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Good morning. My name is Lisa, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Home Capital Group first quarter financial results conference call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Jill MacRae, Head of Investor Relations, you may begin your conference.
Thank you, Lisa. Good morning, everybody, and thank you for joining us today. We'll begin the call with remarks from Yousry Bissada, President and Chief Executive Officer, followed by a review of our financials by Brad Kotush, Chief Financial Officer. After the presentation, we'll have a question-and-answer session for analysts and investors.With us on the call to answer your questions are Ed Karthaus, EVP of Sales and Marketing; Mike Forshee, EVP of Underwriting; David Cluff, Chief Risk Officer; Benji Katchen, Chief Digital and Strategy Officer; and Victor DiRisio, Chief Information Officer.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 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 the slides accompanying this live Webcast is available on our Website at homecapital.com.With that, I'd like to turn it over to Yousry Bissada.
Thank you, Jill. Good morning, and thank you for joining us today as we present our results for the first quarter of 2019. I'm going to start with our originations in the quarter. Historically, Q1 is the industry's slowest quarter in a year. We're pleased to report that our origination volumes in Q1 improved over last year.Last year's originations included funding commitments pulled forward in advance of B20 taking effect. In the absence of that effect in this quarter, a year-over-year increase marks meaningful progress.In single-family residential, our originations were 7.3% higher than in the same quarter last year. Commercial originations fell by 2.3% for overall growth in mortgage originations of 4.9%. And our overall loan book grew by 9.6% over Q1 of 2018.This growth is the result of continuous efforts that started last year and continued into this year. Under the leadership of Ed Karthaus and Mike Forshee, we focus on building on our relationships and providing better service to a focused group of brokers who understand the business of near-prime lending.Our investments in helping our broker partners understand how best to work with us and emphasizing a service culture with our own people is improving the home customer experience. That combination is driving high-quality appropriately priced business volume.We are fortunate that our efforts are earning the attention and appreciation of our customers and broker partners. On May 2nd, at the 2019 Mortgage Awards of Excellence, Home Trust was honored to be named for the first time as Bank Lender of the Year. We're very proud of this accomplishment and the recognition from our industry peers. It validates our strategy to compete on service and relationships.We have also experienced growth in our direct-to-consumer Oaken channel led by Benji Katchen. Oaken-sourced deposits have grown by more than 10% year to date. Oaken is very important to our overall strategy of deposit growth and diversification.The financial strength of our company continues to improve. First, we were pleased to receive upgrades from our 2 rating agencies, DBRS and S&P. We're working diligently to achieve an investment-grade rating. And second, we have deployed capital to steadily repurchase shares under our NCIB at a discount to book value.We have begun to implement our multiyear technology investment program internally known as Ignite under Victor DiRisio's leadership. Brad will speak to you about the impact of our financial results, but I want to share with you an early look at some of the operational benefits.We have completed the migration of one of our datacenters to the Cloud, providing scalable on-demand computing capability for the company. We have implemented paperless underwriting and funding for residential and small commercial loans. We funded about 40% of our loans without the use of paper this year and are looking to do so for all our originations in the near future.This has allowed us to start working on near straight-through processing for residential and small commercial mortgages. Combined, these initiatives provide a number of benefits, improve the efficiency of our lending processes, reduce the manual work for our underwriters and funders by allowing them to make better and more efficient decisions, empower our decisions with data and technology and improve our impact on the environment.We're also adding features and benefits to our solutions at Oaken Financial to make it even more convenient for Canadians to do business with us. For example, we have implemented self-service account linking.We are working on many other initiatives as part of Ignite, which I look forward to sharing with you on future calls.All these indicators are confirming that our focus on service and execution is taking us in the right direction, that we can be successful in the face of changing market conditions and that prudent risk management is indeed compatible with sustainable growth.And I now will turn the call over to Brad to discuss our financial results.
Thanks, Yousry, and good morning, everyone. For the first quarter of 2019, we're reporting growth in our assets, book value and earnings per share. The success of Oaken Financial is supporting our funding efforts, and our IT roadmap offers promising opportunities to increase our operating efficiency and customer service levels.Slides 7 and 8 of the investor presentation present the summary of our results for Q1 2019 on both an IFRS basis and adjusted for items of note. The adjusted to earnings this quarter arises from a change in the estimate of useful life of legacy IT assets that will be retired as part of our IT roadmap. Slide 9 has a summary of those adjustments.Slide 10 shows our originations in the quarter. As Yousry mentioned, our volumes in Q1 2018 were positively impacted by an industry-wide increase in demand driven by customers who wanted to get funding commitments ahead of the B20 changes. Against this strong quarter, we still managed to grow originations by 7.3% to $933 million.Year-over-year growth in our core business, which is the traditional single-family mortgage, reached 11.3%. Q4 '18 was a continuation of several strong quarters of origination activity in 2018.Our growth in originations has helped grow our on-balance sheet loans. As you can see in the chart at the top of Slide 11, the value of loans on our balance sheet grew 9.6% from Q1 2018. By comparison, there are some industry forecasts of mortgage balances on low to single-digit range for fiscal 2019.Homes net interest margin rose from 1.99% in Q4 2018 to 2.01% in Q1 2019. Margins in the quarter benefited from lower interest rates on our new deposits and prepayments. But the overall cost to funds is still impacted by the cost of funds to meet obligations related to the SIB and deposit on repayment in the fourth quarter of last year.Slide 13 shows the high credit parameters of our loan portfolio. If you look at Beacon scores as a measure of credit quality, you see that Home has a very high quality of borrower in our single-family residential mortgage product.There has been much discussion lately about the potential for a decline in home prices in Canada. The potential impact at Home is mitigated by the low loan-to-value ratio of our mortgaged loans, which was 70% on origination this quarter and 59% for the portfolio at Q1 2019, evidence of our disciplined underwriting and risk management principles.Slide 14 shows our net nonperforming loans at 0.49% of gross loans. This is a modest increase from 0.47% at the end of 2018 and well within our internal risk tolerance.Slide 15 shows provision for credit losses on an annualized basis for the past 8 quarters. Provisions were 15 basis points of gross loans for the quarter on an annualized basis. This provision is largely attributable to our HVAC rental component of our other consumer retail loan portfolio, where a portion of the portfolio was transferred to Stage 3, and the provision for credit losses increased accordingly.The increase in provisions was partially offset on this portfolio by a recovery in commercial loan provisions. It's disappointing that a line of business in which Home has ceased originating new loans has detracted from a quarter of otherwise positive results.Turning to Slide 16 for a glimpse of our funding picture, Oaken Financial has grown its share of our funding mix. Oaken deposits in Q1 grew by more than 10% from the end of 2018 to over $2.9 billion, which confirms our ability to grow this strategic funding channel. Our plans for Oaken include digital initiatives, making it even easier to do business at Oaken.Slide 17 gives you a picture of our liquidity profile. As of March 31st, we were holding $1.36 billion of liquid assets on our balance sheet along with a $500 million standby facility for $1.86 billion in liquid assets. Further, our maturity schedule shows our near-term mortgage maturities significantly exceed our deposit maturities for the next 12 months.Slide 18 shows our capital and leverage ratios. As of March 31st, 2019, our CET1 capital ratio stood at 18.99% and our leverage ratio at 7.6%, both well within our internal risk limits.Slide 19 shows the progress of our NCIB. As of yesterday's date, Home had repurchased over 1.9 million shares out of our approved purchase limit of approximately 4.75 million shares at an average price of $16.88 per share. The purchases were made at a substantial discount to our book value of $27 at the end of the quarter. Home remains committed to continue deploying capital through the NCIB to help create sustainable value for our shareholders.We are pleased with the results of our core operations and aware of the opportunities we have available to generate even better results in the future.With that, I will turn it back to Yousry for concluding remarks.
Despite industry conditions that are still showing the effects of regulatory changes, Home has succeeded in growing our assets, our customer deposits, and our value to our shareholders. Canadians are recognizing the merits of our company as a place to borrow, a place to save, a place to work, and a place to invest. And our technology initiatives will keep us moving forward on the path of service and innovation.With that, I'll turn it back to the operator for questions.
[Operator Instructions] And our first question comes from the line of Nik Priebe from BMO Capital Markets.
I just wanted to start with a question on the increase in the impaired HVAC rental equipment loans in the quarter. Brad, I think you alluded to this in your comments, but I just wanted to make sure I caught it correctly. You attributed that to the transfer of those assets. Is that correct?
Yes, the movements in stages, Nik.
Movement in stages, just to Stage 3 is what you mean.
That's correct.
Got it. Got it. Yes, and the size of that, I think it was $14 million, if I read that correctly. That kind of seems large in relation to the overall size of that portfolio. And I know that that's a bit of a legacy portfolio for you guys, but was there anything that you would attribute that to?
Sorry, Nik, what's the $14 million that you're referring to?
I know what number he's speaking of.
Okay.
Yes, thanks, Nik. The -- we had a number of those loans in Stage 2. We'd increased that in 2018. Some of those have migrated into Stage 3. In addition, we've put some more in. We've taken a look at -- we had ordinarily looked to our underlying merchants who are our counterparties and whose accounts are currently current and have decided that, at this time, on a forward-looking basis, it's more appropriate to have a view at some of the underlying assets as well as the merchant.
Okay. Okay. That's helpful. Just shifting gears then, just a bit of a higher-level question here, I -- looking at GIC rates out there, they've clearly declined since peaking late last year. Have you started to either adjust pricing strategies accordingly, or I understand pricing's a bit opaque in -- at least in the [ LTE ] market, but have you seen competitors start to react at all?
I think it's always competitive. We have been able to maintain our rates on the asset side. Over the last couple of weeks, we've seen some slight increases in the GIC rates. But we're still working towards improving our spreads.
Okay. And then maybe just one last quick one on noninterest expenses. It took a little bit of a step up in the quarter, and you guys had signaled that was coming previously with -- as you begin to start to invest in IT and related initiatives. Just wondering, going forward here through the balance of 2019, should we expect to see like another step up, or is that just -- is that growth rate going to be a little more modest consistent with the growth in FTE and other expenses?
I think it's safe to assume that I think last quarter we mentioned that we were thinking that the adjusted expense run rate would be around $60 million a quarter, and we continue to -- well, we continue to forecast that rate.
Our next question comes from the line of Marco Giurleo from CIBC.
I just wanted to touch again on the HVAC rental equipment portfolio. Could you quantify the size of it? Is it -- so your other consumer retail loans total about $350 million. So is the HVAC portfolio mainly that, or is it a smaller portion of that?
It's roughly $140 million.
Okay. And how much of that book is impaired right now?
The $13 million that we've shown in Stage 3 -- or sorry, $13.9 million.
Okay. So the -- there were no previous impairments in that book prior to today's build.
Not for purposes of our provisioning.
Okay. And so in your 2019 outlook, you mentioned that there could be some volatility in provisioning related to this portfolio through the remainder of the year. I'm just wondering, how much of a drag do you think it could be on the loss rate? We saw a 5 basis point sequential increase there this quarter. So just wondering your thoughts there, keeping in mind that we did have a pretty sizable release on the commercial side.
Well, we've said I think starting back in 2018 that we do expect to see more volatility in provisioning with the implementation of IFRS 9 as a forward-looking projection. So that's part of the reason for explaining that there's variability. We have not seen any further issues to date in that portfolio, but it's always prudent to let people know that we're prepared in case circumstances change. So obviously, we're working very hard to make sure that doesn't happen. And last year, we had some volatility in some of our commercial provisions that we were subsequently overprovided on. So we're always working towards doing the best estimate at the time of reporting. And we're continually monitoring this with our credit and recovery team and risk group.
All right. And if I could just follow on, on Nik's question with respect to the expenses, you spoke to a $60 million expense run rate. Now we were at $60 million on a reported basis this quarter. And so I guess, if you adjust for that 3 -- the $3.2 million of amortization, I get -- we get to around $56.8 million. So what you're saying is you expect the expense rate to migrate higher through the year or next quarter, right?
Yes, that's correct.
Our next question comes from the line of Cihan Tuncay from GMP Securities.
Just wanted to touch base on the capital ratio situation. So I guess, firstly, just based off of the Q1 performance and CIB activity, and your outlook for the balance of the year, and you know you -- at the end of Q1, the capital ratio -- the CET1 ratio was 18.99%, was an uptick there, do you think by the end of the year, just kind of order of magnitude, will it be materially different than that, higher or lower at all, just your commentary on that?
It will be roughly similar.
Okay. Appreciate that. And then just on a separate note here, the other -- recently, the Bank of Canada is commenting on potential of fostering of private mortgage-backed security market in Canada. Just wondering what your thoughts on that would be. Have you engaged in any discussions about that, or just what's your general commentary there?
We're continually examining alternative funding channels. You would've seen we have added some other financing facilities that will enable us to smooth out some of the peaks and valleys of the deposit business. And so that was -- I think we would say that's a very encouraging statement from the Governor of the Bank of Canada. And we would work towards doing -- developing that funding channel.
[Operator Instructions] Our next question comes from the line of Graham Ryding from TD Securities.
Maybe I'll start with the portfolio growth. Do you look at your portfolio growth more on an on-balance sheet perspective as opposed to your loans under admin?
Well, right now, Graham, we've been focused because of the level of capital we're carrying, and it is generally more profitable for us to maintain loans on balance sheet. As we continue to grow, we'll certainly look at alternatives and be focused more on an overall loans under administration perspective. So I think, for now, you'll see us focus more on what's on balance sheet. And then over time, we'll be looking towards more an overall LUA perspective. We've made significant progress in rebuilding our business and very positive in how we've been able to work through some of the issues. But yes, over time, I think LUA would be a more important metric for us.
Okay. Appreciate that. And currently, the growth rate of your on-balance sheet is noticeably higher than your loans under admin. Is that because some of these mortgages are coming up for renewal? You're choosing to keep them on balance sheet as opposed to sort of renew them off balance sheet.
Yes.
Okay. On the credit side, is there -- like I realize that your models are sensitive. So there's a lot of -- under IFRS 9, there's lots of puts and takes. Are there any key sort of changes in your models that cause some of the credit provisions to be released on the single family and commercial side of your portfolio?
Yes, because of forward looking, some of the economic scenarios have moderated. So our residential, despite the growth in the portfolio, some of that provision was released. And on the commercial side, it was mostly some recoveries that we had in some Stage 2.
Okay. And the -- I guess my last question would just be on the net interest margin outlook. I realize that there's always going to be -- it's always going to be somewhat fluid. But do you have any visibility on how you think it may evolve in 2019, given where mortgage rates and deposit rates are trending or sitting at today?
Well, we would hope for or plan for a modest improvement in the net interest margin to the extent that deposit rates stay relatively similar to where they are now. As I mentioned earlier, we've been able to maintain a lot of our pricing on the asset side. And we're having some -- especially particularly in the latter part of the year, we're going to have some of our higher-rate deposits roll off. And we're going to replace them with potentially lower-rate deposits.
Okay. And anything to quantify?
So if you're asking -- well, I think we're still saying it'll be -- it's base -- 2 or 3 basis point movements in and around 2% right now.
And we have no further questions in queue. I'll turn the call back to the presenters.
All right. Well, that concludes the conference call for today. Thank you, everybody, for joining us. I know it's a busy reporting week for a lot of our analysts. We look forward to speaking with you again. We have our Annual Meeting on May 15th and our next quarterly conference call in August. If you have any questions, follow-up questions, please contact Investor Relations. The contact information's on the Website. And I wish you all a great day.
Thank you. This concludes today's conference call. You may now disconnect.