Home Capital Group Inc

TSX:HCG

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Rex and I'll be your conference operator today. At this time, I would like to welcome everyone to the conference call. At this time, I would like to hand the call over to Head of Investor Relations, Jill MacRae. You may begin your conference.

[Jill MacRae, executive]

Good morning everybody and thank you for joining us for Home Capital's Q2 conference call. I'd like to apologize for the delay and for the technical issues we are having with our [ NEM ] platform. I'm not able to advance the slides but I would like you to know that the presentation is available on our website for you to follow along with the speakers' remarks. We're going to begin with remarks by our CEO, Yousry Bissada followed by a discussion by our CFO, Brad Kotush, and we'll take Q&A at the end. I'd like to caution you that today's remarks may contain forward-looking statements and that today's remarks rely on both adjusted and non-GAAP measures and a description as such is included in the presentation. I'd like to turn it over right now to Yousry Bissada.

[Yousry Bissada, executive]

Thank you Jill and good morning, everyone. It's been an eventful few months since we last spoke. That's true both in terms of the macroeconomic environment as well as the housing market. Real estate and therefore the mortgage industry is a fundamental and important part of the Canadian economy. Canadian's dream of home ownership has never been higher with current supplies low current demand. We have entered a new phase of higher borrowings. The Bank of Canada tries to bring inflation down to its target level. We're also seeing increasing evidence of a correction in the economy and housing market.

There is uncertainty in the world and in the evolving macroeconomic scene. This has caused concern about real estate values and about potential credit issues. You will hear today a number of ways Home is responding in this environment. The company is well positioned to perform and generate value as we navigate through the changing economic landscape. We believe in Home's ability to weather volatility and deliver value for our customers, partners and our investors. We are confident the because our core mortgage business is a key part of the economy with a supportive underlying trends. This industry and our company are historically very resilient.

Our business is built to be a fortress precisely in case of challenging times. We are experienced. We have seen higher rates before. We have seen softening markets. We know how to manage through times like this. If delinquencies do increase we have experienced people and processes to support our clients through difficult times. We are committed to delivering sustainable value to our shareholders. We are making progress in all our businesses. We are delivering on our goals. We know this is a period of concern about the economy and the looming of a recession and the potential impact this has on the housing and mortgage market.

I'll talk more about our outlook for the business at the end of my remarks and why our strong fundamentals have set us up to weather this well. But first, Brad and I will walk you through our performance in the second quarter. In this quarter, we added assets and customers in our residential mortgage and credit card business. We reported strong growth in our commercial mortgage book and we continue to build a high-quality lending portfolio, underpinned by our disciplined risk management.

On the deposit side, we added new customers through our Oaken channel and made further progress in our strategy of funding diversification. And we continue to invest in the technology that will support and fuel our long-term goals. Our diluted earnings per share were $0.97. This compares to $1.02 in the first quarter and $1.42 in Q2 of last year. Both prior periods included reversals of credit provisions. As we noted in Q1, rapidly rising interest rates continue to pressure margins. We continue to report solid asset growth, and we remain confident in the long-term returns that our portfolio will produce.

Brad will give you more color on why rapidly rising interest rates affect our margins. Our portfolio growth was driven by another solid quarter of originations of just over $3 billion. Originations grew by 43% compared with a strong second quarter in 2021. Both commercial and residential originations more than doubled compared with Q2 2021. Our originations drove significant growth of 17% year-over-year in our loans and on balance sheet and loans under administration. This growth required funding. We added to our open deposits during the quarter. We take pride in delivering great value to Canadian savers and we were gratified by the response in the form of customer growth and deposit inflows.

We also announced our return to the deposit market for the first time since 2015. The level of investor interest in our $200 million issuance was quite healthy and gives us confidence on our ongoing ability to access this option as an element of our funding diversification strategy. Brad will provide more detail about our funding activities in his presentation. The quality of our credit book remains high. We are lending to high-quality borrowers secured by a property at low loan to value, supported by income verification through a disciplined underwriting process. Our delinquency metrics are very low and our loan loss allowances provide a significant cushion against future potential losses.

This quarter we returned to normal provisioning levels. Increased provisions on residential and commercial in line with growth with the portfolio and changes to our economic outlook. Actual write-offs were in line with our historic low levels. We continue to invest in technology and operational effectiveness. It was an eventful quarter for IT development and we hit multiple major milestones. We went live with our second core banking release for deposits similar to our release for our loans in early 2020. This approach is more flexible, less customized and will generate productivity improvements in workflow for high-volume transactions. We went live with our new reporting platform in data and analytics.

This allows us to look at areas where analytics can drive our business for improvements in speed, data quality and lower costs. There are already places where we're using predictive analytics to enhance our business. We will do much more in the areas in the future. We went live with a new call center technology. The improved workflow provides higher productivity and staffing efficiency as well as better service to our customers. Home now runs all our critical applications in the cloud since late 2015 or improved performance 2019, my apologies for improved performance and efficiency.

This enables access to innovative technologies that will drive our business forward. We are relentless in our efforts to build a strong and more resilient company. We have never stopped in this quest and will continue to do so in any economic environment. This ensures we are prepared to thrive no matter what the challenge of the future. We ended Q2 with a CET1 ratio of 16.27% compared with 22.27% at the end of Q2 last year. We accept one of our most important responsibilities is to maximize shareholder return.

To that end, we accelerated our NCIB activity based on our view that our common shares are significantly undervalued in the market. And finally, we announced a sustainable substantial issuer bid in the amount of $115 million. With our shares trading at a significant discount to book value, we believe this is the best use of our excess capital and an excellent opportunity for value creation. This will accelerate our plans to achieve our target CET1 ratio by the end of the year. Our target range and continued strong organic capital generation provide robust levels of capital for any market conditions. Brad will give you more details and I will now ask him to discuss our financial results.

[Bradley Kotush, executive]

Thank you Yousry, and good morning everyone. For those following on the website I will start on Slide 6. This morning we reported net income of $41.3 million and diluted earnings per share of $0.97. The book value per share grew by 9.6% year-over-year to $38.72 and our return on equity for the quarter was 10.4%. Slide 7 shows the different contributions to the change in our diluted earnings per share compared with last year. The most significant variance is the change in credit provisioning.

We reported a reversal of approximately $19 million in Q2 of last year compared with provisions of $4.7 million this quarter. That accounts for $0.33 of the difference. A further $0.23 is due to the change in net interest margin which was 2.61% in Q2 2021 compared with 1.97% this quarter. Partially offsetting these 2 items is a 17% reduction in average shares outstanding compared with last year. Slide 8 shows the change in our net interest income from the peak level achieved in Q2 last year.

Net interest income was the biggest driver of our profitability accounting for close to 90% of our total revenue. So when rates dropped sharply as they did in 2020 through 2021, we were able to access lower cost deposit and capital markets funding at a faster pace than that of reductions in most yields. As noted, rates on our assets adjust more slowly in part because we make our funding commitments 45 to 60 days before the assets come on our balance sheet. The combination of those 2 factors produced high average margins in our last year.

The opposite has been true in 2022. With 4 increases by the Bank of Canada so far this year totaling 225 basis points from a base of 25 basis points, we have seen a corresponding increase in our cost of funds. We have lower cost funding from the last 2 years being replaced by higher cost funds in a competitive deposit market. In addition to deposit funding, we also accessed capital markets funding through our RMBS and ABCP securitization channels. We are working to move up the rates on our mortgages to match increases in our cost of funds and we have had some success in doing that. Since the beginning of the year, we have increased our classic mortgage rates 11x from the low 3% range to the mid-6%.

We expect to see the benefit of mortgage rate increases in our margins over time as lower rate mortgages renew at higher rates and spreads on originations revert to historical averages. Our current expectations for net interest margins in our third quarter to be flat to slightly down from Q2 levels before picking up in Q4 and into 2023 before returning to more traditional levels. Slide 9 shows our noninterest expense and efficiency ratio. Quarterly noninterest expenses increased by 4% over the prior year, primarily due to higher technology costs and an increase in activity-based expenses.

We continue to benefit from our investments in technology and focus on operating efficiency. Our loans under administration have grown by 17% in the same period. We had another very strong quarter in both residential and commercial originations. In our single-family residential portfolio, originations increased by 23% over a strong comparable quarter in 2021. Once again, the growth driver was our classic portfolio where originations set a record for the second quarter. We originated classic mortgages at record comparative quarter levels despite lower term margins for these reasons, maintain leading market share with mortgage brokers and mortgages in our core business and grow our classic balances for higher-margin renewal business in future periods.

Commercial originations in Q2 increased by 166% over 2021 with more than 100% growth in both residential and non-residential lending. We benefited from higher CMHC allocation to grow our insured multi-residential loans. Non-residential commercial loans continued to benefit from the effort and investment our commercial team has put in to develop this business. We've been adding more origination partners and seeing more quality opportunities.

Turning to Slide 11, strong originations are driving strong asset growth. Our single-family loans on balance sheet have increased by 22% year-over-year as we continue to benefit from originations and our focus on retention. Commercial loans on balance sheet increased by 7% year-over-year and have now surpassed the $2 billion mark. Commercial loans under administration grew by 9.5% over 2021. We are still seeing a good pipeline of opportunities in residential and non-residential commercial lending, although at a lower growth rate compared to the first half of the year. Our Oaken deposits increased by about 12% year-over-year. The share of our total deposits is consistent with the year ago level.

Higher rates have led consumers to a greater preference for term deposits versus demand deposits. We have worked hard to diversify our funding sources in the last few years and this quarter was another busy one. We benefit from having multiple funding options during periods of high growth. Slide 13 shows some of our accomplishments during the first half of the year. We placed $200 million of deposit notes and a $425 million RMBS offering. We expanded our warehouse facility and increased our participation in bank-sponsored securitization conduits.

In total, we added $1.8 billion to our funding channels in the first half of 2022 compared with $2.1 billion for all of 2021. Spreads on capital market funding were also wider than at this time last year. Having a variety of funding options in the retail and capital markets channels make strategic sense and allows us to secure funding opportunistically at any time. In the next few quarters, we expect the most attractive funding opportunity will be through growth in our deposit balances.

Slide 14 shows our credit provisions during the quarter. Provisions were $4.7 million in Q2 compared with a reversal of nearly $19 million in the year ago quarter. Annualized provisions came in at 9 basis points of gross loans. Actual credit losses in the form of net write-offs remained low during the quarter at about $0.5 million or 1 basis point of gross loans on an annualized basis. Slide 15 shows our credit provisions by line of business. We recognized approximately $5.9 million of provisions in our Stage 1 and Stage 2 loans and a reversal of credit provisions in our Stage 3 loans.

The Stage 3 provisions were reduced primarily as a result of paydowns and migration to Stages 1 and 2. The increased balances in Stage 3 loans have lower loss given default assumptions and therefore, lower expected credit losses. Our single-family and commercial segments each had about $2.2 million in provision expense to reflect the growth in both portfolios during the quarter and changes in the forward-looking economic models.

A breakdown of our allowance coverage is on Slide 16. Total allowance for credit losses was $40 million which is in line with year ago levels. Nearly 90% of this allowance is attributable to Stage 1 and Stage 2 loans. The allowance coverage for non-performing loans declined from the prior quarter because Stage 3 loans that were discharged or migrate out of Stage 3 during the quarter carried higher provisions than the loans that were added as noted earlier.

Based on our experience we consider this level of coverage to be appropriate. Slide 17 gives some detail of our Stage 3 loans and the solid credit quality of our loan book. Gross non-performing loans declined by 37% from 1 year ago even as we reported another quarter of significant loan growth. Net non-performing loans represent 14 basis points of gross loans down from 24 basis points a year ago and remain well secured by high-quality assets.

Turning to Slide 18 for a look at our capital. Our CET1 ratio is 16.27% down from 22.27% at the end of the second quarter last year closer to our target range of 14% to 15%. We achieved this through a combination of growth in our risk-weighted assets, completion of our $300 million SIB in the fourth quarter of last year, common share dividends and repurchases under our normal course issuer bid.

In the first half of the year, we purchased for cancellation nearly 2.3 million shares at an average cost of $31.10 per share, a discount of 20% to Q2 book value per share. This represents just over 60% of shares authorized for purchase under the NCIB. As of the close of business yesterday August 3rd, we have substantially completed the authorized share repurchases under the NCIB at an average price of $28.93 or a 25% discount to Q2 book value per share. We have suspended that program until the expected completion of our substantial issuer bid in mid-September.

Finally, as I just mentioned, we are launching a $115 million substantial issuer bid. We have set the bid pricing range at $25.20 to $28.60 per share. This represents a discount to book value and a maximum premium of 10% over the unaffected share price. The bid is expected to commence on the 8th of August and expire on the 13th of September. The resulting CET1 level at the end of the year is estimated to be near the midpoint of our stated target range. At this price range, assuming the maximum number of shares is taken up, the bid will be accretive to earnings per share, book value and return on equity. And now I'll turn the call back to Yousry to discuss our outlook for the rest of the year.

[Yousry Bissada, executive]

Thank you Brad. Turning to our outlook for the balance of the year. We believe that further tightening by the Bank of Canada will have the desired effect on inflation which is a very good thing. This also has brought a correction in our housing prices. We expect continued softness in housing sales and a more moderate pricing picture. As lower cost funding matures and is replaced by higher cost funding, net interest margins may contract further before stabilizing at the historical levels.

Stepping back, I want to take a few minutes to talk about why we at Home feel very good about the future. Our business model is well suited for this environment. We think of our business first and foremost as a fortress that protects our customers, our employees and our investors. This is a company that knows how to handle stress and is built for resilience. A company that is designed and proven to be profitable and deliver long-term shareholder value throughout all economic cycles. We're confident for 4 reasons.

First, the characteristics of the mortgage market and the past behavior of the clients we serve. Second, our expertise and historical experience in serving the near-prime market. Third, our investments during the last 5 years building an organization that is fortified for the future. And 4, our expertise and experience in managing delinquencies should they become an issue. Let's start with the mortgage market and why we think there's no better lending business to be in. It may sound counterintuitive but the mortgage business is a wonderful business in these times.

Borrowers prioritize their home as their most important asset. An asset class which there remains underlying demand. People want to own homes. And once they do the last thing they'll stop paying is the mortgage. They would likely compromise on other luxury or other guests before giving up on their home. They're sanctuary. The roof over their families head, their home office. A home has always been the top priority for debt repayment. Canada still has a structural supply shortage that happens to be concentrated in Home's core markets.

It is natural that buyers and sellers both want to step back from a rapidly evolving market while they assess the future direction of rates and sale prices. We believe this will create pent-up demand that will manifest in higher volumes in the future. And there are additional factors underpinning demand growth. Strong immigration. A large cohort of millennial is reaching the home buying years with support from boomer parents that have the wealth to help. Over time, rising rents and falling home prices will make homeownership the more attractive option.

All these characteristics add up to a great business segment to serve both in good markets and more stressed markets. We have the expertise and experience behind us. Now about our expertise and historical experience serving that market, Home has been in business for decades with excellent credit performance. We manage credit and interest rate risk. We have always considered that a core strength that's only become true in more recent years. It is deeply ingrained in our business model.

Our disciplined underwriting practices give us a lot of confidence in our borrowers' ability to pay. Our loan to value across the portfolio provides a lot of support in a declining price environment. We are continually performing our own stress testing, assessing the health of our business against different levels of interest rate risk, liquidity risk, credit risk and risks of all types. We have an industry-leading balance sheet management and interest rate risk management, a key strength in volatile times.

Finally, we've done a lot of great work to make our business even stronger in recent years. We've strengthened our team and our culture. We fortified our balance sheet and funding model and we upgraded our systems over the past 40 years in IT as I outlined earlier. This makes us more resilient and importantly more nimble. We have better insights into our business and our customers. We can react more quickly. We recognize that we may not be done with higher rates and softening home values. Continued inflation, geopolitical uncertainty and even the possibility of an economic recession represent potential stresses to the financial system.

We may see arrears increase and how prices may soften. But for the reasons I've outlined Home is very well prepared. This company is built to perform in all market environments. We'll continue to deliver service to brokers and value to borrowers and depositors while creating a great place to work for our people. We will move ahead with our strategy to invest in the future of our company, diversify our funding and optimize our capital level. And we continue to look forward to the future with optimism and conviction that we are well positioned to deliver superior long-term total returns.

[Operator]

Your first question comes from the line of Geoff Kwan.

[Geoffrey Kwan, analyst]

Brad, you made I think a comment around the NIM yields expecting to be roughly flattish in Q3 and then starting to improve in Q4. Bank of Canada I think most expect to implement further interest rate increases in the short term. So does your outlook reflect that? Or if not what would be your warning be if we do see further increases in the overnight rate.

[Bradley Kotush, executive]

Our outlook does reflect that Geoff.

[Yousry Bissada, executive]

Geoff, may I add a little thing here, Geoff. I'm sure you're aware but the bank in Canada rate and bond rates move differently. The Bank of Canada rate obviously moves when the Bank of Canada moves it. But bond rates immediately react to even when the Bank of Canada implies there's any potential change. So the bond rates which actually affect our pricing have already taken into account the potential Bank of Canada rate.

[Geoffrey Kwan, analyst]

In terms of on the loan growth side, obviously the market's slowing on the residential side. But just within [indiscernible] the key loan categories, are there certain ones that you think that may see further improvements or increases in the loan growth relative to what you saw in the current quarter? Which ones would you say you kind of expect the same and some that you might expect some slowing in?

[Yousry Bissada, executive]

It's very close, Geoff. A prime borrower and a near prime borrower don't know what they are until they go and start applying for a bank and their demand for homes isn't much different. I'd say the Edge will be to the near prime just because it's more heavy on new Canadians who have not yet have sufficient time to build their credit. They're a big near-prime client for us. So because of that the Government of Canada has increased the number of new immigrants that will push that a little bit more. So I don't think by a lot but a little bit more towards that because of that.

[Bradley Kotush, executive]

And Geoff, we still see growth in commercial but the rate of growth in our residential portfolio will slow and we're thinking overall for the year to be mid-teens growth.

[Geoffrey Kwan, analyst]

OpEx was roughly about $61 million in the quarter. Is that given the environment an okay run rate? Or is this closer to I think around $63 million a quarter more reasonable through the rest of the year?

[Bradley Kotush, executive]

Geoff, we're forecasting it will probably be closer to where we were in Q1 at $65 million. Okay.

[Operator]

Your next question comes from the line of Etienne Ricard.

[Etienne Ricard, analyst]

The Alt-A mortgage portfolio yield increased sequentially. Relative to our discussion on last quarter's call this increase seems to be a bit sooner than expected. So how responsive has the industry been in the raising mortgage rates recently? In other words, you mentioned that the Alt-A yields are now closer to 6.5%. Where do you think this could go assuming bond yields may not change?

[Yousry Bissada, executive]

As Brad mentioned, we have increased rates 11x this year. I don't remember 5 or 6 in this quarter. We continue to lead in the near time Alt-A as price increases to widen margins. If rates don't change much from here it will stay close, plus or minus 25, 30 basis points from where we are would be our guess. And if rates move then of course, we'll move up but if they come down appropriately, we'll come down.

What has happened in the bond market Etienne, you probably already have this information is 5-year bonds have come down quite a bit in the last 2 months. 1 year bond rates have come down less about 10. So we're driving towards an inverted curve. So 1 year bonds have come down around 10 basis points. So assuming they stay here we are at the right level of what to price a 1-year near-prime Alt-A mortgage.

[Etienne Ricard, analyst]

On this last point, given the lower bond yields in recent weeks. What competitive behaviors have you seen both from the banks and mortgage finance competitors?

[Yousry Bissada, executive]

Pretty rational behavior. As I mentioned, 5-year bond rates have come down. So have 5-year A mortgages. They've come down. I don't have the numbers at my fingertips but I think bond rates have come down 60 or 70 basis points in the last few months and mortgage rates have come down about 50 on the 5-year term. So rational. On the 1-year side even though bond rates have come down 10 basis points, rates have not come down because it's already a tighter margin. It would take more than 10 basis points to move rates down. We'd probably take another 20 to 40 basis points before you see a move. But I think overall, the market is pretty rational at responding to rates almost instantly on the A side. Takes a little longer on the Alt-A side, near prime side as there are different agendas to volume growth, spread growth, a wide variety of issues that each lender is trying to tackle.

[Etienne Ricard, analyst]

And lastly, on capital allocation the SIB is set to normalize your CET1 at the upper end of your target range. Now given that the business still generates a lot of significant capital, how should investors think about future capital distributions whether that be more NCIBs or dividend increases?

[Bradley Kotush, executive]

I think we will continue to follow what we've been doing to the extent that we see opportunities to repurchase our shares at attractive valuations. We will follow that course. And to the extent that there's an opportunity to create shareholder value by increasing dividends. We'll follow that course as well.

[Operator]

Your next question comes from the line of Nigel D'Souza.

[Nigel D'Souza, analyst]

So I just wanted to first touch on your expected credit losses and Stage 1, Stage II provisioning. I noticed that the gap between your base case allowances and your current allowances have increased a bit. Just trying to get a sense of how much of that is being driven by the change or update in your forward-looking indicators? And how much is driven by perhaps a shift in the weighting and maybe a higher weight to the adverse case in your forward-looking indicators?

[Bradley Kotush, executive]

It's due to the changes in the forward-looking information and growth in the portfolio.

[Nigel D'Souza, analyst]

And if I go back to the question on pricing and margins. Just trying to get a better sense of the dynamics you're seeing between the prime and the near prime space. Are you beginning to see a shift of borrowers that typically will qualify for prime moving down street to near prime? Are you seeing greater retention rates in your existing customer base or book and a harder or more challenging environment for them to graduate to the prime space? Just trying to get a sense of the trends and perhaps if I look at discharge rates that's pretty much back to where it was pre pandemic. Is there a possibility that your discharge rates could have even lower if we enter a persistently high interest rate environment?

[Yousry Bissada, executive]

Nigel, you asked 2 questions. Let me answer the second one first and ask you to repeat the first one in a minute. So on retention. We expect retention to go up. There are 2 reasons we expect it to go. You alluded to one of them. Less housing activity needs less discharges to financial institutions because as people sell their home they just advise you, they sold it and they discharged their mortgage. We have definitely seen less discharges somewhat to offset less originations. In addition, with renewals we expect it to go up not just at our institution but probably most financial institutions because rates have climbed so much in the last 2 or 3 months.

Usually, if you are not in arrears, you've made your payments, you get an automatic renewal. There's no further underwriting required. However, if you move you will have to go through the entire process again. And if you move to a regulated financial institution has to be underwritten at 2% more. So if today, we offer you I'm going to make up a number, 6% on a renewal, you get it automatically. We stress tested you at 2% over so you can probably handle that for very close to the upper end. However, if you want to move you will be underwritten by another regulated financial institution at 8%.

So that discourages a lot of people for moving and we expect it to increase our renewals. Specifically in our numbers, we haven't seen that upward. We've seen normal renewals but that's only because we make offers anywhere between 60 and 90 days in advance. So we're seeing the results of offers we made 60 or 90 days. In advance as we go forward what I talked about will become more real. And Nigel, if I can ask you to repeat the first question. I just didn't hear it.

[Nigel D'Souza, analyst]

So the first question was on the credit quality mix of your originations. Are you seeing that credit quality improve because there's a greater portion of borrowers that would previously [indiscernible] and having to move downstream to the near prime space? Just trying to get a sense of the trends and the credit quality mix of the origination.

[Yousry Bissada, executive]

No, we have not seen any change in credit quality. The most people who come in near prime it is for the main reason of they don't have evidence of 2 years of FICO score at certain ranges, new Canadians, very common. The other category is self-employed. Self-employed do not have [ TForce ] which takes them out of a prime business and move them into near prime because we have to look at bank statements and financial statements. So it hasn't changed.

And I suspect one of the reasons it hasn't changed yet is unemployment is so low. People are employed. So people's financial situations haven't changed. In fact, if anything, they may have gotten better. Because of inflation, we're seeing people have gotten higher rates under business or higher salaries and so on. So no, we haven't seen it yet, Nigel. If unemployment starts tracking negatively then we might see a bit of a shift.

[Nigel D'Souza, analyst]

And the last question for me was on the SIB. Last quarter you mentioned that you liked the flexibility that NCIB offered. So just trying to get your updated thoughts on how you weigh the SIB versus NCIB? And why you decided to go down the path with utilizing SIB to repurchase shares?

[Bradley Kotush, executive]

We'd substantially complete the NCIB so there are no further shares available for us or very few. And the NCIB can't be renewed until February of 2023. So our only option left in repurchasing shares was in SIB.

[Operator]

Your next question comes from Graham Ryding.

[Graham Ryding, analyst]

Similar topic just on your previous SIBs. I think you announced your intention to do an SIB and then you would let the stock respond. And then you announced the Dutch auction sort of pricing range. This time you've just gone ahead and announced the pricing range right away with the announcement. Why the different approach?

[Bradley Kotush, executive]

Just based on our experience we thought it was more appropriate just to go with an announced range. If it's not appropriate and needs to be revised upwards so we can always do that through the course of the bid.

[Graham Ryding, analyst]

Because it just seems like you may be limiting the share price upside here with the price range that you've come out with? My second question would just be on the NIM outlook. I guess how much more downside do you potentially see here? We've seen 2 quarters now of pretty material declines. Is the sort of the large amount of compression largely baked in? Or is there a potential for material step-downs over the near term?

[Bradley Kotush, executive]

I'd characterize it as a smaller reduction than you've seen previously.

[Graham Ryding, analyst]

But safe to assume that compression over the near term is still likely.

[Bradley Kotush, executive]

[indiscernible] Yes, what we're anticipating is that in Q3 depending on how rates move, we may see some further compression not to the extent that was in Q2. And that will start to expand again in Q4.

[Graham Ryding, analyst]

And then just on the provision for credit losses. Can you maybe talk about what drove the increase this quarter in terms of your sort of forward-looking credit model inputs? Because I think I saw that your sort of base case unemployment rate actually decreased quarter-over-quarter. So was it HPI assumption, economic growth level? What were the key endpoints that sort of drove the PCL increase this quarter?

[Bradley Kotush, executive]

Yes. The most significant change was in the HPI decline. And you're looking at the base from 1% to 7% as opposed to the unemployment rate that had a slight 40 bp increase meaning to the better 40% decrease in unemployment.

[Graham Ryding, analyst]

So we've now seen bank economists starting to forecast some higher unemployment for 2023. So does that suggest that there could be some PCLs related to that over the near term if that's as get put into your credit model?

[Bradley Kotush, executive]

That may happen. Again, these are all forecasts and we've seen the volatility in IFRS 9 provisioning. I think the statement that we make is we think we're well provided and we'll continue to do so and we have the resources to weather downturns.

[Graham Ryding, analyst]

And then if we do go into a recession in 2023, what's your expectation for credit loss provisioning? What's a reasonable range?

[Bradley Kotush, executive]

Well, I don't want to speculate on what that will be until we see what the data is going to tell us. I can't answer that until we see what the actual date is.

[Operator]

Our next question comes from Jaeme Gloyn.

[Jaeme Gloyn, analyst]

[indiscernible] that last theme just a little bit differently if possible. Can you isolate the impact of the movement in the unemployment rate and the movement in the HPI? So for example, the improvement in unemployment drove x million dollars of lower base case ECLs and then the worsening HPI drove x million of higher ECLs? Is that something you're able to provide to give us a little sense of sensitivity.

[Bradley Kotush, executive]

What I can say is that HPI declines will have a larger impact on our residential provisions and the level of unemployment has a bigger impact on some of the commercial loans as that affect some of the cash flow forecast that you're using in valuation. So employment drives the probability of default and HPI drives the loss given default.

[Jaeme Gloyn, analyst]

In terms of Stage 2 loans increasing in the single-family residential portfolio as well as commercial a little bit. Are you able to describe what was the driver or would be described as an increase in significant risk of default or a significant increase in the risk of default for those loans?

[Bradley Kotush, executive]

If it wasn't significant enough for us to pay, I mean we did have the movement but the actual trend like we do this on an individual loan level. So there's no substantive answer to that in terms of this loan. We were concerned and moved that out. What we haven't seen is an overall level of defaults across the portfolio. But there may have been individual ones that's more Stage 3. So there's also a little bit of FLI that would move those into Stage 2. So that's probably the primary reason for the movement is some of the changes in FLI.

[Jaeme Gloyn, analyst]

As I'm thinking about the SIB and the capital position coming off of that SIB we're on target. RWA growth still running pretty high the last few quarters. How should we think about RWA growth over the next several quarters? Is it something that should flat line, maybe even decline? I'm just thinking about the ability to continue to grow excess capital RWA is growing this rapidly.

[Bradley Kotush, executive]

We think RWA will continue to grow and in particular on our commercial side which as you know has 100% risk weighting. So part of where we're investing our capital is growing RWA.

[Jaeme Gloyn, analyst]

A couple of higher-level questions. Talking about that we've seen in the paper a couple of months ago maybe is around mortgage investment corps and pausing activity. Is there anything you can comment on what you're seeing from liquidity of the second tier below you? And are there any impacts on your business? Are you seeing more borrowers moving into home or otherwise? What can you share from a more macro view as to the impact of mortgage investment corps from liquidity?

[Yousry Bissada, executive]

Wide question. Let me try to answer it. So first of all on construction and homes I think part of your question, we only deal with condo builders and homebuilders that are reputable that we dealt with before. We don't deal with new ones. We also deal only in the core markets. So we've had very good consistent behavior on that side. So we think there are even more opportunities coming from there. And the mix that you're talking about most of the ones are residential as opposed to commercial.

We have seen where a couple of commercial mix have kind of backed out of the business because as you said they're in another tier below us. So it's usually more remote than GTA, maybe some developer coming in for the first time, less experienced. It's a kind of thing we won't touch at this stage. So yes, that we've seen some bumps in that. We've seen people walk away from condos not on our book others book because supply chain has caused problems and they're not building it. Again, these are more related to people who haven't done this for a long time. So we stick to that. As I said, you asked a broad question. Did I hit on what you wanted or is there a piece you want me to elaborate a little more Jaeme?

[Jaeme Gloyn, analyst]

No, that's okay. We can take it offline a little bit that I wanted to touch on as well as.

[Operator]

Our next question comes from the line of Stephen Boland.

[Stephen Boland, analyst]

I just have one question. Yousry, your comments over the course of this call like in terms of sacrificing NIM and the volatility of NIM to I guess, grow and it seems like probably getting more market share. If that's true then what is it that's driving that goal to get more market share? Is it retention, future retention? What's the end goal here at this time to get more market share of your competitors?

[Yousry Bissada, executive]

There's a view out there that we are buying market share. Let me tell you that is absolutely not true. We are the highest rate in getting market share in the industry. And I'm talking specifically about the near time not the [indiscernible] we're in the middle of the field. But in the near front we have been price leaders. We have the highest rate. Our brand, our reliable service, our relationship with the brokers in this volatile time. Home is a very good place to bring a mortgage because if we say yes, there's no walking back. We do all our work upfront and we say yes. So that has brought us a significant amount of business. It is not NIM as in the past for the reason that bonds and the deposit side and the funding side of our book looks quicker than we are able to stretch the entire market on the near prime for reasons of market share or whatever.

Some are not going up as quickly as they should. And we have to be in the same zone. We can't be way out there to be reasonable. So that corrects over a period of time, Steve. So we have not bought market share, wouldn't. But are delighted on how much growth we've had in this environment because of the future. It will come up again. We will get it at full NIM upon renewal and it will set us up for the next few years very well. So that's a great question and I just want to be very clear on that point. We're not buying market share.

[Stephen Boland, analyst]

And maybe the second question just on the NIM. You've given guidance that it is going to come down a little bit more. But going forward and obviously not with this series of rate hikes, but going forward past the next 6 to 12 months. Where do you expect to be able to reduce that volatility and just say a year to 2 years, what other funding mechanisms can you put in do you think, to reduce that volatility?

[Yousry Bissada, executive]

Let me start and Brad may want to add. NIM is a function of a lot of things. We quite often talk about a function of what we raised new originations at. That is definitely a big part of NIM. The other part of NIM is renewals. And as mortgages leave our book at what rate do we replace them. In the past 3 years, we've had very wide NIMs which is great for our business. But as they renew a higher rate NIM is leaving and being replaced by a more normalized NIM.

Now on the renewal side we're pretty close to normal. It's on the origination side where it squeezes on. But pretty close to normal today is below what was in the past. So part of the NIM building is the renewals. And there's still a lot of the rules that are very high that will go through our system over the third and fourth quarter. Hence, as part of that formula you get NIM as Brad has said, probably slightly less than the 3Q and then it starts to get back in 4Q and 1Q next year and so on. Does that help, Stephen?

[Stephen Boland, analyst]

Just a little bit more on the funding side Brad, if you want to just talk about part of the NIM too. That part of it I guess is one side of the NIM. What about on the deposit side? What other mechanisms besides more deposit notes or MBS. What other mechanisms do you think you could create or put in over the next 12 to 24 months? What are you looking at?

[Bradley Kotush, executive]

We put in about $1.8 billion in new facilities or new funding sources. What we've seen is in the capital markets side compared to a year ago investors are demanding higher spreads, anywhere between 85 to 100 basis points over what you could do comparably a year ago. We expect that in a year's time or once there's maybe less volatility in the market to then be able to go back to accessing more capital markets funding. It's worked well for us in previous periods and we want to continue to invest in and grow Oaken. So as I said in my comments, we're focused on deposits and that will be helpful over time. And we can have a range of maturities there that we can bought back into terms that more adequately match our asset side. So that's where we'd be focused.

[Operator]

Mr. Bissada, I turn the call back over to you.

[Yousry Bissada, executive]

Thank you all for your interest in Home Capital. Please contact Investor Relations if you have any further questions and wishing you all a great day.