Home Capital Group Inc

TSX:HCG

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Home Capital Group first quarter financial results conference call. [Operator Instructions]Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the call over to your speaker today, Jill MacRae, Head of Investor Relations. Please go ahead.

[Jill MacRae, Director of Investor Relations]

Thank you, Amy. 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.With us on the call to answer your questions are Ed Karthaus, EVP of Sales and Marketing; Mike Forshee, EVP of Underwriting and Funding; Benjy Katchen, Chief Digital and Strategy Officer; David Cluff, Chief Risk Officer and Victor DiRisio, Chief Information Officer. All our speakers are at different physical locations for this call, so please understand if our sound quality and response time are not at their usual level.Before we begin, I'd like to caution listeners that this conference may provide management with the opportunity to discuss financial performance and conditions of Home Capital. As such, these comments may contain forward-looking statements 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.Now I'd like to welcome Yousry Bissada.

[Yousry Bissada, President, CEO & Non]

Good morning. Thank you for joining us for our Q1 2020 results conference call. We especially appreciate your participation today because we know everyone has a lot of important issues concerning them right now -- the markets, the economy, their job, the health of their families, friends and themselves. We share your concerns. To everyone listening today we send our best wishes for your collective health and safety.I'll touch on the value of our purpose at Home Capital, our response to COVID-19, review some of the accomplishments during the first quarter and finish with some thoughts on Home's positioning as we emerge from lockdown conditions.There's nothing more important at this time than someone's home. It's our homes that are keeping us safe right now. Home is where we can be safe and look after our families. Home has become our workplace, our classroom, our gym and so much more. More than ever, I am proud of the work we do here to help people own homes.I'm also proud of the work we did to respond to the public health issues confronting us all. Our business continuity plan was up to date and regularly tested, so that when we needed it people hit the ground running to put into action. We gave our people the tools and resources they needed to keep doing the important work of serving our customers from their homes. That included setting up our virtual private network so everyone had access to the data they needed, incorporating industry best practices around privacy and data security.For our employees, our leaders from IT, human resources, compliance and risk management put measures in place to communicate with our people and ensure their safety and wellbeing. Sales, underwriting, deposits and operations quickly put in place processes to allow us to communicate with our customers and partners and complete transactions on their behalf.We put in place a crisis management team that meets daily to monitor and resolve issues arising in our business. We held regular webinars to both reach out to and support our mortgage brokers. We also had regular outreaches to employees through virtual town halls to address their questions and concerns.For our mortgage customers, we set up relief options to help those experiencing temporary financial stress. We increased hours of operations in our contact center and added information on deferral solutions and government programs to our website. This assisted us in providing answers to the thousands of questions and inquiries received from people who wanted to know if we could help them get through this stressful period. We want our stakeholders to know that we mean it when we say we are here to help.We entered this pandemic environment with a strong capital position. We were also well positioned from a liquidity perspective with a high volume of liquid assets and relatively low balances of near-term liabilities. Our sustainable risk culture had set us up for a framework that would enable us to manage conditions of economic stress while providing high levels of service to our customers while continuing to work on our strategic initiatives, ensuring that people can continue to count on us being able to help them with home ownership and building their financial future.Moving to Q1, our reported results show a quarter that started off strong, with good progress on a number of key strategic elements. We started the year with an active housing market, with regular strength in our major business area where we saw meaningful growth in sales transactions. There was also a lot of opportunity to continue growing our commercial segment. As a result, we increased our originations in both residential and commercial loans during the quarter compared to Q1 last year.On the deposit side, Oaken continues to grow both in terms of dollars and percentage of our overall deposit funding. While Oaken stores are currently closed, existing and new customers are still able to transact online or over the phone. As we set out in our strategy, this demonstrates that we are now able to service our customers using their own choice on how to interact with us.We made good progress on Home Trust's IGNITE program. During this quarter we launched our new DASH system. This stands for Deposit Automation System for Home, which is a straight-through processing system for deposit originations. We set up best-in-class reporting to mortgage broker houses on business transacted with Home through our advanced CRM system. We have had excellent feedback from our mortgage partners on this new reporting.In adopting to COVID-19, we set up DART, or Default Administration Robotic Technology. DART is a robotic process automation to assist in efficient processing of large volume of deferral requests that we received. Despite the demands on our people related to the change to a work-from-home model, we made sure that IGNITE is a priority and the people working on it had the technology and resources needed to continue with our efforts.Our technology upgrades from 2019 have given us flexibility to address the operational challenge of dealing with COVID-19. We were able to move our people off premise efficiently and without business disruption because we had migrated a substantial percentage of our banking system and data to the cloud throughout 2019. Similarly, going paperless in our underwriting and funding groups last year enabled a rapid transition to working remotely.We cannot know how long this period of self-isolation will last or forecast with certainty what the ultimate economic effects will be. What we do know is that we're here to help and that we are very well positioned to offer that help. As we emerge from the lockdown conditions, whenever that happens, there will be a lot of new borrowers that have experienced a change in employment or income. Borrowers with varied and complex individual circumstances that require a more personalized approach to underwriting. This is exactly what we do. Not only do we have the expertise that comes from 30-plus years of experience in precisely this type of borrower, but we have availability, liquidity, capital and the strongest balance sheet in our industry.We are not just waiting for conditions to normal. We are engaging with our customers and our partners, employees and stakeholders. We are learning, building and growing. We will continue to find better and more effective ways of meeting the needs of our customers while maintaining our sustainable risk culture.I will now turn the call over to Brad to discuss the quarter in more detail.

[Bradley William Kotush, Executive VP & CFO]

Thanks, Yousry, and good morning, everyone. We appreciate you taking the time to join us.As Yousry mentioned, we've all been working hard on the conditions without precedent in our times related to the COVID-19 global health crisis. The results from Q1 reflect the business conditions that prevailed during most of the quarter. However, changes to our forward-looking economic assumptions as of March 31, largely as a result of COVID-19, impacted our expected credit losses. Any changes in forward-looking information subsequent to March 31, 2020, will be reflected in the measurement of ECL in future quarters, as appropriate. This may add significant volatility to ECL. What is important to understand is that Home Capital is very well positioned with respect to liquidity, capital and risk management. We are confident in our capacity to navigate the current forecasted environment.Let me begin on Slide 7. Overall, our increased revenue was offset by increased expected credit losses from COVID-19. Net income was $27.7 million, or $0.52 per share, in Q1 2020, compared with $27.8 million, or $0.45 per share, in Q1 2019, and $37.2 million, or $0.65, in Q4 2019. Adjusted net income of $29.9 million, or $0.56 per share, in Q1 2020, up 14.3% from $0.49 per share in Q1 2019 and down 22.2% from $0.72 per share in Q4 2019.Book value per share increased by 9% to $29.44 as we reduced our shares outstanding by 15.1% from the first quarter 2019, through our $150 million substantial issuer that completed in January of this year and the normal course issuer bids that were in effect throughout 2019 and the first quarter of 2020.There is a breakdown on Slide 8 of the factors that contributed to the change in earnings per share compared with Q1 2019. Growth in net interest income contributed $0.31 to the improvement. A reduction in shares outstanding added another $0.06. The increased revenue was almost entirely offset by higher provisions for credit losses this quarter compared with 2019, which reduced earnings by $0.33 per share.Slide 9 shows the adjustments to reported net income for the quarter. $2.2 million relate to the IGNITE program, including $1.7 million due to a change in the estimated life of some of our legacy assets. Our IGNITE program remains on track for its targeted completion date.Our originations for the quarter are shown on Slide 10. Originations increased by 33% over Q1 of 2019. In the residential housing market the months of January and February were normal, with higher volumes expected in March with the advent of a strong spring selling season and expected change in the benchmark rate used in the mortgage stress test.Towards the end of the quarter sales activity in our major markets began to slow. Typically changes in transaction volume will take some time to flow through to changes in funding volumes, so it is logical to expect originations in the second quarter to decline from past levels. Commercial originations grew by over 100% from 2019, with a lot of that growth coming from the insured multi-residential market.Our total loan portfolio, as shown on Slide 11, grew by 3.8% year-over-year.Our net interest margin, as shown on Slide 12, was 2.38% for the quarter compared to 2.31% last quarter and 2.01% in the first quarter of 2019. The increase in margin is largely attributable to lower costs on our funding liabilities, while the yield on our asset portfolio was slightly higher.With respect to our deposit funding, deposits from our Oaken channel, as shown on Slide 13, grew by 14% year-over-year, to reach nearly $3.5 billion in the quarter or 25% of our total deposits. Once again, it is an important feature of our liquidity risk management that 85% of our Oaken deposits and 95% of all our deposits are in the form of term funding rather than demand deposits. We saw a slight net migration of demand deposits to term deposits during the quarter and that trend has continued into the second quarter.Slide 14 discusses our other funding strategies. Our initial RMBS has performed well in the marketplace and the credit maturity and prepayment maturity profile has performed in line with expectations. While market conditions have forced us to delay a second offering this quarter, we still plan to be a serial issuer of RMBS and will return to this market when conditions are favorable.Subsequent to quarter end, Home took a 30-day draw of $100 million from the Bank of Canada's Standing Term Liquidity Facility in order to test our ability to utilize this facility.Slide 15 highlights the characteristics of our loan book. Uninsured single-family mortgages originated in Q1 had a weighted average loan to value of 70.3%. The average loan to value across the portfolio of uninsured single-family mortgages was 61.3%, both in line with levels reported at the end of 2019.The FICO score, formerly Beacon, of our Classic single-family residential mortgage portfolio was 682 on originations during the quarter and 705 across the portfolio.Turning to a discussion of credit provisions beginning on Slide 16, provisions increased to an annualized rate of 0.7% this quarter from an average of 0.12% in the last 4 quarters. We considered it necessary to take a substantial increase in provisions to reflect the change in macroeconomic assumptions resulting from COVID-19. The lower line on the graph shows net write-offs, which remain in line with recent experience at 3 basis points of gross loans.As a result of the higher credit provisions this quarter, we ended with a $91.3 million allowance for credit losses compared with $62.4 million at the end of 2019.Slide 17 shows the allocation of the allowance among portfolio segments. The largest increases in allowance relate to the commercial mortgage and other consumer retail portfolios.As we turn to Slide 18 you will see that almost 80% of the increase in allowance is allocated to loans in Stage 1 or Stage 2. Loans in these stages are not currently in default.Slide 19 shows our Stage 3 loans. Nonperforming loans are down from year-end levels to 36 basis points of total loans. Looking at the single-family residential portfolio, net nonperforming loans are 31 basis points of gross loans, also below the year-end 2019 level. Coverage of gross nonperforming loans has grown to 34.3% from 25.2% at the end of 2019.Slide 20 shows that we are managing liquidity by moving a sizeable portfolio of liquid assets on our balance sheet. Further, we continue to manage our liquidity portfolios such that near-term loan maturities are in excess of maturing deposit liabilities.Our capital and leverage metrics are depicted on Slide 21. Our leverage ratio is 7.03% compared to the regulatory minimum level of 3%. Our common equity Tier 1 capital stands at 17.73% at the end of the quarter.During Q1 we completed our substantial issuer bid, repurchasing 4.4 million shares. We began a program of common share buybacks under our normal course issuer bid and bought back 655,000 shares. We also purchased 518,000 shares as Treasury shares for future share-based compensation awards. In mid-March, we suspended purchases under the NCIB.The board and management regularly review all options for productive use of our capital. At this point, we consider it prudent to preserve our capital position until we have greater clarity on the economic conditions ahead.In order to support our mortgage customers in dealing with the challenges imposed by COVID-19, at the end of March we began a process of allowing deferrals of principal and interest payments where criteria were met. As of April 30, 2020, we provided deferrals of $28.4 million of principal and interest payments, representing approximately $3.9 million of outstanding mortgage balances. By providing these deferrals we are assisting our customers through these difficult times until improvements in the economy allow them to resume payments. We do not expect these deferrals to have a significant impact on our liquidity and we are treating these loans in accordance with regulatory guidance.I will now turn the call back to Yousry for concluding remarks.

[Yousry Bissada, President, CEO & Non]

Thank you, Brad.Next week, on May 13, we will be hosting our Annual General Meeting. For the first time, the meeting will be virtual. We made this decision to comply with public health directives and to protect the health of our employees, shareholders and the community at large. Only shareholders will be allowed to vote at the meeting, but we will be taking questions from investors, analysts and other interested parties following the formal business of the meeting. I hope you will log in to view the virtual AGM.I'll now ask the operator to poll for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Geoff Kwan with RBC Capital.

[Geoffrey Kwan, Analyst]

My first question was on the PCL provision. So it's based on economic assumptions as of March 31, as mentioned. And I know you use a third-party provider to determine those economic scenarios and you probability-weight those. But in your opinion, would those scenario assumptions be presumably, I guess, unchanged or worse if they were to be updated today?

[Bradley William Kotush, Executive VP & CFO]

Geoff, it's Brad. We did just receive some updated assumptions for April. They're largely unchanged. And we -- there were some changes in the overall assumptions related to unemployment levels and housing prices that applied to our largest portfolio and we did use a severe recession scenario. There aren't substantial changes there in terms of the forward-looking information.We do see where it's less -- the models we're applying, we do I guess anecdotally expect some slightly worse conditions, more focused on our consumer retail portfolio as opposed to our larger portfolios. And you would have seen in the last quarter that we did take substantial provisions on that consumer retail portfolio.

[Geoffrey Kwan, Analyst]

Okay. And maybe just on that, most of the PCL was coming out of, call it, the consumer loan book, which is pretty small for you on a relative basis, and then to a lesser extent coming from the commercial book. Can you describe what were the key drivers and the attributes that were driving the PCLs in each of those lines of businesses?

[Bradley William Kotush, Executive VP & CFO]

Similar to some of the provisions we took in prior periods, we're looking at the overall financial strength of some of our counterparties who in turn have their own loan books. So it's really a reflection of what's happening in those markets and an expectation of severe recession.

[Geoffrey Kwan, Analyst]

Okay, so it's a counterparty risk assessment, as opposed to some other...

[Bradley William Kotush, Executive VP & CFO]

Yes. And we also -- sorry, Geoff -- we also do look at the performance of the underlying portfolio.

[Geoffrey Kwan, Analyst]

Okay. And just my last question was on the mortgages that were deferred. Would it be accurate that all, or almost all, of those would have not had some sort of major provision for credit loss attached to them? And so to the extent that when these deferral periods end and that the credit risk is higher, that the provision would be recorded at that time and therefore not in the Q1?

[Bradley William Kotush, Executive VP & CFO]

The short answer is no, Geoff. The regulatory guidance that was provided is that a request for deferral is not indicative of delinquency or credit issues. We're currently conducting stress tests on the portfolio, but the average LTV, geographic distribution and FICO scores are all -- they're close to the attributes of the overall portfolio. The splits between -- and roughly 80% of the number of residential loans deferred were Classic and in terms of versus our insured portfolio and in terms of value roughly 86% were Classic versus 14% Accelerator of those deferrals.So we don't -- we do review that portfolio and to the extent that we thought there was credit deterioration, they would be part of our overall provisioning. But the fact that there's a deferral is not indicative. It doesn't automatically make them delinquent or change their stage assessment.

[Geoffrey Kwan, Analyst]

Okay. So that's what it would be. If I were a borrower that requested the deferral, I would not have been included in the Q1 '20 provision for credit loss. But in 6 months, if my credit risk is higher, it is at that point, so in 6 months, that you'll book that provision. Correct?

[Bradley William Kotush, Executive VP & CFO]

There is potential for that. Yes, Geoff.

[Operator]

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

[Unknown]

Appreciate the incremental disclosure around the deferred loan balances. Wondering if you could give us a sense of what the approximate split would be in the mortgages that have been granted payment deferrals between insured and uninsured loan balances. Would that roughly be the same proportion as the mix of the broader portfolio?

[Bradley William Kotush, Executive VP & CFO]

Well, just I'll tell you now, in terms of value it's 86% uninsured in terms of value and in terms of the number of loans it's 78% uninsured, in reference to the residential.

[Unknown]

Okay. That's helpful. And then with -- I was wondering if you could give us some color on what criteria would have qualified borrowers for loan deferrals in the quarter, like presumably temporary job loss as a direct consequence of COVID-19? But I imagine for the self-employed there's more discretion involved. I was wondering if you could just shed some light on that.

[Bradley William Kotush, Executive VP & CFO]

Well, I think initially we had -- and I think Yousry -- well, I know Yousry alluded to it earlier. We had a large influx of requests. And our bias was to grant the deferrals now and we granted them for a 2-month period. We're now approaching a round of where people who were granted initial deferrals are maybe asking for further deferrals. And we're tightening up the criteria, looking for more enhanced rationale for why they haven't been able to make payments as well, where there's any number of government programs that have been initiated to try and assist people through this very different time economically. Our overall forecasts assume that they'll be helpful, but there will still be issues.So we have our -- what we've done is we're moving underwriting staff to assist our collections group and assessing these on an individual basis. And I think it's a matter of judgment for experienced collection and underwriters as to why we would be granting further deferrals after initially having more, I think, permissive requirements in the initial phase of COVID-19 requests for deferrals.

[Operator]

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

[Jaeme Gloyn, Analyst]

First question, still on the payment deferral breakdown and just getting a little bit more color there. Can you give us a breakdown of the maturity time line of the mortgages that have been approved for payment deferral, what percentage of those, or maybe a dollar amount, that would have matured in the next 3 months, for example?

[Bradley William Kotush, Executive VP & CFO]

I don't have that right now, but we can provide it.

[Jaeme Gloyn, Analyst]

Great. And if I understand the commentary correctly, I just want to clarify this point. In the Classic uninsured mortgage portfolio as of April the $3.1 billion that's been -- or, sorry, $3.6 billion that's been deferred, 86% of that single-family mortgage is Classic. And so that would translate to about 28% of Classic mortgages are under some form of payment deferral in this program. Does that sound about right to you?

[Bradley William Kotush, Executive VP & CFO]

I haven't particularly done that math, Jaeme, but I'm pretty sure you've done it correctly and that's -- yes.

[Jaeme Gloyn, Analyst]

Okay.

[Yousry Bissada, President, CEO & Non]

Jaeme, it's Yousry. We can confirm that. Intuitively I think 28% is too high, but we can confirm that math.

[Jaeme Gloyn, Analyst]

I'd appreciate that. Next line of question, just getting away from the payment deferrals into commercial mortgages. I noticed a pretty significant uptick in Stage 2 commercial mortgages. Can you just talk about what you're seeing in those loans specifically and what drove the movement from Stage 1 to Stage 2?

[Bradley William Kotush, Executive VP & CFO]

It's related to our probability-of-default modeling, Jaeme. It's all model-driven.

[Jaeme Gloyn, Analyst]

Okay. And what factors in that model would have driven the significant increase quarter-over-quarter, specifically?

[Bradley William Kotush, Executive VP & CFO]

Many of these assumptions worsened.

[Jaeme Gloyn, Analyst]

Okay. So that's macroeconomic driven, then, I take it?

[Bradley William Kotush, Executive VP & CFO]

Yes.

[Jaeme Gloyn, Analyst]

Okay. And I guess what -- the follow-on to that then is what gives you enough comfort that the provision related to those loans moving from Stage 1 to Stage 2 also didn't increase by, let's say, a similar amount? Or was the increase or provisions related to those mortgages -- like, how did you arrive at that number that was provided [for in the] Q1?

[Bradley William Kotush, Executive VP & CFO]

We do run our models in terms of taking into account the economic forecasts. Our probability of default, the loss from a default which then generates your expected credit loss. We also take a look and where appropriate we would use some management judgment in an overlay. And particularly when we look at some of the portfolios where we think there may be additional risk, we can use some management judgment, but it's primarily model-driven.

[Jaeme Gloyn, Analyst]

Okay. And as we see this increase in, let's say, risk in commercial mortgages and some news or articles that are suggesting that the larger lenders are stepping back from the commercial landscape, how are you thinking about commercial mortgage growth over the next couple quarters, given that framework?

[Bradley William Kotush, Executive VP & CFO]

It's...

[Yousry Bissada, President, CEO & Non]

It's Yousry. I -- I'm sorry, Brad. Go ahead.

[Bradley William Kotush, Executive VP & CFO]

No. Go ahead, Yousry.

[Yousry Bissada, President, CEO & Non]

Yousry here, Jaeme. So yes, not just the large lenders; others have backed off as liquidity became more scarce, which provided an opportunity for us on some quality commercial business. But we would look at a commercial loan taking into account the latest economic data. So the underwriting would incorporate what is expected for the housing information, employment information. So I would say we've tightened. But because of liquidity, we were -- of other lenders -- we were able to grow our book this quarter. And I suspect everyone's going to tighten over the next [while].

[Operator]

Your next question comes from the line of Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Just wondering could you maybe give us some bit of color or an update on what sort of volume or activity you've seen in April, like, what sort of pullback are you seeing in terms of activity?

[Yousry Bissada, President, CEO & Non]

It's Yousry, Graham. It's been surprisingly more active than we thought. What has changed -- I think it's quite public -- is the amount of sales in major cities have gone considerably down. Listings are down, I believe, 65%. In Toronto and Vancouver, it's something like 40%. So home sales have gone down. However, refinancings, which means people renewing from one institution to another or our own portfolio, borrowing more money, has gone up, almost offsetting what we would have expected in sales. So it's always difficult to say we're ahead or behind normal because there is never a normal. But we have been getting more volume than we would have imagined. We thought it would taper off a lot more, but it's still been pretty consistent, more so in refinance than home [ resales ].

[Graham Ryding, Research Analyst of Financial Services]

And on the refinance side, do you underwrite that differently than you would an origination? Like, do you view refinancing as slightly higher credit risk?

[Yousry Bissada, President, CEO & Non]

We use the same underwriting standard, Graham. It is a new deal to us, whether it's from our own portfolio and somebody borrowing more money or if it's a mortgage in an existing institution that's applied to us to transfer to us. We underwrite in the exact same way as a new loan.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then, the FICO score, one of the charts you showed [ just ] showed the FICO scores of originations, I think it might have been on the Classic side, relative to the FICO score, the average FICO score of the portfolio. So it looks like the originations FICO scores are slightly lower. Is that you making a deliberate effort to move down the credit spectrum somewhat in terms of sort of a risk/reward tradeoff? Or how should we think about that?

[Yousry Bissada, President, CEO & Non]

So the quarter can be split into 2 parts. The first quarter there was -- everything was normal and then the world went to COVID-19. But normally -- in the normal part of our world of most of the quarter we very much like lower FICO, lower Beacon score. We think we understand that market very well. Quite often bruised credit, there's a reason for it. And we look at that and it's a part of -- it's one of the pillars of our mortgages. We know how to price it right and we know how to borrow right. And we take ultimate protection in LTV. And of course we have to satisfy ourselves that they can pay that mortgagor.So we do like lower because of better margins. And we're targeting that. But again, in the back half, we underwrote with more conservatism. We lowered LTVs in major urban centers. We looked at income a little closer. If somebody was laid off and getting government supplement, we took that into account. But we have to be satisfied why they were laid off, the probability of a job is going to be high or low or medium. And you would know only that by having discussions with our mortgage broker as well as with the consumer. So it just made us more prudent on seeing that the income will continue, not just what they earned in the past.

[Graham Ryding, Research Analyst of Financial Services]

Fair enough. And one last question if I could, just for Brad. I guess on the net interest margin, it looks like it's coming from both lower funding cost and higher mortgage rates, but the heavy lifting of the NIM expansion is coming from an expanding Classic mortgage rate. Is that a fair assessment?And then just maybe could you provide us with an outlook should we continue to expect NIM to expand? Or what are your thoughts?

[Bradley William Kotush, Executive VP & CFO]

It's difficult to provide any kind of forecasting in the current environment. But what I can tell you right now is that we have maintained or slightly increased our levels of liquidity and our ability with the decline in interest rates to earn -- where we've seen a decline in the average rate that we're earning on our Treasury portfolio. And everything else is really just our ability to maintain the spread.So we saw a peak in some of the market GIC rates at the end of March. That started to decline through April and continues to be a relatively lower level [some] till the end of March. So we don't know yet whether we'll offset the decline on the Treasury portfolio with our ability to make maintain spread. I think it's safe to say that we don't think that NIM will increase above the 2.38% that we achieved in Q1. It's more likely going to decline.

[Operator]

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

[Geoffrey Kwan, Analyst]

Just wanted to look at the operating expenses. So if we exclude the IGNITE-related expenses, would what you had in Q1 '20 look reasonable as the run rate? And how does the deteriorating, I guess, economic environment impact how you're thinking about OpEx, relative to how you would have thought about it when you reported Q4 results? So for example, if you think originations in loan growth are going to be slower than what you thought a few months ago, or a couple of months ago, would expense growth also be lower?

[Bradley William Kotush, Executive VP & CFO]

I think if you look at our noninterest expenses, they're down. We have -- most of our expenses have not increased, with the exception of we did budget some additional advertising for Oaken. And in addition, we had been planning with larger growth to add to our headcount. And we may add some critical hires, but we're not going to I think significantly increase our headcount. We're far more likely to be, as I spoke earlier, to redeploy some of our trained individuals to work in other areas of the company where we expect to have more activity. And we've seen declines in some of the activity-based expenses in relation to our credit card portfolio as well as, for obvious reasons, there's less business travel and other expenses in the current environment.So I'll call it, the $60 million run rate in March may increase slightly but it won't be at the levels that you saw in Q4, based on our current estimates.

[Geoffrey Kwan, Analyst]

Okay. And you mentioned earlier the Classic mortgages are getting a 2-month deferral. Is that the same -- is it 2 months for Accelerator? Or are they getting kind of 6 months, which is kind of what other lenders seem to be doing for prime mortgages?

[Bradley William Kotush, Executive VP & CFO]

We've based it on a 2-month period for all of the residential portfolio.

[Geoffrey Kwan, Analyst]

Got it. Okay. And just my last question was just in light of COVID-19, would it stand to reason that the pie of the nonprime mortgage universe in Canada is getting bigger, whether or not it's from bruised credit or whatnot. And is that a part of the market that you have some degree of appetite to be going after in the current economic environment? Or is that just something where it's not necessarily as attractive to you right now?

[Yousry Bissada, President, CEO & Non]

Geoff, assuming employment is healthy, that's a very attractive market for us. Bruised credit with employment we understand very well and we know how to look at a deal and say the probability is very high of a full payment. If the bruised credit is attached with high unemployment, that's a different story. That doesn't appeal to us. But as people get through this -- and mortgage deferrals, as I'm sure you know, it's not affecting people's credit. It is specifically not affecting. But there may be other payments that people aren't making that may affect their credit. And then if they are employed after that, then that is where Home is an expert, in that field.

[Operator]

The next question comes from the line of Cihan Tuncay.

[Cihan Tuncay, Analyst]

Sorry. My questions have been answered already. Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, Analyst]

I just want to dig into some underwriting changes that you may have taken recently as a result of the current environment. Can you talk to us specifically about some of the items that you have tightened around -- LTVs, FICO scores, et cetera? And have you applied, let's say, a higher risk rating or taken a more conservative approach to specific industries that may be more impacted in the current environment?

[Yousry Bissada, President, CEO & Non]

So a number of things in underwriting. As I mentioned on another part of an answer, typically you look at what people made in the past and the probability of them continuing to make that in the future. Obviously, in this environment we do more work on that. We will take into account the government subsidies. We have also restricted some of the LTVs, even within certain segments. We've lowered how much LTV we will lend.In terms of the types of jobs and so on, clearly the ones that are dependent on high people-gathering we're looking at closer, restaurants or a business where concerts -- whatever it may be, that has high people collection. And this new normal, as it starts coming back, we still believe there are going to be restrictions on social distancing. So we will look at that a little differently, whether it's in the commercial side or the single-family residential side. So we also are restricting LTVs on rentals. We are also in noncore restricting LTVs even further, as well as looking at Beacon scores.So we've tightened to ensure a higher quality of business. But the framework of where we will lend, to whom we will lend, is the same. It is the diligence behind all of these and restrictions on LTV. Did that help?

[Jaeme Gloyn, Analyst]

Yes. As I think about the macroeconomic forecasts that are implied and the 12-month outlook, I guess what would be the weighting you have towards the base case and upside case as disclosed in Note 5 relative to downside? And if you could give us a little bit of sort of like a range or a high water mark as to where unemployment rates are projected to go in those forecasts over the next 12 months at a peak level.

[Bradley William Kotush, Executive VP & CFO]

Jaeme, it's Brad. The weightings and the models are a matter of judgment that we're not disclosing. We don't -- I know you're asking the question, but the way our models are driven we don't think that that weighting is going to provide all that much useful information. So we're not disclosing it. And the last -- can you just remind me of the last part of your question?

[Jaeme Gloyn, Analyst]

Yes. It was just about unemployment...

[Bradley William Kotush, Executive VP & CFO]

Oh, unemployment rates.

[Jaeme Gloyn, Analyst]

Forecasts within those projections. Where does it peak out and how long does that persist?

[Bradley William Kotush, Executive VP & CFO]

Well, I can tell you the unemployment rates are assumed to peak in the second quarter. And we don't reach pre-pandemic levels until [2020]. The models expect the rise in unemployment outweigh stimulus provided. And our model results in a decline in housing prices over the next 12 months. This is all from a third party. And so each of the scenarios show a significant spike in unemployment, GDP declines with varying degrees of recovery, and that the pre-COVID-19 recovery doesn't occur until 2022. And we have...

[Jaeme Gloyn, Analyst]

Are you able to share where -- sorry; go ahead.

[Bradley William Kotush, Executive VP & CFO]

And so just we've got an average unemployment rate of 11.6% on the downside and a housing price index annual decline of 15.6% in that scenario. So in between there are peaks, but I don't have that for you now. And we'll probably just be sticking with these annual averages in terms of our disclosure.

[Operator]

The next question comes from the line of Graham Ryding of TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Two follow-ups, if I could. Just given the whole backdrop is so fluid, would you be able to provide an update on what you've seen in terms of arrears and how mortgages are performing in Q2 to date? Have you seen any noticeable deterioration either in your residential or commercial book in Q2 to date?

[Bradley William Kotush, Executive VP & CFO]

We did just finish the month of April. We have not seen a significant increase in requests for new deferrals. And suggesting to us that there hasn't been a significant increase in delinquencies so far.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Helpful. And then just to be clear, the provisioning that you did do in Q1, that did not reflect any of the deferral volumes or requests that you've seen post-Q1 '20. Is that correct?

[Bradley William Kotush, Executive VP & CFO]

The forward-looking information was all as of March 31 and the balances are as of March 31. I think we do assess the credit quality of the entire portfolio at that time and, as I said earlier, the fact that anyone has asked for a deferral in these circumstances is not an automatic indicator of credit deterioration or to be treated as a delinquency.

[Graham Ryding, Research Analyst of Financial Services]

That's fair. But is it also fair to say that there's some potential that those deferrals will migrate into default?

[Bradley William Kotush, Executive VP & CFO]

Yes. There is a possibility. And similar to our other portfolio, it's all mitigated by the underwriting LTV and the credit of the underlying individual.

[Operator]

This concludes our question-and-answer session. I would now turn the call back over to Yousry Bissada for closing remarks.

[Yousry Bissada, President, CEO & Non]

Well, thank you for all your questions and for your interest in Home Capital Group. We look forward to speaking with you again soon.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.