Canadian Western Bank

Thank you, Johana. Good afternoon, and welcome to CWB Financial Group 2019 first quarter financial results conference call.

My name is Matt Evans. I lead the Investor Relations team for CWB.

Presenting to you today is Chris Fowler, CWB's President and Chief Executive Officer; and Carolyn Graham, our Executive Vice President and Chief Financial Officer. Before we begin, please note that the conference call graphs, quarterly results, news release and supplemental financial report are available on our Investor Relations website at cwb.com.

I'd like to remind listeners and webcast participants that statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by management. Actual results could differ materially from expectations due to various material risks and uncertainties associated with CWB's business.

Please refer to our forward-looking statement advisory on slide 15. The agenda for today's call is on the second slide.

Chris will begin with our first quarter fiscal 2019 performance highlights and comments on the continued execution of our strategy. Carolyn will follow with details on our financial results before we move to the question-and-answer session.

I'll now turn the call over to Chris.

Thanks, Matt. Moving to slide 3, I'm pleased to report we're off to a great start this year.

This morning, we reported strong results with performance meeting our most significant medium term targets. We delivered strong 7% growth of common shareholders' income, 10% growth of pre-tax pre-provision income, positive operating leverage and strong credit quality.

Growth in cash EPS would have been even higher, excluding pre-tax gains from CWT strategic transactions in the first quarter last year. We continued to execute successfully against our balanced growth strategy.

We are broadening our relationships with business owners across the country and steadily delivering a more diversified bank by geography and industry. Diversification creates value for our stakeholders in two ways.

It increases our addressable market and enhances our risk management profile. Today, we have more channels for growth than ever before, operating from a more resilient base than at any point in our history.

We're also taking steps to grow our funding sources through specific initiatives to realign client facing operations within our branches. Complemented by a current technology platform that supports ongoing development of new product and service capabilities, we expect our strategy to continue to deliver an improved client experience every quarter and support deposit growth.

Our steady execution on all fronts also includes progress towards a planned transition to the advanced approach for managing regulatory capital. This transition will enable us to accelerate profitable growth across our expanded geographic footprint and create value for our shareholders by improving our ability to compete for growth opportunities that generate the most attractive risk adjusted returns.

Our dedicated people have been working hard toward this transformation for a number of years and we are pleased to be nearing submission of our final application this fiscal year. In all of our activities, we remain focused to increase value for our clients and shareholders.

This quarter, we fully utilized our normal course issuer bid to purchase and cancel 2% of our outstanding common shares. This was an appropriate investment of capital as recent market prices did not reflect the underlying value of CWB's business and our average buyback price was less than current book value.

Yesterday, we declared $0.27 per share dividend, up $0.02 or 8% from the dividend we declared one year ago and $0.01 higher than last quarter. As we consider the full scope of the opportunities that lay ahead of us, I'm confident that fiscal 2019 will be a great year for CWB.

Turning to slide 4, overall organic loan growth is off to our best start in three years, with total loans up 10% over the past 12 months. While the Canadian economy slowed in the latter part of 2018, we continue to expect moderate positive GDP growth this year at a level sufficient to support our loan growth expectations.

We see a mix of economic factors at play across our footprint and the benefits of a balanced growth strategy are clearly apparent. Today, British Columbia represents the largest proportion of our book at 33%.

Alberta represents another third at 32%, down significantly from 52%, 10 years ago and more than 40% when we entered the commodity price downturn in fiscal 2015. Ontario and Eastern Canada now account for nearly another third at 27% of the loan book.

These significant markets comprised less than 6% of our book 10 years ago. In terms of momentum, our Ontario business lines delivered 16% growth over the past year, with Alberta and BC also delivering strong growth at 10% and 9% respectively.

With Ontario leading the way, each of these three provinces delivered just under a third of our growth over the past year, a close proxy for our strategic objective to divide our business presence equally across the three regions. Slide 4 also demonstrates successful execution against a strategy to target growth in general commercial loans.

This is our largest lending category at 29% of the portfolio and represents our growing presence across the broadest segments of Canada's economy. Relationships in this space provide excellent opportunities for CWB to deliver full range products and services to business owners and we delivered very strong growth of 15% over the past year.

Personal loans and mortgages increased 10% this year and now represent 20% of overall loans. Within this category, we have minimal unsecured personal loan exposures.

CWB Optimum Mortgage grew 7% with alternative mortgages now representing 54% of our personal loans and mortgages. We continue to expect our residential mortgage originations to include an increased proportion of A mortgages through the remainder of the year.

The overall growth rate of residential mortgages is anticipated to be in line with growth across the rest of our loan portfolio over the next three quarters of 2019. Real estate project loans have contracted slightly, with net growth in Ontario more than offset by successful project completions and payouts in Alberta and BC.

This category now represents 15% of the loan book, consistent with last year. As we move forward, we expect to continue to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale and pre-lease levels.

We closely monitor housing market conditions and remain committed to support our experienced clients and prudently structured construction related opportunities within targeted markets. Slide 5 demonstrates our performance against our strategic objective to diversify our funding sources.

Total deposits increased 5% from last year, branch raised deposits were up 3%, including very strong 13% growth of branch raised term deposits and a 2% reduction of demand in notice deposit balances. The shift in the composition of our branch raised deposits reflects both depositor preference for longer term deposits in today's higher rate environment and intensive competitive factors.

Term deposits raised through the broker network increased 9% and now represent 37% of total funding, relatively consistent with last year. As I mentioned earlier, we began to realign client facing operations in our branches last year, and our efforts will continue throughout the remainder of 2019.

These changes are focused to improve our client experience and empower our teams to deliver on our reputation for standout personalized service in a highly scalable manner. With an ongoing strategic focus on process improvement, new product and service capabilities and a commitment to strategic pricing initiatives, we remain focused to strengthen our competitive position for funding.

With that, I'll turn the call over to Carolyn.

Thank you and good morning, everyone. As Chris mentioned, CWB Financial Group delivered a strong first quarter, driven by quarterly net interest income that was up 13% year-over-year, common shareholders net income and pre-tax pre-provision income were up 7% and 10% respectively.

As Chris noted, growth would have been even higher, excluding $3 million of pre-tax gains from the CWT strategic transactions in the first quarter last year. Net interest income was down 13%, as growth in credit related fees was more than offset by the impact of last year's gains, which I've noted.

Non-interest expenses were up 9%, primarily due to a 7% increase in salaries and benefits and 14% increase in premises and equipment expenses. Higher salaries and benefits mainly reflects hiring activity to support overall business growth and annual salary increments.

Higher premises and equipment expense primarily reflects ongoing investment in technology infrastructure to position us for future growth. Diluted and adjusted cash earnings per common share of $0.75 and $0.80 were up 9% and 7% respectively.

Turning to slide 7, compared to last year, net interest income increased 13%, reflecting the combined benefits of 13% growth in average loans and 9 basis points higher net interest margin to 2.61%. The increase in net interest margin primarily reflects higher asset yields and favorable changes in asset mix, which more than offset higher funding costs.

The increase in asset yields mainly reflects the higher interest rate environment. Changes in asset mix include both lower average balances of cash and securities and stronger relative growth of higher yielding loan portfolios.

The increase in funding costs also reflects the higher interest rate environment as well as client preference for longer term deposits. Sequentially, net interest margin was stable, as the positive impacts of a higher interest rate environment on asset yields were offset by increased funding costs, including the impact of continued client preference for longer term deposits.

We now expect to deliver growth of net interest income in the high single digit range in fiscal 2019, driven primarily by strong loan growth. Higher total revenue and effective expense management supported positive operating leverage of 0.4% this quarter.

Our efficiency ratio of 44.4% is unchanged from last year and compared favorably with our average annual efficiency ratio over the last three years of approximately 46%. We expect to deliver slightly positive operating leverage on a full year basis in 2019, although quarterly volatility of operating leverage may occur based on the timing of expenditures.

Turning to slide 9, overall strong credit quality continues to reflect our secured lending business models, disciplined underwriting practices and proactive loan management. We continue to carefully monitor the entire loan portfolio for signs of weakness and have not identified any current or emerging systemic issues.

The provision for credit losses was calculated under IFRS 9 for the first time this quarter, with the provision in prior periods calculated under IAF 39. Under IFRS 9, the first quarter provision for credit losses, as a percentage of average loads, of 24 basis points consisted of 22 basis points related to impaired loans and 2 basis points related to performing or stage 1 and 2 loans.

Under IAS 39, provisions for credit losses represented 18 basis points in the first quarter of last year with 16 basis points for impaired loans and 2 basis points for performing loans. The 19 basis point provision for credit losses last quarter was entirely related to impaired loans.

The increase in the provision related to impaired loans compared to both prior periods primarily reflected provisions recognized on two general commercial loans this quarter. Turning to slide 10, gross impaired loans represented 51 basis points of gross loans compared to 56 basis points last year and 52 basis points last quarter.

As we noted before, the level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected writeoff, given tangible security held in support of lending exposures. The overall loan portfolio was reviewed regularly with credit decisions undertaken on a case by case basis to provide early identification of possible adverse trends.

Our business model remains focused on secured mid market commercial lending and we have no material exposure to unsecured personal borrowing, including credit cards. Gross impaired loans within Alberta accounted for 43% of total impairments compared to 58% last year and 56% last quarter.

We expect the relative concentration of impaired loans in Alberta to continue to normalize in the absence of material commodity price weakness compared to recent levels. Gross impaired loans within CWB Optimum Mortgage may increase in the event of a material correction of residential home prices.

We primarily participate in housing market activity through personal mortgages and residential project financing. Personal mortgages are originated within both our branches and through CWB Optimum mortgage and both channels continue to perform well.

CWB Optimum mortgage continues to deliver strong growth with an attractive risk profile. Our business model targets affordably priced homes with an average loan to value at initial funding of 69% this quarter on an average origination of 323,000.

The average size of each outstanding mortgage is just under 300,000. On slide 11, we provide the November 1, 2018 IFRS 9 transition impacts, relating to our allowance for credit losses and capital positions.

Actual transition impacts were consistent with the estimate we shared in our 2018 annual report. Upon adoption of the IFRS 9 impairment requirements, allowances for credit losses on performing loans or stages 1 and 2 decreased 31 million from the prior accounting method collective allowance as at October 31, 2018.

Stage three allowances on impaired loans were unchanged under IFRS 9. We recorded a corresponding after tax increase to shareholders' equity of 23 million upon transition.

This resulted in an increase to the set 1 and tier 1 capital ratios of approximately 10 basis points with a nominal impact to the total ratio. Slide 12 shows our strong capital ratios at January 31.

Using a standardized approach for calculating risk weighted assets, our common equity tier 1 ratio was 9.1%, tier 1 ratio was 10.7%, and our total ratio was 12.0%. And at 8.5%, our BASEL III leverage ratio remained very strong.

As Chris noted, we fully utilized our normal course issuer bid during the quarter, resulting in a decrease to CWB's capital ratios of approximately 20 basis points. We also issued 125 million of preferred shares just before quarter end, which resulted in an increase in the tier 1 and total capital ratios of approximately 55 basis points.

Dividends related to the new preferred shares will be approximately 5.7 million in fiscal 2019. And with that, I'll turn the call back over to Matt.

Thanks, Carolyn. That concludes our formal presentation for today's call.

I'll ask Johana to begin the question-and-answer period.

First, just to start with Chris on the normal course issuer bid. So you put that in place last quarter, and as you mentioned, acted on it very quickly.

What happens now? Your capital position obviously is still in pretty healthy shape under the standardized approach?

Do you anticipate putting capital to work again via share repurchases or was that more a reflection of where the stock was during the latter few months of the year?

It was certainly a reflection of where the stock was at the time, certainly significant undervalued based on how we look at our model. So we will continue to evaluate how we look forward on the NCIB.

So what does that say for how your - for how you look at evaluation today?

I would say that, we still believe that we've got lots of room to grow in terms of our business model and adding more value for shareholders. We expect the target ranges to - as we look at the - increase in the value of our stock to reflect the very strong performance we gave in 2018 and in Q1 of '19, so we continue to perform very well and we expect the market to see that strong performance and certainly an uptick on the stock.

Our goal is to, as you know, to focus on ensuring that we have strong capital ratios to grow. And if we have a very egregious stock price, then as we did in December, and we exercised our NCIB, we will consider all those opportunities as the market evolves, but we're very confident in our business and want to support it with strong capital.

I was half kidding with that one, Chris, but I know, I'm guessing the book value per share metric is maybe one we can think about if you were to?

Yes.

Okay. That's fair, okay.

Maybe something a little bit more - a little bit more tangible to the business, your commentary in the report to shareholders on net interest income growth, obviously a key part of the revenue line for the company, so I think it was the double digit objective was there last quarter, it's a little bit lower this time around at high single digits. It seems like for either Carolyn or Chris, this is almost fully a reflection of net interest margin, so if you could just update us on how your thought process has changed here?

Is this part and parcel with what's happening with the Bank of Canada commentary or are you seeing more pressure on the funding side that you think is going to have a dampening impact on NIM as 2019 progresses?

Yeah. Sumit, I'll start, When we put out our annual report in early December, we talked about expecting a NIM outlook that was - had an increase of about the same magnitude as 2018, so that's 4 basis points approximately that did include an assumption for one Bank of Canada rate increase earlier in the year.

The expectations for that has certainly changed since December. So the difference of that to our projections is in the range of 1 to 2 basis points.

And then we continue to see intense competition on both sides of the balance sheet, but in particular around deposits, so the combination of those two is why we've dampened the outlook related to margin.

First one on credit. There were some moving parts in the impaired loan categories.

I did want to ask about the increase in real estate project loan impaireds, looked like there was a $10 million increase, but maybe no material PCL, is that right, Carolyn, can we get some details around that?

Well, no material change in PCLs on the real estate project category. We have loans that go in and out that remains a very strong part of our book.

So credit - the credit conditions, I would say is business as usual this quarter.

So the impaired - okay, so that - there was an impairment, but no P&L impact?

No.

Okay. On the expense line, just thinking about regulatory costs for a moment, they've been pretty stable the last three quarters, should we think of them as having peaked, is there - are we at a run rate or is there potential for this to normalize lower as we get - as you get through your application process on AAR, advanced ARB and so on, how - any sense for that would be helpful.

Yeah. The regulatory cost line doesn't include any costs related to AIRB.

So it would be standard recurring regulatory costs, including CIC deposit premiums. So the run rate for the last three quarters, it's probably a reasonable expectation going forward.

Yeah.

And then last thing for me if I could, going back to credit, you mentioned the two commercial loans, any detail around which business they were from, or what sector I guess?

They were in our general commercial category. They were in different cities.

They were just specific impairments that occurred with businesses that failed. There is nothing really unusual, no systemic issue, doesn't speak to any industry weakness, just loans that ran into challenges in the current economy.

I just have a couple of questions as well. With respect to the Optimum mortgage portfolio, you noticed that there was a bit of an increase in the provisions or sorry, in the gross impaired loans and your language around your appetite for them seems to have changed, can you speak to why that might be, Chris?

So, this was our first portfolio we put on AIRB, so that modeling is certainly helping us as we think about our underwriting and as we came into fiscal '18 and with the changes that were occurring in the regulatory environment would be '20, the underwriting process we had through the AIRB model really helped us making sure that we were underwriting at a stronger credit quality, so that has continued as we've come into fiscal '19. So '18, we ended up with 10% growth in that book this year, year-over-year, we're at 7.

We expect the volume of that to sort of mirror the rest of the bank, as we look at fiscal '19. But certainly our goal is to ensure that we maintain a conservatively underwritten book in that category, as we have historically, but we certainly got better tools for us to manage that with and we continue to focus on that.

So it has nothing to do with the quarter over quarter increase in impaired loans, personal loans and mortgages?

No, no, nothing to do with that. No, it's just - we have a very consistent underwriting process that we follow there.

And maybe a question for Carolyn, the stage 1 and stage 2 provisions for credit losses, 2 basis points. Is it fair to say that that was entirely due to the growth of the loan book, or were there actually changes to any of your estimates, assumptions, or was there any sort of migration from stage 1 to stage 2?

Yeah. Quick answer is all of the above, but from a magnitude perspective, the most significant impact is the growth in the portfolio, followed by some small weakening in some of the economic forecast indicators.

But not much migration of from stage 1 to stage 2?

Not from a client specific perspective, that would move a specific client into stage 2, but the impact of the economic forecasts can move some clients into stage 2, just by virtue of the conditional probability of default. So nothing's significant there.

Good morning. Just back on the real estate project loans in gross impaired loans.

Is BC a driver of that increase sequentially? Like, what would be the geographic breakdown, just like ballpark?

Sorry, I'm just looking at my schedule. Both BC and Alberta are factored in there.

And the increase in BC was from a number of small exposures and not any one particular large exposure.

Okay. And subsequent to the court, I guess we've seen continued sort of weakness in the BC real estate market, especially as it relates to projects, are you guys seeing any credit deterioration.

I understand that these are secured loans in the Kansas where major losses are low, but just from an impairment perspective, are you seeing an uptick there that's continued subsequent to the quarter?

We have not seen any change in credit quality in that portfolio. It maintains, we've got a real focus on what we call, tier 1 borrowers, very strong credit structures, high levels of pre-sales, they like to deal with the developers with a proven track record.

So you take out the construction risk out of it and you manage market risk through pre sales. So we've had a very - we continued a very strong credit performance in the project lending category.

And then with respect to expenses, your NICs was quite a bit better than your 46% benchmark. Given that you left your 46% reference point unchanged, is it safe to assume that expenses move up throughout the rest of the year?

So Q1 is usually a seasonally low quarter for us. So I would say, it's not an indicative run rate.

But, we continue to manage to slightly positive operating leverage and managing expenses in with constant consideration of what the revenue forecast looks like.

I see Q1s are normally lower, I just wanted to make sure that was the case? Okay.

And then finally with respect to the lowering of your NIM guidance modestly, sorry NII guidance, but keeping your loan growth guidance more or less intact and on Sumit's point, it seems that NIMs are implicated in all this. But is it safe to say that you could actually see sequential NIM contraction potentially through the rest of '19, as opposed to just even flat?

Well, with what we're seeing today, and what our forecast is that flows into the way that we've revised the forecast, we're seeing lots of competition on both sides of the balance sheet, in particular on deposits. So again, there in some respects, it depends on what we see in the competitive landscape.

It would be mixed too.

It would be safe to assume therefore though that NIM contraction is sort of on the table potentially, if sort of competitive pressures, especially on the deposit front doesn't subside?

We continue to focus on what can we control. So that's the initiatives that Chris talked about to improve the client experience, building out full service relationships, and we believe that will support our funding profile.

My first question, I just wanted to turn back to capital and just discuss the AIRB implementation timeline. So you mentioned that there's going to be a submission to the regulator in 2019.

Is it safe to assume that you'll be fully running on AIRB in the first half of 2020?

Well, we are optimistic, but approval is subject to the regulator's approval, so that's not in our control.

Okay. And then just when I look at your corporate presentation, you have a slide there that outlines your pro forma CET1 relative to the big six and in there, you assume a 20% reduction in your RWA, is that based on what your models are spitting out right now for AIRB or is that just a conservative number, because when I compare your, call it, your risk weighting on commercial at 100% to the big six at around 50, I would have just expected maybe a greater decline than that 20%.

Yeah, so the 20% that we include in the forecast is a hypothetical expectation that we've included in there for purposes of just calculating what it might look like for us. The actual result will be a combination of two things.

The first will be the pillar one requirement, which is the very quantitative risk weighted asset calculation. So, as you know, our portfolios - business portfolios today, are risk weighted at about 100% compared to the large banks about 50.

And then the second thing is pillar 2 economic capital, where we think about our portfolio and what are the appropriate levels for us. And then the third constraint would be under the new BASEL framework, the output floor which is 72.5% of the standardized approach.

So, there are a couple of different factors at play that will work together to determine what the end impact is when we have approval.

Okay. So that 11.5% should largely be ballpark, maybe a little conservative if you go down to that 72.5% floor?

Fair?

Fair estimate.

Okay. And so then at 11.5%, relative to the DSIBs at 11.5%, would you guys consider yourselves over capitalized at that point, and if so, how would you deploy capital?

So, capital allocation is a key opportunity from AIRB. That's how we've always viewed it, as giving us the ability to number one to grow.

It gives us better ammunition to really feel our ability to grow. So that's our number one focus and ultimately we want to deploy capital effectively to ensure that shareholders are adequately recompensed and we can then look at share buybacks and dividend changes.

So, but our number one focus would be growth.

Just back maybe on the credit side, the two loans that were impaired or the two commercial loans that you singled out, were they already impaired and this was a top up, is the provision or to the allowance?

These were actually loans that became impaired. There was no resolution.

We wrote them off and so if you look at the - they're in our formations, they're in our PCL, but they're not in our opening or closing balances for gross impaired. So they're loans that just went right through in - within one quarter.

And so I guess, where I'm going with, if you look in the notes, so I'm sure you've seen the notes, the financial statements, page 38 and if I look at your stage 1, 2, 3, in stage 3, there is a net re-measurement of 14.4 million. And so just, was that just degradation of loans that were already impaired?

Or was that actually the economic variable changes, just trying to get a sense of what that 14 - what drove that 14.4? And if it's easier to go offline, I'm fine with that, so…

So that would be that - yeah, that's the balance in the - that's the actual balance, so that would be net new formations for the quarter, primarily with the, be the closest description compared to the way we've traditionally reported it.

Okay. So that's new formations, that's PCL related to stuff that went from stage 2 to stage 3 essentially?

Yeah. New formations have impaired, whether or not it has a specific on it would be the second conversation, but it would be new formations to impaireds.

Okay. And then if I then look at the other schedule in your notes and I look at the increase in loans past due 61 to 90 days and this might relate to the IFRS 9 and so you can kind of walk me through if that's the case, but if there was a decent increase and it was - there was a decent increase in the personal category from 691,000 to 15.4 million and so that just caught my eye, can you walk through what drove that?

So the - yeah, the IFRS 9 impact of this past due note, which is on page 36, note 6 of the report. The IFRS 9 impact would really only impact - factor into the fact that we now have no loans that are past due more than 90 days and are not impaired.

So IFRS 9 brought in a hard stop. So anything over 90 days is in the impaired bucket.

Other than that, it's relatively consistent with the way that they were calculated before, so the increase in personnel is just primarily what we're seeing across the market. So there are some additions and impairments on the personal mortgage side, sort of across the entire portfolio of where that portfolio resides and appropriate specifics have been put on a number of them.

And so this is just, so - and this is more on the mortgage, I guess, this would be mostly on the mortgage book, is it more the LTE mortgage book where that is starting to build?

Probably I think, yeah.

And then maybe just lastly, for me, I mean, I was surprised you had pretty good loan growth in Alberta, which is great to see. I just wanted to maybe get an idea of, if you can flesh out what drove that and what segment, because it was noticeable I think from 10% year over year and just maybe kind of additional color and I know it's smaller part of your overall loan book is Alberta, but it's one that we often get a lot of discussion about.

So just kind of the feel for the environment right now.

So I can, I'll sort of talk to the numbers and then Christ can maybe talk to the environment. So, 10% growth in our Alberta exposures year-over-year, half - more than half of it is in the general commercial category, which is the area that we've been focusing on, about a quarter in personal loans and mortgages, little bit in equipment finance, little bit in commercial mortgage.

So fairly well spread across the book. On the sequential increase, 3% sequential increase, it's about three quarters in general commercial and the rest is sort of split across the different categories, not really material in any one of them.

So Doug, that's really our focus. That's the core client we're looking to find ways to win and we've absolutely increased our horsepower with all the investment we've made in our infrastructure ability to take on more cash management, so we're very active out to recruit, particularly that general commercial client.

That's a key focus for us and we've seen good success.

And what you've seen, just because it doesn't feel like you're getting that deposit traction yet, like where do you feel like you are on that evolution of asking for that deposit business from these accounts?

It continues to grow. I mean, as we've had very positive impact of that, we have absolutely had switching from demand and notice into terms that term branch-raised deposits overall continue to grow quarter over quarter.

It's how they're held that's changed. We've had 30% growth in term deposits in Q1, 2% slight decline in demand in notice but we expect to see that continue to grow because we just increased our capabilities.

And it was just 12 months ago, we put out the - all the new online tools for online banking for our mid market commercial clients. It was just last May, we brought out the remote deposit capture.

So we continue to have rolled out more ways to win more business in that category from our very strong technology platform. So that will continue to work and so we see great traction there and it's a key focus for our teams.

My first question is for Carolyn on credit. Last year, you talked about including IFRS 9 at your PCL range and guidance for '19, could form that 18 to 23, [indiscernible]?

With what we've seen now, like what we know now, we continue to believe in that range. The two commercial accounts that we've talked about this morning increased the provision in the first quarter, but again, it is based on current thoughts around economic forecasts and so if the credit cycle turns, then there is a potential that the stage 1 and 2 could go higher, but at this point, yeah.

And then just on the loan growth side, maybe for Chris, the equipment financing loans were, if I look at this quarter, it dropped sequentially after robust growth in '18, perhaps you could talk about that portfolio and the outlook for 2019 and even 2020.

Sure. Yeah.

So, again, this is a key portfolio for us. And we've got really three big areas that we focus on for, it is our EFG group in the bank, our national leasing group, and then within national leasing, there is broker buyer center.

What we've seen is good originations. We've also seen a lot of paybacks as well.

So it's kind of a mix of that and we've had some geographic wins necessarily seen across the board, has had good volumes, but we've certainly seen lots of paybacks as well. We continue to focus on that book.

We believe it's an area that we can continue to grow and it's been, for the last 25, 30 years, been a key strength for us and I think we've got strong teams in front of it.

Just a question on another aspect of geography in your loan book, relatively smaller part of the book is Quebec, but maybe because of that, I'm a little surprised at the year-over-year loan growth there. So I'm just wondering if there's anything notable there, maybe even in terms of paybacks.

What was driving that? It just seems quite a bit slower than I would have expected, especially relative to some other provinces.

And if you could just remind us on the nature of your business in Quebec as well?

Yes, we don't have extensive business in Quebec, the area that we have a team on the ground is in national leasing, so we have equipment finance lending in Quebec. We don't do branch lending there.

On occasion, we've done some corporate lending in Quebec, but that's - the focus has been equipment finance or national leasing.

So the 2% year-over-year growth, what's driving that? It seems unusually low.

Well, it also would include in that book 12 months ago when we acquired the ECM portfolio that have some Quebec exposure as well. That book overall has performed well, but it is a pay down as well.

So when you look at kind of the net growth, that could be an impact on that portion of the portfolio for quite - Quebec exposures that were required to the acquisitions, offsetting growth that would be seen in the national leasing in Quebec for.

And then just following up on Darko's question, just curious about what your expectation would be for the PCL ratio on performing loans, just due to the kind of loan growth that you're looking for a loan, isolating everything else.

Isolating everything else, yeah, all else being equal on economic factors in the staging and work end up in dollar terms, we would expect the stage 1 and 2 provision to increase approximately on pace with the growth in the loan book. So I can't quite move that to place in my head.

I just wanted to follow up, I have up two quick questions. The first is just to follow up on Marco's comments around the AIRB versus the standardized risk weighting that you provided on page 18 of your corporate presentation.

And I noticed you also provided your PCL ratio against big six pure average and like my takeaway from this slide is that various things highlighted between the standardized and the AIRB risk weighting, would it be fair to say that, given your lower credit loss experience, you're fairly confident that you can bridge that gap, if and when you transition to AIRB?

Well, the AIRB risk weights are based on our own credit losses. So we would be able to realize some of that benefit, just constrained by the various regulatory factors.

So we don't expect a 50% reduction in our business related. Yeah, we don't expect that to be the level of capital release that comes with AIRB, but certainly given our outstanding credit loss history over our - the experience of the bank, we do expect to be able to realize that differential as constrained by the regulations.

So the lower credit loss modeling would be a net benefit to AIRB risk weighting, is a good takeaway there?

Absolutely. And the overall risk weighting becomes risk sensitive in a way that it is not under the standardized approach.

And the second quick question I have, I just wanted to follow up on page 13 of the supplement pack, where you outline details on your residential mortgage portfolio. And I just had a question on the LTV that you have in the British Columbia bucket.

So it's relatively flat, down sequentially. And we've seen some peers effective LTVs move up sequentially.

So could you just speak to maybe the dynamic there, what's contributing or supporting the stability in your LTV for British Columbia, because we have seen some price softness in the market recently?

Well, I would just say we're a conservative underwriter on the residential mortgage side and that the focus of our credit has been on that average house. So as Carolyn mentioned in her comments, $323,000 is the average size of that origination, under 300 is the in the book size that we always specifically targeted that portion of the market because it has less price volatility.

So we don't want to see, we don't have any residential mortgages in the book that's over $1 million. We want to be in the affordable category and the one that has less price volatility.

So that's been our structure of how we've approached this market since we started in 2003, and it's worked out very well for us. So, I think that would probably help to explain more stability in the loan to value, as we look sort of across the years.

You're putting in the pricing bucket, which is I guess less sensitive to downward pressures and you're being pretty prudent in your underwriting, in terms of LTVs?

That's our focus. Yes.

I just wanted to get a couple of clarifications here. The commercial loans that you notice, they were in Western Canada?

Yes, at two different provinces.

And where they syndicated credits?

No.

They were just - they were in that sort of mid market commercial category.

And Carolyn, when you've given us some of the NIM commentary, you've also talked that this quarter, there was a bit of a mix shift to kind of maybe ran with a little bit less cash and securities balance in a bit more higher yielding. Is there some more opportunity there?

When you're thinking about balance of year, are you still thinking of some remixing opportunity.

The most significant factor on that difference in average levels of cash and security was that in quarter one of last year, we carried more liquidity as a conservative strategy, knowing that we needed to close on the ECN acquisition on January 31 last year. So it was an acquisition related unusual item.

As I look at the dollar value of average cash and securities for the last four quarters in about 2.5 billion, I think is the number, we'll see some small changes in the quarter end balance, depending if we have a senior deposit note coming up for redemption in the next quarter. But overall, that is not a bad run rate, we will see a little bit of variability, but probably more current with like.

We don't - we manage to within both - we managed to within our own liquidity metrics and guidelines and so it'll fluctuate as necessary as opposed to strictly trying to - it ends up being more an outcome on the NIM impact rather than something that we're proactively driving. Our liquidity policy drives how much liquidity we hold.

And then during - in the past few years where there was exceptional weakness in the oil and gas space, you talked a little bit about your own stress testing, you've now adopted the IFRS 9, obviously things are a little bit different. I'm just curious if you could kind of give us some updated thoughts as to what are some of the key variables that you're stressing the portfolio, the gains nowadays?

And how did those results compare to when you were looking at the stress scenarios you were looking at back in '16, for example?

Yeah, I think the - maybe I'll start and then I'll let Chris talk a little bit about how our oil and gas portfolio, what it looks like today and the composition of it, because that's quite different from 2016. This stress test that we're running today, our press on the factors that impact our IFRS 9 macro-economic forecasts, so things like GDP growth, house prices, unemployment, oil prices are a factor in there, but they're a small factor in there.

Interest rates, yeah, so the stress tests we've done lately are around interest rates, the price of oil and seeing what impact that has on our clients and I would say overall, the results that we're seeing, particularly compared to 2016 is that we are more resilient and more diverse. So we're seeing the benefit in those stress tests coming from the way that the portfolio is now more diversified than it was in 2016.

And less dependent on oil based underwriting. So we have a very significant contraction in that book and the exposures we have today in that E&P side are, they're primarily in the syndicated category, all of which have very strong credit metrics.

They actually focus more on natural gas liquids and they are on the oil side, so we've completely changed our underwriting appetite structure and exposures.

So just Carolyn, I think you would have maybe kind of, I recall correctly, you would have kind of quantified for us what stress loan losses may have looked like back in '16, is there a comparable set of numbers that you could share with us right now, as to what stress losses may look like, given the resiliency of the book today?

Not that I have my finger on. Yeah.

Okay. Well, anyway, and Chris, I think it was good to see the agility of the management team to actually act on the buyback when the stock was misbehaving the way it was relative to book value.

Yes, it was misbehaving. Yeah.

Thank you, Johana. Thank you all very much for your continued interest in CWB Financial Group.

And please note that our annual meeting will be held in April 4 at 1 PM mountain time here at Edmonton. A link to the webcast can be found on our Investor Relations website at the cwb.com and we invite you to listen in.

We also look forward to reporting financial results for the second quarter of fiscal 2019 on May 29. With that, we wish you all a good morning and good day.