sort of differences you're seeing and what customers are asking for and what's important? Is there a differentiated approach in keeping that respective business?

[Yousry Bissada, President, CEO & Director]

This is Yousry here. It's not -- the process isn't different. It's just more customized for the type of product that we anticipate they would like to renew it. But the process is the same for whatever product we have.

[Brenna Phelan, Equity Analyst]

Okay. And based on your renewal experience to date. I understand you're not required to stress under B-20. But are you stress testing as you see rates go up at renewal? And can you give us an idea of how many borrowers, if they were going to requalify and the experience that you've seen in 2018 today with renewals wouldn't qualify if they were a new borrower?

[Yousry Bissada, President, CEO & Director]

I will start, maybe David Cluff will add a little bit. It's Yousry again. We don't know yet how many would or wouldn't qualify as a result of the B-20. But if -- in our normal guidelines even before B-20. If there is any reason that indicate we need to underwrite that individual, we would. Bounced checks might be a reason. If there was any reason that particular market has a deep change in market value. If there was any reason that we thought, this is a -- a bounced check may indicate a loss of job or something like that, then we would re-underwrite and potentially not offer a renewal. But beyond that David, I don't know if you want to add anything.

[David J. F. Cluff, Executive VP & Chief Risk Officer]

It's David Cluff her. I'll just add we do all the required stress testing as outlined in B-20 as part of our renewal process. There's a number of factors that we look at as Yousry have alluded here that helps drive, a, decision whether everyone offer renewal terms than what the pricing might be. Number of those factors relate to repayment as well as credit score migration as other proprietary test that you will take.

[Brenna Phelan, Equity Analyst]

Okay. I guess what specifically I'm trying to get at it is, when these mortgages come up for renewal, you're not necessarily required to re-underwrite. But are you seeing any sort of stress in affordability based on where rates are headed and renewal volumes looking out based on if your assumption were to be that interest rates are going at meaningfully? Is there, like, what are you doing around affordability of payments being made on a month-to-month basis?

[David J. F. Cluff, Executive VP & Chief Risk Officer]

So we are able to stress the payments, but what we don't have always at the time of renewals what the employment income level would be. So it's difficult to fully do that without fully underwriting the loan and that's not presently a requirement. So we use all the information that we had to inform us within renewal decision.

[Yousry Bissada, President, CEO & Director]

This is Yousry again. We wouldn't offer renewal if didn't think that client could afford the mortgage. But I think to answer your question, we don't specifically go and do the B-20 2% stress test as we re-underwrite a mortgage. We don't do that. On renewals.

[Brenna Phelan, Equity Analyst]

Okay. And last one for me. When you talk about alternative sources of capital. Are you -- is it like, certainly, this is going to be another standby line? Or do you think there's any sort of possibility of some sort of securitization facility for nonprime product either here or in the U.S. any demand for that and people you're talking to?

[Bradley William Kotush, Executive VP & CFO]

Brenna, this is Brad. I'll just recharacterize your question. This is funding not capital. And so yes, we would consider, as I said earlier, we will consider trying to develop an R&D asset market to the extent it was possible. And in addition, we would be looking at a warehouse line for insured product, and we are looking at any alternatives we can to diversify away from GICs. But we're confident with our ability to continue to fund using GICs, both through broker channel and Oaken. And as I said earlier, we're looking to replace our standby facility, although that's not anything that we would ever expect to use.

[Yousry Bissada, President, CEO & Director]

I'll just add one more. We are active in the CMB market as well in securitizing insured mortgages.

[Operator]

And our last question comes from the line of Marco Giurleo from CIBC.

[Marco Giurleo, Associate]

Just a quick follow-up question on pricing. You mentioned that you wanted to take back market share. I'm just wondering how do you think about profitability and when you're underwriting these loans? And can you speak a bit just to your discipline around profitability for the various products?

[Yousry Bissada, President, CEO & Director]

It's Yousry .We have targets of NIM that we will have in our pricing. So I think you are aware in the Alt-A space there is a price you'll put out on mortgages for 1 year, 2 year or whatever it may be. And then, if there is a further grid depending on the Beacon of the individual, the higher the individual, the closer they will get to that rate. If they have a low Beacon, we may risk adjust that price. So we take all that into account as we try to set our pricing and get a weighted average to get to the NIM that we want. As I mentioned in earlier comments in one of the questions, some of the pressure on NIM right now is normal as rates are going up, [indiscernible] accounted rates go up, GICs follow slowly and then mortgages follow slowly. So sometimes that process takes days, weeks and maybe months to get back to normal levels, but we're very conscious of that as we make these decisions.

[Operator]

And it looks like we do have an additional question from the line of Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

All my questions have been answered. Thanks.

[Operator]

And there are no more questions. I would like to turn the call back over to Yousry Bissada for some closing remarks.

[Yousry Bissada, President, CEO & Director]

Thank you, everyone, for joining us today. We look forward to reporting back in Q2.

[Operator]

And this concludes today's conference. You may now disconnect.