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Good day, and thank you for standing by. 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 hand the conference over to your speaker today, Jill MacRae, with Investor Relations. Thank you. Please go ahead.
Thank you, Chelsea. Good morning, everyone, and thank you for joining us today. Our agenda for today's investor presentation is as follows.We'll begin the call with remarks from Yousry Bissada, Home's President and CEO. Our CFO, Brad Kotush, will then review our financial performance, which will be followed by a question-and-answer period for all participants. We have members of our senior management team with us on the call to help answer your questions.On behalf of those speaking today, I note that this call may contain forward-looking statements and that actual results could differ materially from forecasts, projections or conclusions in these statements.Please refer to our advisory and forward-looking statements on Slide 2 of the presentation. I would also remind listeners that Home uses non-GAAP financial measures to arrive at adjusted results, and that management will be referring to both reported and adjusted results in their remarks.And now, I'd like to turn the call over to Yousry Bissada.
Good morning, and thank you for joining us for our first quarter conference call. Today, I'll discuss the results for the quarter and some of our strategic objectives for the remainder of 2021 relating to underwriting, funding, update on our IGNITE Program and capital optimization.We had a good start to the year. We continue to see the effects of strong housing demand in our major markets. Sales figures and transaction prices are significantly higher than in 2020. We expect this trend to continue in the near term as early indications of a healthy spring housing market will be compared to April and May of 2020 when the economy first went into lockdown.At that time, there was early evidence of uncertainty around the progress of COVID-19 and the direction of the economy. Home responded with a number of strategic decisions to prepare the company for this uncertain future.The first decision was to move to a work-from-home model. This was accomplished quickly and seamlessly with our primary concerns being for employee health, health and safety and for customer service and data security.The second was a shift to what we call, pandemic underwriting conditions. This meant a change in our risk appetite for both residential and commercial loans.On the residential side, we reduced our maximum loan-to-value criteria in certain geographic areas. In other geographic areas, we stopped underwriting altogether. We used extra due diligence in the income verification efforts for our small business customers that were working in a location-based, people-gathering industries.In our commercial underwriting, we pulled back significantly from properties in areas like hotel, restaurant and retail. We did this consistent with our sustainable risk culture and to ensure Home's resilience in the face of the pandemic.The third decision was to build our reserves for future credit losses. This led to significant additions to our loan loss allowances in the first and second quarter of last year.Now, let me update you on where we stand with each of these decisions today and our outlook for the rest of 2021. First, with the exception of a few essential workers, we're still working from home. We have learned a lot about our employees, their capabilities and concerns and how they are all balancing work with family obligations.In spite of this, our employee organization health surveys continue to go up. Our team wants to know when we will be back in the office and whether we will require everyone to come back full time.Right now, we don't have all the answers to these important questions, except to say that we will follow public health guidelines and also consider our experiences from the past year, input from our business leaders and ongoing support for mental health. We believe that some form of new hybrid model of a mix of work-from-home and the office will be the way back and that it will likely take some time to settle into the new normal.Second, our pandemic underwriting guidelines are still in place, but are currently under review. We will determine as to when to relax these standards in stages to get back to our normal guidelines over time, commencing this year.The economy has posted an impressive recovery in the last 12 months. While there's still uncertainty about the presence of the variants of concern, we have reason to be optimistic about the progress of vaccinations and the effectiveness of public health measures. In addition, we continue to manage the fast rise of home values with prudent guidelines around maximum loan-to-value.Even under pandemic underwriting conditions, almost still the leader in alternative mortgage lending originations due to our commitment to excellent service and the engagement of our broker partners. We believe we have a compelling opportunity for even more growth in this market through the rest of 2021.Looking beyond this year, there is a growing pool of consumer saving and higher employment and immigration targets for the next 3 years are the highest in history. We believe this will lead to a healthy market in mortgages and specifically, strong growth in the Alt-A segment of mortgages.Finally, we're reversing some of the earlier provisions we took against future credit losses as the expectations arising from our third-party economic models continue to improve. Brad will discuss this in more detail in his presentation.I will point out, we continue to see our loan book as well secured and well provisioned. We continue to be conservative in our provisioning. Our loan loss allowance after this recovery still offers attrition of $19.4 million compared to what it would be under the model-driven base case scenario.Looking at the results of this quarter, we have a lot to be pleased about. Home reported net earnings of $64.5 million or $1.24 per share compared with $27.7 million last year. This came as our single-family loan book grew by 27% compared with last year, even under restrictive pandemic underwriting conditions.Our focus on excellent service and relationship with our brokers is one of our key strategic priorities, and we expect the easing of our pandemic underwriting restrictions will contribute to opportunities for growth for the rest of 2021.Another of our strategic priorities is diversifying our funding sources. This quarter, deposits through our Oaken Financial business surpassed $4 billion or 29.5% of our total deposits. Even with the temporary closure of our Toronto store and limiting our other locations to visit by appointment, we continue to draw customers with our value proposition of attractive rates, flexible range of saving options and top-level customer service.Later this year, we'll be delivering an enhanced digital experience to our open depositors with the launch of our new apps for iOS and Android. This will both improve the Oaken offering for existing customers and widen the appeal of Oaken platform to younger customers. This is one example of how our IGNITE Program is continuing to enhance our service offerings. We look forward to sharing more details with you in future calls.In addition, later this quarter, we expect we will be coming to market with the next offering of our residential mortgage-backed securities. Investors were pleased with the market performance and credit performance of our in inaugural RMBS offering. And we believe conditions are favorable to continue with our strategy while being a programmatic issuer in this market.We also sold mortgages under our whole loan sales program initiated in Q4 of 2020. We expect this program to develop throughout 2021, providing with another attractive option for funding diversification.We continue to move forward on our IGNITE project. The replatforming of our banking system earlier in the year is stabilizing well and no disruption to our customers, brokers and financial reporting functions. This involves a long process of data migration and training for hundreds of employees.While this was happening, other IGNITE projects were able to go live concurrently, including an update of our document storage platform, the rollout of more robotic process automation bots and the development of our data analytics capability. Another operational benefit from our work on IGNITE is a change to our way of doing things.For every IGNITE project that finishes, we leave behind an agile development team that continues to operate. This process ensures we will go on sustaining innovation once the heavy lifting is over.Another of Home priorities is optimizing our capital base. While we delivered a return on equity in the mid-teens for the third quarter in a row, we recognize that we would do even better on this measure with a more efficient capital level.As you know, in March of 2020, OSFI announced its expectation that all federally regulated financial institutions, health dividend increases and share buybacks. The company continues to be focused on its capital base and for so long as OSFI's expectations remain unchanged, we expect our capital levels to remain higher than we would otherwise target.Once OSFI modifies or renews its expectations with respect to dividends and share buybacks, we intend to consider appropriate mechanisms to optimize our capital levels, including share repurchases and dividends.Balancing business opportunities against returns of capital and subject to prevailing market conditions, we intend to sustainably manage towards a target CET1 range of 14% to 15%.Finally, one of our key strategic objectives is to attract, develop and retain top talent. We are focused on building a culture that prioritizes inclusion and engagement, in line with our Home values. Our efforts were recognized this year when Home was named a Great Place to Work and a best mortgage employer in 2021.Our cultures and values are critically important to the success of our operations and the achievement of our strategic objectives. It is one of the material issues we identified in our inaugural ESG report, and we published earlier this year -- which we published earlier this year.I encourage you to read the report, which is available on the governance section of our website. This represents the first step in our sustainability reporting journey, and we look forward to feedback from the investment community as we develop and expand our communication in this area.I'll now turn the call over to Brad, who will provide greater detail on our financial results.
Brad you might be on mute.
So thank you. [ Apologize ] for the delay. Thank you, Yousry, and good morning, everyone. My presentation begins on Slide 6 with highlights of our first quarter financial performance.We have a lot to be pleased about in our Q1 2021 results. We reported first quarter net income of $64.5 million. This represents growth of 133% in net income over the first quarter of 2020. Adjusted net income was $65.7 million or 120% above the comparable quarter. On a per-share basis, net income was $1.24 compared with $0.52 in the first quarter of 2020, up 138%.Our book value grew by 15% year-over-year to $33.85 per share, and our annualized return on equity was 15.2% for the quarter or 15.5% on an adjusted basis. I note that we generated that return on equity while holding a significant amount of excess capital, ending the quarter with just over 21% CET1. If our CET1 level had been at 15% throughout the quarter, our pro forma annualized return on equity would have been over 20%.Slide 7 shows the factors contributing to the year-over-year quarterly earnings per share growth. The largest contribution came from the relative change in credit provisions. We took substantial credit provisions in the first quarter of 2020 at the onset of the pandemic and taking into account updated forward-looking information and our credit performance, release provisions in the first quarter of 2021. I will discuss credit provisions in more detail later in the call.The EPS change from taking provisions last year to releasing them this year accounted for $0.58 of the year-over-year quarterly growth in EPS. Our total revenue grew by nearly 10% during the quarter, while noninterest expenses grew by 8%, producing positive operating leverage and year-over-year quarterly growth of over 11% in our pretax pre-provision income.$0.16 of our earnings growth was due to an improvement in our net interest income as our net interest margin expanded from 2.38% in the first quarter of last year to 2.61% this year. Our net interest margin continues to benefit from a reduction in our funding costs from a decline in interest rates.We expect our net interest margin to stay in this range for the balance of 2021, based on our current expectations of the interest rate environment. A reduction in the number of average shares outstanding resulted in a modest benefit of $0.03. Offsetting these increases was a drag of $0.06 from higher noninterest expenses.Slide 8 shows our originations for this quarter compared with last year. Total single-family originations grew by 27%, led by our Accelerator business. This is particularly gratifying because, as Yousry discussed earlier, pandemic underwriting guidelines in our Classic mortgages were instituted in the middle of March last year and remain in place for the entire first quarter of 2021.The fact that we grew our Classic originations while operating under a more restrictive risk appetite, gives us confidence in the opportunity for growth in the rest of this year as those restrictions are relaxed.In our commercial business, we had a strong quarter last year when a number of lenders exited the market, giving us a good pipeline of high-quality projects. This year, our volume of insured residential loans declined primarily due to a change in our allocation of CMHC insured volumes.Our nonresidential commercial originations declined due to a change in risk appetite that was in effect for all of Q1 2021 compared to only the last 2 weeks of Q1 2020. We expect that the easing of pandemic underwriting restrictions will drive growth in this business for the balance of the year.Turning to our funding. Slide 9 shows that deposits through our Oaken direct-to-consumer grew by 70% year-over-year. Oaken continues to attract customers with its attractive rates, flexible solutions and customer-centric service and makes up 30% of our total deposit funding compared to 25% at the end of Q1 last year.As Yousry mentioned, we are planning to launch another RMBS issue in the second quarter, following on our inaugural 2019 offering. It is our intention to be a programmatic issuer in this channel, subject to market conditions.Moving on to a discussion of our credit provisioning and write-offs this quarter, as shown on Slide 10. We booked a $12.1 million recovery this quarter compared with a provision of $30.2 million in Q1 of 2020.Write-offs as a percentage of gross loans were 1 basis point. This is consistent with our historical experience and is evidence of our prudent underwriting practices, the high credit quality of our borrowers, a level of security provided by the assets backing our loans, the overall motivation of our borrowers to pay their mortgages and protect the value of their most important asset.Last year, our provisioning was affected by a sharp downward revision in the inputs to our forward-looking economic models of employment levels and housing prices as well as a management overlay to model-driven results. As a forward-looking information in those models have changed, we have adjusted the level of credit provisions accordingly.Slide 11 shows the distribution of credit provisions by line of business. Of the $12 million released this quarter, nearly $11 million is attributable to our commercial segment. This includes allowance that was attributable to loans that were later repaid.Slide 12 shows the economic scenarios underlying this quarter's credit provision as well as a total loan loss allowance. The base case assumption for future housing prices has changed from deterioration to slight appreciation and the outlook for employment has improved in all scenarios.The total probability-weighted allowance for loan losses stood at $58.3 million at the end of the quarter. Our use of multiple scenarios adds $19.4 million to what the allowance would be using just the base case.The segmentation of our allowance for credit losses by line of business and by loan stage as shown on Slide 13. The chart on the right shows that 78% of the allowance for credit losses is attributable to loans classified as either Stage 1 or Stage 2, which are considered performing under IFRS. We consider our loan portfolio to be well provisioned.On Slide 14, you can see that net nonperforming loans are down to 38 basis points of gross loans at the end of Q1 compared with 57 basis points at the end of Q4 2020. On an absolute basis, nonperforming loans are at their lowest level since the beginning of the pandemic, and allowance for credit losses as expressed as a percentage has increased from last quarter to 16.5% of total Stage 3 loans.Turning to Slide 15 for Home's liquidity and capital metrics. We are holding nearly $1.3 billion of high-quality liquid assets at the end of the quarter. Based on an assessment of our future liquidity needs and liquidity risk management framework, we have determined that there is no longer a requirement to maintain a standby credit facility, and we have arranged to terminate this facility prior to its scheduled expiry at the end of June 2021.Our CET 1 capital ratio at 21.01% increased by 119 basis points in the first quarter from internally generated capital. It is well above the level needed to fund organic growth. While we are currently restricted from returning capital out of our regulatory entities due to industry-wide regulatory expectations, we were able to repurchase shares as part of our normal course issuer bid using funds at the holding company level.In the first quarter, we bought back 1,105,500 shares at an average price of $31.08 per share, representing a total outlay of $34.4 million. This price represents a discount of 8% to the book value at the end of Q1.We recognize that we are holding significant levels of capital in excess of our current business requirements and growth plans. Our first priority for utilizing that capital is to invest for growth in our core businesses, and Yousry has described a number of opportunities for us to do that for the balance of 2021.Home has created value for shareholders through strategic returns of capital in the form of normal course issuer bids as well as by completing 2 substantial issuer bids since December 2018. When we are able to do so, we intend to use the most effective and efficient methods to achieve our targeted percentage range of CET1. As always, decisions around our capital deployment options will be governed by our view on current and expected market conditions.And now I'll turn the call back to Yousry for closing remarks.
Thanks, Brad. To summarize our discussion this morning, we're pleased with the results we're reporting today. Home is reporting good growth as well as visibility into growth potential for the balance of the year. We believe we have opportunities for further value creation through funding diversification, asset growth and capital deployment, which will be -- which we will execute strategically when conditions warrant.I thank our customers and our partners for their loyalty through this period. I thank all our employees for their perseverance and dedication to our purpose. Every day, you make me proud.Finally, our annual meeting takes place virtually this year at 10 a.m. on May 18. We invite all shareholders and interested parties to attend. And I thank you all for participating in today's call. I'll now ask our operator, Chelsea to pull for questions.
[Operator Instructions] Your first question comes from Stephen Boland with Raymond James.
I guess, Yousry, I guess I'm trying to understand -- I know the pandemic restrictions in terms of originations. What's -- and maybe the trigger has been -- has already happened, but what's the trigger to release that? Like what's the -- what are you looking for to resume growth in not only in Classic, but commercial, I guess, all the business lines, what are you looking for in terms of the economy or the pandemic to get that going?
Hi, Steve, to just answer the big picture first, that's the right economic conditions, which all the signals are -- things are getting better, vaccines are working. There's indications that employment is going to go up. So we're seeing all the signals that it's getting better. And as I said in my comments, we wouldn't go from pandemic restrictions to exactly where we were overnight. We'd eased into it. So we'd increased loan to values in certain areas slowly and then eventually get back to our normal levels across. We would stay still cautious with certain employment industries. Social gathering, it looks like it's going to still be here for a while. So we'd ease that when we saw that, that has come out and looks sustainable.So it is -- just looking at the various things and just to ensure that we are continuing to build a strong balance sheet and not choosing growth and have to pay for it in losses down the road. And we're feeling quite good as we sit here today on what looks like the potential for Canada in 2021.
Maybe just a quick follow-up. In terms of the relationship with the broker community, because certainly other lenders and your competitors, I presume, you can see the numbers have opened up. What's the -- is there a growing frustration with brokers that are sending you applications? Or do they understand that these are unusual times. So I'm just trying to gauge, like are you missing a window here, I guess, in terms of restarting your growth?
I think it's a little of both, Stephen. The brokers that we deal with are -- as you know, we don't deal with the entire broker community. We deal with a subsection that really understand Alt-A. I think they understand, they would, of course, like us to relax our underwriting more, because they think there's value to placing mortgages with Home. But they understand and our team -- our mortgage team is in constant communication with them and advising them of where we're seeing the world. And we get a lot of feedback on how the industry is shaping from them. So yes, some would like us to open up tomorrow morning, but I think they understand, and they continue to be very loyal to Home, which pleases us.
Our next question from one of Etienne Ricard with BMO Capital Markets.
So strong operating efficiency in the quarter. And great to hear about initiatives at Oaken, such as the new application. Can you talk a bit more about this initiative? And what's next for the IGNITE program in 2021?
I will ask Benjy to make a few comments, who's on the line. Benjy, among his many responsibilities, is in charge of our Oaken brand. But I will just talk a little bit about 2021. We embarked on a mission about 2 years ago to upgrade our core SAP system and with that allow us to get more ability with digital, more ability with CRM, more ability with database management. We have really seen the fruits of that labor. There's a lot in place now in database and CRM and we think we're going to continue to use that and continue to grow in that.I also mentioned robotic processing. There's lots more opportunity for us. So it's a wave that's going to hit every part of our business where we understand our clients in all the various sectors a lot better and how to serve them better, how to ensure that we've got the right solutions for them, how to ensure that we have the right answers for when they want to renew their mortgage.So all that has progressed us. We are also going to be big users of AI. That journey has also started, as we understand more and more about our clients. But I just want to pause and let Benjy talk specifically to Oaken.
So with respect to Oaken, the big plan for this year is the replatforming of digital banking that Oaken has run on. We launched that 7 years ago. We're moving to a more modern platform for online. But with that, we're also introducing our iOS and Android apps, that's going to allow us to serve our existing customers on the Oaken platform better.In addition, it's going to widen the appeal of the Oaken offering to a new generation of customers. As you know, we've been very GIC focused, which tends to be a slightly older consumer. We have a lot of younger consumers as well. But obviously, to be with the time, we've got to get on to the app stores for Android and iOS. In addition to that, our historic ways of communicating with customers were primarily by e-mail. This opens up a number of customer experience initiatives with e-mail, SMS, app alerts, et cetera, among a number of other things.
And so would you have an updated comfort range for your efficiency ratio in 2021? Because I understand previously, I think you were kind of comfortable below 50%. So any update on that front would be great.
Perhaps I can let Brad answer that one.
Yes. That continues to be what our range is. Certainly, we're not anticipating probably more plus or minus a couple of percentage points around what we reported in Q1.
And also great to see progress on your whole loan sales program, could you share how meaningful this funding source could become over time? And how do the economics compare to securitization alternatives, for example.
Yes. Just for everybody, Brad and I are at different locations. So we just have to make sure we're queuing each other. Brad, maybe you can answer that one?
Sure. We think the whole loan sale are relatively comparable to any of the other securitization income processes that we would do. We're still negotiating a number of agreements in that area, but we would hope to get close to or at least in the range of $300 million for the year, if not more.
Your next question comes from Geoffrey Kwan with RBC Capital Markets.
Just want to expand on one of, I think, Steve's question earlier. Just you have a lot of excess capital. And I would think you want to deploy it in a prudent manner to grow the loan book. But just wanted to get your sense around just the overall appetite on increasing loan growth. And in which loan categories, in particular, you believe you should be able to increase loan growth over the next year?
Hey, Geoff, all 3 categories, which is our Classic business, alternative business where there's a lot of fundamentals, as I did in my comments, that looked like it is going to continue to grow. We are still -- while we're the largest originator of that, there's still lots and lots of opportunity in that area.In the A business, as you -- if you look back in -- over the last year, we have been growing every quarter -- our A business. We think that there's still lots of opportunity there. The market is -- got lots of volume, very competitive, but we are able to get volume share because we have a very, very good relationship with brokers. And we see it as in the future, as Alt-A mortgage clients graduate to A, it will improve our potential offering to our own clients upon renewal.And, finally, on the commercial side, as Brad mentioned in his comments, we see that the market is waking up for lack of a better word. There's a lot more volume coming in. CMHC has introduced new programs that we would like to figure out how to get involved in them. It's the affordability category of multi-mortgages. And so in all 3 of our major mortgage categories, we see opportunity and we see that the -- it's all in our hands on how fast we want to go and when we think it is a good time to go and get more aggressive for growth.
And maybe just is there within the 3 buckets, is there 1 or maybe 2 that you think would grow or you would like to grow faster than the other or others?
Yes. I mean, our core, Geoff, as you know, is Alt-A, that's the business we understand, we think, very, very well. We know how to risk price it. We understand the market. That is why we can be very sophisticated when we're doing our pandemic underwriting. We could buy postal codes, say we're going to be okay here, we're going to be more reserved here. We understand it deeply in terms of the fast-rising real estate prices and how to do that. So that's the one that is, A, our core, and B, our most profitable.A, is a wonderful business as well, but there's a ton more competitors, including the big banks. So that is more a commodity, if you will. We have great service, which helps us. But in terms of getting more business, we have to keep giving the great service, but it's more of a commodity.And commercial is always something we want to grow. We are targeting over the long run, as I think you've heard me mention before that it gets to be about 15% of our book. As our book grows, that means commercial's portion grows, and we haven't hit the 15% portion. So to kind of summarize this. It's Alt-A, for sure, but we think opportunities in the others.
And just my second question was around just how you're seeing activity on the mortgage or the broader housing front so far in Q2? And if there's parts of the market that have you maybe a little bit more concerned than others?
No. I mean, the market continues to be very active. Still supply is a little low, still homes are going quickly. At the higher end, it's kind of stabilizing a little bit. But in the core mortgage it's still very good. Nothing worries us. We are just adding a lot more prudence in terms of if we get an application of a home that sold 15% or more than listing, we have a team that looks at that a lot closer. We have very dedicated appraisals management. We deal with the same people. They understand what we want to look at.So we take more thorough looks. We make sure we've got the best team looking at it to understand, first of all, and most importantly, is can the person pay. And if the person can't pay, then it kind of discounts us. But if they can pay, then just to understand values and to go with it.So nothing worries us. We think we have the expertise. Of course, we've got to be careful. And as any time I talk about this, we deal with mortgages one at a time. Every single one has a story. A recent single one has circumstances and risk related to it, and we deal with that one at a time, and I believe we're well staffed to understand that.
Your next question comes from line of Nigel D'Souza with Veritas Investment.
I wanted to touch on your PCL reversals this quarter. And if I dig a little deeper into the reversals by stage, I noticed you had Stage 3 reversals for single-family residential and commercial mortgages. And it looks like those were driven by transfers out of Stage 3. And you mentioned loan repayments. But I was hoping you could just provide some more color on what's driving those trends there.
I'll start. We had concluded that those items would be in Stage 3 and then the performance of those loans resulted in them coming out as well as some of our assessments in relation to levels of -- I think, as we talked about an overall provisioning, some of the levels of unemployment also migrated things from Stage 2, although that wasn't your question. But I think that's the easiest way to respond to your question.
I guess, what I was getting at is, is it just a specific -- counterparty-specific improvements for their financial conditions? Is that government support measures that have helped them out? Just any underlying trends that you could point to that's helped those impaired loans or previously impaired loans?
I think we had a larger increase as well as some paydowns that just created that opportunity. We did have kind of a rapid increase in the previous quarters as a result of the pandemic and a lot of those issues ended up being resolved.
And I noticed in your outlook for the press release, you commented that the forecast for ECL model since the end of the quarter, March 31 half will obviously change with the rapidly dynamic environment. And I was wondering, does that signal that you are confident that the excess reserves you currently have or performing loans are more likely to be released sooner rather than later. Is that the right way to think about it?
Well, that's one that we would probably prefer, but we use a third party to provide our forward-looking information and not -- that can vary -- we get it monthly. And if you were to look back through the past few quarters, we've seen ups and downs in both their housing price index and unemployment forecasts. So the only thing we can say it's volatile and looking -- or has been volatile and looking forward to the extent that there's some normalization in the housing market, then that will probably lead to more stable outlook in terms of HPI. And certainly, government programs have helped in the overall level of unemployment and expectations.So that's probably not the answer you were looking for, but that's the answer. It's volatile. We certainly preferred, and I think everyone would prefer large improvements in the forward-looking information. But we take it as it comes. And overall, we consider ourselves to be well provided.
That's really helpful. And you could just finish with a broader question. I mean, with recent froth and concerns about real estate, there's pressure for more macroprudential tools to be implemented. And I was wondering if you could just speak to what your outlook is for the near-prime space? Do you think that any macroprudential measures that make it more difficult to qualify in the prime space? Is that -- do you see that as a net benefit for Home Capital over the medium term?
It's hard to say, really, because it depends what those conditions are. Historically, though, you're right. When there have been prudential measures on A mortgages that has helped the Alt-A. So generally speaking, I think you're right, but it also depends what it is they can…
Your next question comes to the line of Rasib Bhanji with TD Securities.
If I could just start on the ECL side. So even after the large release this quarter, it looks like the difference between your base case allowances and allowances on your balance sheet that has widened out. Just wondering what that difference would have looked like before the pandemic? And would it be reasonable to assume that you will always continue to carry an ECL balance in excess of your base case forecast?
In reverse order, we will always have a -- or we fully expect to have a difference between the base case as we weigh some different probabilities. So I think you can expect that there will continue to be a difference. It was a larger difference this quarter previously, and it was generally smaller pre-pandemic.
And then if I can shift to your capital side. Correct me if I'm wrong, but it looks like you've lowered the target CET1 range to 14% to 15%. I think it was 15% to 17% before. If this is accurate, can you provide any color on the change in the target range over here?
Brad can you...
I will start. Yes.
Okay.
Sorry. As we continue to analyze some of our business mix and future -- the forward-looking balance sheet, the overall credit performance and other things that we would try and maintain capital for. We have -- you're right, we have changed those levels, and it just is reflective of some increased overall confidence in our business.
I have nothing more to add except that we look at this all the time and have come to the conclusions of what we're seeing our new targets are based on a lot of months and years of data analysis and understanding what makes sense for -- from a risk perspective as well as from a shareholder perspective, and that would be the right number.
And I just have 2 quick questions on your NIM outlook. Did you share the expected savings from -- so first, removing the standby credit facility? And second, with the R&D issue that you're on track for, could you share the NIM impact from both of those initiatives?
We haven't really shared the impact of -- well, I think we did probably back when we implement or started the standby facility. By memory, it was around 3 basis points. We have not provided any further NIM impact. One of the things that has impacted our NIM in relation to RMBS previous -- recently was some of the increases or the rapid change in the pandemic had caused us to take some modified loans out of the current RMBS, and that's put pressure on spreads as there's been a lower base of loans to cover some of the fixed costs related to that offering.But in Q4 of '19, when that RMBS was first implemented, the spreads were close to what we think in our Oaken funding and looking -- it was around 174 basis points in Q4 '19 for RMBS -- or sorry, Q1 2020.
[Operator Instructions] Your next question comes from Jaeme Gloyn with NBF.
First question is on the new CET1 ratio target, 14% to 15%, is it safe to assume that since it's in print, this has sort of been checked or run through OSFI?
Yes.
Everything. Go ahead, Brad. Sorry.
Sorry, go ahead, Yousry.
I'm going to say everything that -- I think any financial institution with respect to capital and so on would include a discussion with us.
The net interest spread continues to trend higher quarter-over-quarter for the last several quarters. So I was just curious if you could give us a bit of an update as to how Q2 is progressing from a net interest spread standpoint with deposit costs seemingly backing up a little bit. I'm just wondering if the asset yields are also reflecting a similar increase.
Brad?
Jaeme, we're expecting -- I think we said that we'll be consistent through the course of the year, and that's both the mix of trying to improve the yield on our assets as well as the broker deposit boards. Maybe you can see the publish rates, they've been going up and down. And -- but averaging still lower, and we're having -- we're still having some higher-cost deposits roll off and then come back in as lower-cost deposits. So that's been one of the trends that we've been seeing over time here.
So still some favorable tailwinds for the net interest spread. I'm not necessarily speaking about the net interest margin. Yes, next question is on the commercial reserve releases. And I think a question before was trying to maybe get at this a little bit.But first off, are these commercial reserve releases broad-based or were there any sort of one loan or a couple of loan items that drove the big decline?
Yes. It's a mix of both. There is a big decrease in Stage 3, relatively speaking. And then the rest was really across the pieces of changing some model inputs.
So there wasn't 1 or 2 specific loans to call out in the commercial book.
Well, as I said, there were the -- there were a couple, but that's had -- that has had an impact. But again, one of the bigger changes was some of the movement from Stage 2 to Stage 1 and some of the economic indicators, in particular, the level of unemployment.
And in single family, the assets you recognized or repaid -- in terms of repayment, does that imply that the borrower just brought the loan current and it moved from Stage 3 somewhere else? Or does that imply that the house was sold and the loan was fully repaid?
Short answer is both.
Maybe the last one. And this might be a little bit -- well, in terms of thinking about the potential for future reserve releases, if I'm looking at the allowance for credit losses as a percentage of gross loans, it's been declining pretty steadily here quarter-over-quarter for -- since Q2 '20. It now stands at about 34 basis points. What would you say is an appropriate level that you would be comfortable operating that from an allowance for credit losses standpoint? Are we there now at about 34 basis points? Or do you think that could trend lower for any number of reasons?
I'll start with that one, Jaeme. I think we look and it's really -- some of those things are driven by the models. So to the extent that, that improves, we'll see lower percentages and we'll review that over time. If the economic environment approves, we are -- we'll see where we get to over time. It's hard to speculate given the volatility. But the overall expectation is, as it kind of improves, that will probably come down.
Thank you, Jaeme.
There are no further questions. I will turn the call over to Yousry Bissada, CEO, with closing remarks.
Well, thank you for joining us today. And we hope you will join us at our Annual Meeting on Tuesday, again, to remind you at 10:00 a.m. Stay safe, and have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect.