EQB Inc. (EQGPF) Q4 2023 Earnings Call Transcript

EQB Inc. (OTCPK:EQGPF) Q4 2023 Earnings Conference Call December 8, 2023 8:00 AM ET

Company Participants

Sandie Douville – Vice President of Investor Relations and ESG Strategy

Andrew Moore – President and Chief Executive Officer

Chadwick Westlake – Chief Financial Officer

Conference Call Participants

Meny Grauman – Scotiabank

Mike Rizvanovic – KBW Research

Lemar Persaud – Cormark

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Stephen Boland – Raymond James

Operator

Welcome to EQB’s Earnings Call for the Fourth Quarter of 2023 on Friday, December 8, 2023. At this time, you are in a listen-only mode. Later, we will conduct a Q&A session for analysts. Instructions will be provided at that time.

It’s now my pleasure to turn the call over to Sandie Douville, Vice President of Investor Relations and ESG Strategy for EQB.

Sandie Douville

Thanks, Laura.

Your hosts today are Andrew Moore, President and Chief Executive Officer; and Chadwick Westlake, Chief Financial Officer. Also with us is Marlene Lenarduzzi, our new Chief Risk Officer. Marlene joined in October with more than 25 years of experience in risk management. Most recently, Marlene was Head of Counterparty Credit Risk Management and Market Risk Strategic Initiatives at BMO Financial Group. Expect to hear from her on these calls in future quarters. Welcome, Marlene, to the bank.

For those on the phone lines only, we encourage you to also log on to our webcast to view our accompanying quarterly investor presentation. There, on Slide 2, you’ll find EQB’s caution regarding forward-looking statements as well as the use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted.

It is now my pleasure to turn the call over to Andrew.

Andrew Moore

Thanks, Sandie, and good morning, everyone.

Before jumping into 2023 performance highlights and our 2024 guidance, I want to acknowledge a few important milestones in our long and successful corporate history. 10 years ago, Equitable Trust received its banking license and became Equitable Bank to appeal to a new generation of financial services customers. 2024 will mark our 20th year as a TSX-listed company. And yesterday, EQB began reporting on the same fiscal year basis as the Canadian banking industry.

These 10 years included the launch and scaling of EQ Bank, the best digital platform in Canada; the expansion of our leadership positions in single family and multi-unit residential lending; the launch of decumulation lending; and the accretive acquisitions of Bennington Financial and Concentra Bank. These and many other developments define and reflect the organization we are today, purpose-driven to enrich people’s lives, managed with a strong risk culture, technologically advanced and more capable than ever.

Then and now, picture of Equitable Bank’s assets and deposits demonstrates our transformation in scope and scale becoming Candan’s seventh largest bank. And with that, the shareholder returns at EQB are leading compared to banks on the TSX and S&P 500. Our progress has been accompanied by annual earnings growth, a consistent achievement of ROE above 15%, strong credit performance, and unwavering focus on doing the right thing with customer service as the beating heart of our approach.

These calls are intended primarily to help our investors and analysts sort out the underlying financial performance over recent history, and Chadwick will provide that insight shortly. While the noise inevitably accompanies a change in year-end makes comparisons more difficult, EQB clearly delivered great financial results in 2023. In fact, our EPS performance over 10 months surpassed what we achieved in 12 months in 2022.

What I’m most proud of is that through this 10-year journey, we’ve kept our clear focus on building a better bank that improves our customers’ lives. This is a hard culture and mindset to maintain and one that is now embedded in our DNA to provide enduring competitive advantage. Equitable Bank’s defining strengths position us as the Canada Bank — Challenger Bank in Canada, a category we established and defined with customer upside that is different and better than our industry peers.

I’d like to thank the entire Equitable team for delivering great results again this year with a special shout out to those whose efforts were required to transition our reporting year.

Canada’s banks got together in 1965 and agreed that October would be their common year-end, apparently as a favor to overworked accountants to shift year-end reporting away from the times that these firms are most busy. This change predated Equitable’s founding by five years. Now that we have firmly established as a distinctive player in the banking industry, I think our industry analysts will be pleased with the ability to make side-by-side comparisons that include Canada’s Challenger Bank going forward.

Now to performance highlights and our outlook. I speak regularly to our focus on value creation, discipline of capital allocation, and a North Star objective of generating more than 15% return on equity. We achieved our ambition again in fiscal 2023 with 16.5% ROE in the fourth quarter, ending at 17.1% for the 10-month fiscal period. This takes our 10-year ROE average to 16.3%, which we believe is leading amongst Canadian banks. Our priority for 2024 is to again deliver ROE of greater than 15%, which is performance that rewards shareholders for their ownership while being consistent with investing in the capabilities required by the business to flourish in the years to come.

We ended the year with a record $111 billion of assets under management and administration, up 8% in just 10 months. This continued growth demonstrates the strength of our brand, trust customers have in us, and the value of delivering innovation and service excellence in underserved customer segments. On November 1st, we marked one year since our Concentra Bank acquisition, which gave us additional scale advantages and made Equitable Bank the seventh largest bank in Canada.

I’m pleased to say we outperformed our key business case targets ahead of schedule. We’re also continuing to find new ways to serve our credit union partners. Recent expansions of securitization, consulting, foreign exchange and digital banking services create the means for us to do even more for them and their 6 million members. With the experience gained in working with the people who joined Equitable through the acquisition, we are also confident that the Concentra investment is poised to continue to deliver great results for shareholders in the form of earnings accretion, non-interest revenue growth in 2024.

Foundational to the long-term franchise value and growth of Equitable Bank is EQ Bank, our digital bank. Here we had another big year on the back of the highly successful “Make Bank” brand campaign and new service innovations. The Forbes Number 1 rated bank in Canada for three years running added another 93,000 customers in just 10 months, growth of 30%, taking us past the 400,000-mark with hundreds signing up daily.

You may recall that we launched the EQ Bank payment card at the beginning of 2023. Just a few weeks ago, the card launched in Quebec. This payment solution has been game changing for our customers and EQ Bank as a purely digital bank. Customer enthusiasm for our first-to-market all-digital first home savings account also surpassed our expectations.

We could not be more excited about what lies ahead for EQ Bank in 2024. Early in the New Year, you will see us expand our brand voice with a message that builds on our learning and success from 2023. In 2024, we’ll be the first all-digital business bank for small businesses, giving them a better way to bank. These initiatives will help us achieve our 30% to 40% EQ Bank customer growth guidance.

Another business that’s important to us is commercial banking. We operate through seven lines of business and our on-balance sheet loan portfolio grew to $15 billion in 2023. The vast majority of our commercial lending supports real estate where people live. We are a leader in funding the development and renovation of apartments, construction of condominiums, and other types of multi-unit residential real estate properties.

In order to help Canada close a significant housing supply gap and as a matter of strategy and risk management, we focus on lending in major urban markets. We have been a reliable lender in this space for decades and are a significant player in the market to securitize insured multi-unit loans through CMHC sponsored programs. You will see in our MD&A guidance that our expectations for multi-unit lending continues to be — to reflect a bullish outlook, and with it an expectation that we will again realize strong earnings from the associated securitization activities.

Recent actions by the Canadian Federal Government support our guidance, including the increase in the Canada Mortgage Bond Program to fund multi-unit projects, ensured by CMHC, which the government believes will stimulate up to 30,000 more rental apartments being built per year. In our MD&A, we describe the composition of our commercial portfolio and underscored office buildings, shopping malls and hotels represent about 2% of our loan assets.

In personal banking, our strategic focus has remained particularly on growing Equitable’s decumulation lending business, particularly reverse mortgages. Our Talking House TV campaign debut this fall, and for the first time, we established a direct-to-consumer connection. I’m delighted to note that decumulation lending assets now total $1.5 billion, up 43% in just 10 months. We expect this growth trajectory to continue in 2024 as Canadian seniors look to Equitable Bank to help them tap the wealth that their homes represent.

For single family uninsured lending, we experienced moderate growth aligned to our 2023 guidance, with assets increasing 3% from year-end 2022. You will recall that in both June and July, the Bank of Canada raised the overnight rate with a discernible market impact. On the flip side, loan retention is much higher, and this is a tailwind we expect to continue into 2024.

For those of you worried about tail risks, I would point out that over 80% of our uninsured single family mortgage customers had their mortgage originated or renewed in this higher interest rate environment. As you think about risks, I urge you to review the MD&A showing how the Bank’s historical loss rates over the past 10 years, including 2023, have always been far lower as a percentage of total loan assets than Canada’s peer banks.

I’m also excited about our announced agreement to acquire 75% of ACM Advisors. Beyond adding about $5 billion in assets under management to EQB as a new subsidiary, separate and distinct from Equitable Bank, ACM brings us a new opportunity to enrich people’s lives and a new source of non-interest revenue for EQB. We look forward to partnering with Chad Mallow, Chad Mercer and the entire ACM team to build on their 30-year history of delivering value for institutional and accredited retail investors and commercial borrowing customers.

Now, over to Chadwick.

Chadwick Westlake

Thanks, and good morning.

Before I jump into the numbers, let me reinforce Andrew’s earlier comments regarding the fiscal year change. Our Q4 results in 2023 are presented as a four-month period ending on October 31st and compared to a three-month Q4 that ended on December 31st in 2022. There is no Q3 in 2023, which is a one-time occurrence to enable the change. This realignment of our year-end is a great strategic outcome for EQB.

As you’ve reviewed in our results, we exceeded our ambitious guidance on all key earnings metrics. Our employees delivered for our customers and in turn we are able to reward our investors for it. 2023 presented a challenging macro environment in the first full year with Concentra.

This morning, I’ll offer context on a few key performance measures before turning to Q&A, including margin and funding, revenue, credit performance, expense management, and our guidance for fiscal 2024. As part of revenue, I’ll include some comments on a top strategic priority that translated extremely well in fiscal ’23, being multi-unit residential and affordable housing that now represents nearly a third of our $62.4 billion in total loans under management.

First, margin and funding. At 2%, NIM expanded 1 basis point from Q2, mainly due to higher sequential prepayment income, higher yields on the conventional loan business, and cost of funds increasing more slowly as we continue to optimize new funding sources. On a year-over-year basis, NIM expanded 10 basis points to 1.97%, primarily benefiting from the Bank of Canada rate increases and a static lower deposit beta maintained in EQ Bank. This strong net interest margin led to a 13% increase in net interest income in fiscal 2023 compared to 2022 even with two months less of results.

Our long-term efforts to diversify and strengthen sources of low-cost funding are translating. Funding markets continue to be liquid and efficient for our strategy. In Q4, we launched our first BDN, or Bearer Deposit Note, program as a new wholesale lever, and we have many others in addition to core retail, such as $1.7 billion of covered bonds, $1.6 billion of deposit notes, and $2.4 billion of credit union deposits. More than 95% of our deposits are term or insured in our matched funding focus and approach to hedging are serving as well.

Now more into revenue, particularly non-interest revenue. Anchoring back to our 2022 Investor Day, we set a goal to diversify and grow our non-interest revenue to represent 12% to 15% of total revenue by 2027. We are progressing well towards this target with non-interest revenue representing 13% of total in Q4 and 12% on a full-year basis compared to 6% in 2022. A few key areas to call out here are multi-unit, Concentra Trust, and payments.

For insured multi-unit, we now have $20 billion in loans under management, up 11% sequentially and 27% year-over-year. $15 billion of this amount has been de-recognized through the CMHC, CMB and NHA MBS programs. As these units are insured against defaults and are not prepayable the assets are de-recognized when securitized and sold. The corresponding event and spread differential results in upfront non-interest revenue in that reporting period. This amounted to $25.9 million for Q4 and $56 million for fiscal 2023, more than double year-over-year.

Second to touch on is how we’re building relationships and expanding product offerings to credit unions and wealth advisory firms across Canada through Concentra Trust, which contributed 23% of total non-interest revenue in 2023. Also to note is that we have been growing contributions from payments, including priorities such as EQ Banks Payment-as-a-Service business, serving as BIN sponsors for third parties, such as Berkeley Payments and Blackhawk. This business enables us to support the needs of the fintech community by leveraging our card infrastructure and rolling out prepaid cards of various use cases. Upcoming, the acquisition of ACM will be accretive to fee-based revenue in fiscal 2024 once the deal closes in the order of magnitude of 15% to 20% plus growth of over current levels of fee revenue.

Now to credit risk trending. Our net allowance for credit loss ratio increased 2 basis points sequentially to 22 basis points, in-line with our expectations, given shifts in our lending portfolio and provisioning following changes in economic conditions. As a reminder, in our lending portfolios, nearly 100% is secured and approximately 52% is insured. The average LTV for our single family uninsured portfolio was 62% in Q4 compared to 63% in Q2. We do not offer single family variable rate mortgages that could be triggering negative amortization. About one-third of our single family lending is insured and the credit scores of our borrowers remain healthy with an average of 742 [beacon] (ph) on new originations in the past quarter. We are holding to our consistent risk management framework.

And as we’ve been signaling in the past few quarters, we expected impaired loans to continue to increase through the credit cycle, which you see in our results. Due to our prudent lending approach, in general, we continue to not expect to lose money on these impairments. Gross impaired loans increased $146 million or 63% quarter-over-quarter to $380 million. Most of this increase related to our commercial business with two-thirds relating to five commercial loans. We are appropriately provisioned and these loans are expected to resolve in coming quarters without losses on many of them. This translates to a net impaired loans ratio of 76 basis points as a percentage of loan assets.

PCL has increased to $19.6 million in Q4, up from $13 million in Q2, with a PCL ratio that increased 1 point to 12 basis points. This growth was primarily related to Stage 3. Over 70% of the PCL was attributed to equipment financing, which is something we expect in price of the business, plus one commercial loan. Our personal and single family portfolios are performing well. And as Andrew noted, the majority of our single family uninsured lending has already renewed to current pricing levels.

And now shifting to expenses. We are pleased to end another year with a world-class efficiency ratio, particularly compared to other Canadian banks. On a quarterly basis, expenses were up mainly due to there being one extra month in Q4. And for fiscal ’23, while there were only 10 months, it was the first year with Concentra included, plus new investments in EQ Bank products, services and marketing.

In terms of Concentra, as noted on our last earnings call, we set a target to achieve annualized cost savings of $30 million within 18 to 24 months post closing and achieve this ahead of schedule. This milestone is reflected in our Q4 43.8% efficiency ratio or 44% for fiscal ’23. This is particularly strong in the context of Concentra having had a near 70% efficiency ratio. While additional earnings synergies continue to be expected over time, the most significant drivers have been substantially delivered. There will be some continued investments on the technology side.

In Q4, we also had other one-time adjustments, including for costs related to acquiring and preparing to close ACM and for our fiscal year change. Our staffing level growth slowed sequentially as we leverage our economies of scale made possible with our technology stack and momentum to being a cloud-only bank.

Now, I’ll wrap up with some context and guidance. While inflation has moved in the right direction, interest rates continue to present some challenges in the broader economy which may impact short-term growth across EQB’s various business lines. Rate relief for customers may come before too long, but either way, we take confidence from the fact that our business model is proven to perform across economic and credit cycles and the ongoing diversification and sources of funding, assets and revenue have further strengthened our positioning and risk management profile.

While there remains uncertainty, we have conviction in 15% plus ROE guidance. We expect some variation in returns each quarter in part to do investments in our EQ Bank franchise, but 15% plus remains our North Star performance for the year as a whole, more weighted to the second half of 2024.

With our change in fiscal, to help with transparency, we were again issuing dollar range guidance. For diluted adjusted EPS, we provide a range of $11.75 to $12.25, dividend growth of 20% to 25% and book value per share growth of 13% to 15%, combined with CET1 remaining above 13%. These targets are a great reflection of EQB’s business model.

To wrap up, 2023 was another year of solid execution, purpose-driven solutions introduced for Canadians with the best service of all banks, and continued momentum for our Challenger story as we aim to continue reducing the significant discount in our share price and expand our track record of delivering the best long-term shareholder returns of all peers.

Now, we’d be pleased to take your questions. Laura, can you please open the line up for analysts?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman

Hi, good morning. Andrew, I was interested in getting a little more detail in a point you made about 80% of uninsured residential mortgages either originating or renewed in the higher rate environment. And just I wanted to explore that a little more. Obviously, it’s a big focus for the market. And just wanted to see if you’re seeing any signs of stress in customers that are renewing at higher rates? Is there anything that you could highlight in terms of that being a stress point for any of the customers? I’m so curious about that first.

Andrew Moore

Certainly, I have a lot of empathy for our customers here. I think lots of people wouldn’t have expected interest rates to rise as fast as they have. And so, when you — we’re offering renewals — our cost of funds is going up and we offer renewals at a fair spread on those renewals. So, we have a lot of empathy for our customers have to face such challenge and we are seeing some people at the margin that are seeing a little bit more early delinquency people’s — people having a little bit of challenge to make those payments, but it’s not really translating into anything in the way of losses.

I assume that some people unfortunately are forced to maybe sell their home to find a cheaper way to live or whatever. But in general, I think it’s more encouraging the other way where the vast majority of our customers are able to absorb this increase. I don’t know whether it requires working on an extra shift or whatever to get the extra income, but that seems to be the general theme, as most people, because the employment situation is still fairly good, are able to accommodate this shock to the mortgage payment.

Meny Grauman

And how big a factor is amortization here? Are you seeing customers increase the amortization in order to make the payments lower and able to manage the rising rates?

Andrew Moore

Amortization doesn’t change, but of course mortgage math is such that the principal payments you’re paying as you go through an interest shock, the principal payment per month reduces. So that does soften the blow of the interest rates going up a bit. As you sort of recall, mortgage math interest rates are very low. The vast majority of the mortgage payment is actually principal payment. When interest rates go up, the principal payment goes down in actual normal dollars, but the number of years to term or size has not been extended in general.

Meny Grauman

And just if you could update us, we’ve spoken in the past about retention rates and how they’ve moved higher. Is there any change there? Can you just update us on what you’re seeing in terms of retention, especially relative to sort of historical levels?

Andrew Moore

Yeah. So, we are seeing higher retention rates, roughly speaking, on renewals. We’re sort of 10% ahead of where we would normally be. And that seems to be — it’s been the case throughout the last year or so. It’s fairly consistent.

Meny Grauman

Thanks so much. That’s it for me.

Operator

Our next question comes from the line of Mike Rizvanovic from KBW Research. Please go ahead.

Mike Rizvanovic

Hey, good morning. A couple of quick ones for me, but I wanted to go back to the impaired loans. And what I’m wondering is, just looking at the ratio of 76 basis points, I get it that it’s mostly in your commercial book but it seems like it’s a lot higher than it was even during COVID. And I fully understand that what you see on your impairments is certainly not necessarily correlated with what you’ll book in terms of the loss. So, can you talk a bit about the collateral, or maybe first off why it’s as high as it’s ever been? And then secondly, talk about the collateral and why you’re confident that you’re not in fact going to see that correlation increase?

Andrew Moore

Thanks, Mike, for that question. So, I sort of I think thematically what we’re seeing is that we lend against good real estate, good cash flow in real estate by and large. What we’re seeing is some of our customers that may have other projects that we’re not lending on, but as they’ve seen interest rates rise, inflation in the project costs and so on, it’s put a bit of stress on them. So, we’re seeing the way lending gets good collateral, and essentially what’s happening is they’re being forced to restructure those assets, either selling the assets or refinancing them in different ways.

For those of you that followed Equitable for a number of years, you’ve seen this pop up in the past where we’ve seen fairly significant impairments. We’ve had the confidence to express that they’ll resolve over the next sort of three to six months [than] (ph) they have resolved that loss. So, this is not a new phenomenon in our Bank, but it is one that’s definitely more accentuated this quarter than you’ve historically seen. But the senior executive team have been through these kind of major loans, kind of loan by loan, thinking about the underlying asset values, thinking about the path to resolution for our customers.

And we certainly have pretty confident that over the next couple of quarters, you’ll — I think you’ll see some good progress over Q1, but the bigger progress is going to be in the Q2 period. So, the March period onwards, you’re going to see a number of things evolve. We’ve got properties already contracted for sale and that kind of thing. We’ve got one closing I think this week or next week. So, there is some pretty good resolution on the bigger ones that we’re able to identify.

Mike Rizvanovic

Okay. So, you’re confident that there’s no real change in the underlying risk of your book?

Andrew Moore

That’s certainly our feeling. I mean, certainly it’s a stressed environment and [we aren’t] (ph) blind to the fact that we were in an elevated risk world. But we’ve done a — clearly it was an issue coming into the quarter around to make sure that we did a super deep dive to make sure more than normal that we were comfortable with that statement. And the conclusion of all that work was we’re pretty comfortable.

Mike Rizvanovic

Okay, that’s super helpful. And just a quick one on the mortgage growth. So, the single family growth, it looks somewhat stagnant this quarter. Certainly not surprising. We’re seeing volumes in the market very, very weak in most jurisdictions, especially the GTA. So, do you have an outlook for near-term, say, heading into 2024? Do you think this book can grow low single-digits or are we looking at maybe a little bit of contraction? I know you’ve got the shorter duration in your portfolio, so you’d see that a bit more quickly than some of your larger peers. But if we do see rates higher for longer or rate cuts maybe not happening until the back half of the year, are we looking at maybe a little bit of shrinkage in the book?

Andrew Moore

I don’t think we’ll see shrinkage. I think we’ll see low single-digit based on kind of current best case, it’s low single-digit type annualized rates through the middle of next year. Clearly, the market signaling that the Bank of Canada is going to be starting an easing cycle in March or April. And as you mentioned, that may not happen. But I think as the market starts to anticipate rate cuts, you will see a bit of — a bit more activity in the housing market. There’s clearly pent-up activity, potential buyers sitting on the sidelines, a bit of a stand-off between sellers and buyers. So, I’m rather optimistic, frankly, that as we get through the first third of the year or so, we’ll see some more activity.

What I’ve been encouraging our teams to do is really to keep our franchise really strong. So we’re — our teams are at front of the brokers providing excellent service where we can, even when it’s a bit difficult to qualify based on the kind of current interest rates and the stress test under B-20 and so on. So, as the market starts to come back into a more normal cadence and as we start to see interest rates perhaps soften, then we’re the first call. So that’s — I’m feeling very comfortable that our team is really doing all the right actions and not trying to kind of measure them, particularly on volume right now, but more what are we doing to buttress our franchise until markets return to a more normal period.

Chadwick Westlake

If I can add, Mike, as well, good morning, the — you would have seen in the guidance though, right, so we had 5% to 10% for single family uninsured for 2024 compared to that 3% to 5% we have for 2023. So that does show, to Andrew’s point, some of that conviction for later in the year. And then I just underpin that even more with how we look at our overall business mix and then that wealth accumulation side though that reverse mortgage side particularly we have that additional guidance of 40% to 60% growth. So, you can see where we are focusing on growing and at different points in the year.

Mike Rizvanovic

Okay. Thank you for the insights.

Operator

And our next question is coming from the line of Lemar Persaud from Cormark. Please go ahead.

Lemar Persaud

Hi. Thanks for taking my questions. Maybe just sticking along the lines of Mike’s questioning there, I’m wondering if you guys could square up the 8% to 12% loan growth guidance at a consolidated level for 2024. It just seems a little bit high to me. Can you perhaps talk to what assumptions you’re baking in there? Maybe you’re assuming some rate cuts. How do you see momentum in the first half of the year versus the second half? And maybe I’ll leave it there.

Andrew Moore

Yeah. I think as we spoke about in the script, so we are expecting a bit more growth towards the back half of the year. Chadwick, maybe you can sort of get into more of the details of the models and so on.

Chadwick Westlake

Yeah. The one important nuance, Lemar, is that, that’s loans under management, too, right? So, where you see that continued growth expectation in particular is the multi-unit residential business, the insured business, that just increased another 11% sequentially and 27% year-over-year. We have that 20% to 25% growth. We’d expect that to have pretty good continued momentum in the first half as well, plus with our decumulation business, we think that will [indiscernible] especially into Q2 really, and then the balance on the personal side, particularly in the second half of the year. So, it does build up, but that’s where you’re seeing some weighting, because those are big dollar figures in the multi-unit business as well, weighting up that 8% to 12%.

Andrew Moore

Yeah. Just to be clear on that, to give you sort of a bit more color, we do a fair bit of CMHC construction lending, so we already know that these projects are committed and that we’re all starting to fund into them. As capital is put in those buildings, we’re advancing against that building. So, we have a pretty good line of sight on that, and that, through Q2, through Q3, we’ll be good, as well as on a multi-family term business, we’ve got nice pipelines building even into Q2. I think the kind of single family story is probably a bit more one for the sort of more towards the end of the year, Q3 — Q4 time period, which I think, again, demonstrates the strength of franchise. If you were talking to us 10 years ago, it would all have been about that single family growth story. And right now, we’re able to balance across a range of different businesses.

Lemar Persaud

Got you. And would it be fair to suggest that you could come in below there if — I mean we all look at the economic forecast, they’re forecasting rate cuts into the second half of the year. But what if the Bank of Canada doesn’t move? Is it reasonable to assume something below that 8% to 12%?

Andrew Moore

I mean it can always happen. I mean, we’re, first of all, driven by risk, right? We’re, first of all, driven by making sure we lend sensibly, prudent — as prudent bankers. And if the assets are there that match that mindset, then we will grow slower. And we’ve always been clear about that. While we — our general growth has been running at about 15% a year over the last decade. But we — the first job is to make sure we can lend safely into a market that we’re comfortable in, where the cash flows are there, the asset coverage is there, and we’re lending to borrowers of good character and so on. And so that’s — if that isn’t there, then we won’t be trying to make it to force it.

But I do think despite that let’s remember the underlying dynamics. You’ve got household formation has been — there are people that have had children and want an extra bedroom and haven’t moved in the last little while because the housing market has been slow. There are people coming to Canada that want to buy homes. There are people getting married that want to buy a home, and all that has been a little bit put on delayed for the last 12 months. So, I think one can think that towards the end of this — end of next year, surely that pressure starts to kind of create a more active market.

Lemar Persaud

Appreciate that. And then, you guys talked about the need to invest in growth initiatives and risk management. Maybe you could spend some time on talking about how you’re seeing expense growth play out for 2024? Could you pull back on expense growth if loan growth comes in below expectations? Maybe some comments on operating leverage and efficiency expectations would be helpful.

Andrew Moore

Yeah. I’ll let Chadwick deal with kind of the math on that again. But I think it’s very important that we kind of move across all frontiers of the business. So, sometimes we’re obviously investing — we talk about investing more in advertising, you’ll see that on watching your live sport in the new year, you’ll see us advertising with a really great campaign. So that that leads to expenses. But also, we’ve got to make sure that we’re investing in risk management, compliance management. It’s really critical to banks. And so, we were not going to back away from that just because maybe have a quarter or two just little bit soft in terms of loan origination. So, there’s always a little bit of expending on the expenses, but these are non-negotiable. We’re going to make sure we’ve got the infrastructure around a safe bank.

Chadwick Westlake

Yeah. I don’t think that so much to add there. It’s well said. We didn’t provide the efficiency guidance, but in general, as we said, we believe that’s an advantage for us. I think we can stay within the ballpark, but we’re going to continue to invest to grow the franchise. Do we have levers, Lemar? Could we pull back? To Andrew’s point, yeah, there are some areas we could pull back on and make our choices in some select quarters, but we have the ability to continue to invest for the cycle. Those are some of the choices we’ve been making to grow for the long term. So, we’ll keep an eye on it, which is what we’ve done. I think it’s pretty remarkable, as we said, that we also just integrated in a 70% efficiency ratio business and are back in that 43% — high 43% range, 43% to 44% versus our historical range of 42%. So, we’ve shown we can be very smart and efficient with our spend. We’ll apply that next year too.

Andrew Moore

I mean other banks have other levers. They can move their executives from the business class into the back of the plane. We’re already in the back of the plane. So, it’s not much further we can go in terms of some discretionary expense there. Just in terms of kind of mindset, we’re always very careful with our shareholders dollars, which means we don’t really have much kind of — there’s not much — we need to make sure we invest in the critical things to run this bank safety and there’s not a lot of flex. And I don’t think — I also think that our executives need to come into the year knowing that they’ve got the permission to spend the money on the things that are going to be important five years from now, not so much about what Q3 might look like, for example.

Chadwick Westlake

Yeah. But we won’t lose focus. I know you’re leaning into, which you often do, if you’re going to target even flat op positive — a flat operating leverage, and that’s still like the goal over the average of the quarters is to maintain our efficiency, but you’ll see the operating leverage flip based on the quarter.

Lemar Persaud

I appreciate the time. Thanks.

Andrew Moore

Thanks, Lemar.

Operator

Our next question comes from the line of Etienne Ricard from BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you, and good morning. This might be premature, but with the increasing possibility of interest rate cuts in 2024, what deposit beta would you expect for your demand deposits at EQ Bank in a declining rate environment? And would you expect that beta to be similar to what we’ve seen since the start of rising rates over the past two years?

Andrew Moore

Yeah. I think it’s a great question. I mean, certainly I have a strong view that it looks like the Bank of Canada is going to be into easing sooner rather than later. And I think that will impact our deposit beta. So, it’s going to be hard for us to offer the value proposition if we want to stand up in the market and be offering great rates all the time. It’ll be hard for us to drop EQ Bank and — rates and still stand out in the way that we want to kind of build our brand.

I would say that generally what I’ve observed over the years in a dropping interest rate environment, spreads on — mortgage spreads and just general lending spreads expand. So, don’t forget these are managed rates. Somebody is going to make a decision to drop mortgage rates in a competitive market that tends to lag a little bit. So, there may be a bit of an offset there with spreads on mortgages themselves expanding. In fact, we’re already seeing that today.

If you look at prime mortgage spreads in the market today, they’re actually quite wide based on the fact that the bonds rallied 90 basis points over the last 30, 45 days over the five years, and yet we haven’t really seen much in the way of dropping five-year rates. We have dropped rates a little bit in the five-year terms. Across a few buckets, we’re already seeing that downward trend. But nonetheless, spreads tend to be wider for banks in a falling rate environment. So that may offset some of the deposit beta in EQ Bank.

Etienne Ricard

Great. Thank you very much.

Operator

[Operator Instructions] We have our next question coming from the line of Graham Ryding from TD Securities. Please go ahead.

Graham Ryding

Hi, good morning. I just wanted to go back to the commercial impairments. So, it looks like your allowance for credit losses for commercial are 25 basis points right now, which is essentially in-line with your last five-year average. I’m just wondering, like, why you don’t think there’s an argument to move those allowance for credit losses higher, given your arrears are sitting about 3 times higher than the last five-year average currently?

Andrew Moore

Well, I mean, I think, as I mentioned, it’s a loan by loan analysis. And despite the fact we’ve had 25 basis points reserved for a number of years, we’ve never lost anything like that. In fact, I don’t think we lost anything on a commercial loan in the last 15 years. Well, [indiscernible] I can already remember of any significance were in a commercial loans in [Edmonton] (ph) back in 2008. So, we feel very comfortable with it.

I know it’s sort of — it’s a very reasonable question. What I can tell you is that I referred to it earlier, our team has really done a deep dive looking at each asset, understanding the value, understand the cash flows, really comfortable the position we got to. But I think I was asking similar questions, “Does this make sense, guys, when we see this numbers and does that line up?” And I think having tested and prodded at it, we feel this makes sense.

So there’s a lot of the large ones you can look at, say very clearly, we have an exit route, there is no loss to be made. It’s just a matter of timing. So, I think feel pretty good about it, Graham, but I can understand there might be some skepticism about that.

Chadwick Westlake

Yeah. And just remember it comes back to how we even look at the LTVs and the properties, and to Andrew’s point, the types of properties that we’re lending into, the locations of the properties, that’s why we say we’re very prudent. This is one thing we’re extremely good at. And for a lot of the growth, remember a lot of this has been insured and very targeted growth as well going forward. So, the diversification, the spread of these loans across each province and our understanding of the properties, I’ll just reinforce Andrew’s point, there’s a lot that goes in behind us. And there’s quite a lot of complexity to these models, but we have conviction in this.

Andrew Moore

Just as a reminder for those perhaps that sort of observing U.S. experience in commercial mortgages, don’t forget, we’re always first lien, always, always first lien. We typically have almost always have personal guarantees from the proponents of the project. So, we’ve got a lot of sort of backup support here. Sometimes there’ll be mezzanine that in behind us that’s — people that really know how to manage real estate. So that the model has always worked well and it continues to I think stand up well in this more stressed environment.

Chadwick Westlake

And remember, for commercial, 73% of that book is insured now.

Graham Ryding

Yeah. No, I’m looking at both your ACLs, both on insured and uninsured basis. Okay, that color is great. Maybe just broadly, if I could just do one more follow-on. When you give us your EPS guidance for next year, what is sort of baked in there from a credit loss provisioning perspective, perhaps relative to what you’ve done in 2023? How do you think about that?

Chadwick Westlake

Well, we can’t really project that with the PCLs. I’d say we have some consistent expectations built in, Graham, but unfortunately — perhaps, we can’t just pick a PCL number, but we certainly have some continued expectation of some continuity for the next couple quarters, probably more towards normalization and expectations in the second half. But that — it’s that ACL ratio, right? When you even think of the overall ACL ratio as a percentage of lending assets, that’s where we have some consistency in our assumptions.

Graham Ryding

Okay. Understood. Thank you.

Andrew Moore

It’s a super tricky one just to think about this one. Just intellectually, Graham, if you think about it, you’ve got to roll forward to 12 months and then try and figure out what the macroeconomic forecast is going to be 12 months from now and then predict a forecast. So, I think the team does a good job in putting a number that’s reasonable, but of course, if there were a lot of dark clouds, that would be a bigger number at the end of the year. And if the future looked brighter at that point, then we’re going to be positive, none of which really relates to the actual performance over the next 12 months.

Chadwick Westlake

Yeah. And so a little bit — we go back to our earlier point, a little bit more waiting on the first half versus second half, just reinforce that.

Graham Ryding

Yeah, that’s helpful. Okay, thank you.

Operator

We have our next question coming from the line of Stephen Boland from Raymond James. Please go ahead.

Stephen Boland

Good morning, everyone. Maybe just one question Andrew and Chad. On the single family business, the government put out that mortgage charter. There’s a lot of media around it. But is there any impact to your existing book right now? And is there any way that you envision you may get market share gains out of — if there’s any changes with the bigger banks as well?

Andrew Moore

I don’t know this market share gain opportunity. Clearly, there’s more obligation on banks, which we’re able to feed our customers properly and frankly we always believe we have. So, what’s being asked for is entirely reasonable. So, it seems sensible. I was worried that you go from a feed your customer right to that becoming a regulatory process, which doesn’t have quite the same sort of feel to it. But we’re always working with our customers if they’re looking for things to help them get through the period. But, generally, we’re very disciplined on giving relief because our experience has been that really people [indiscernible] getting too far behind on their mortgages, they can never catch up. So, there’s very, very little kind of real change that you should be concerned about as investors going on in the book.

Chadwick Westlake

It’s just good that we’re very consistent to our purpose. This is just to Andrew’s point, right, in terms of how we have this operate. This actually reinforces the principles of our business and how we support convenience. So I think to Andrew’s point, if anything, it undertones our entire mission. So hopefully that gets more broadly reflected by customers as well.

Stephen Boland

Okay. So…

Andrew Moore

You recall that our average LTV is in the sort of low 60%s, so there’s a fair bit of room to have some.

Stephen Boland

The mortgage charter itself, do you find it has teeth or is it — it’s just general stuff that banks should be doing anyhow? When — you can comment that you’re already doing that work with your customers, but do you see any irrationality out there with the single family business in general in terms…

Andrew Moore

I mean, it certainly has teeth, because — it certainly has teeth because the FCAC regulates us and so we have to — that’s teeth for sure. I don’t think it really changes our behavior because I think we would have behaved in this manner in any event.

Stephen Boland

Okay. Thanks, guys. That’s all from me.

Operator

Thank you. There are no further questions at this time. I’d now like to turn the call back over to Mr. Moore for final closing comments.

Andrew Moore

Thank you, Laura.

Before we leave you today, I want to thank my fellow Challengers for delivering a tremendous year. We look forward to our next analyst call at the end of February. In the meantime, I challenge you to change the status quo. Sign up for an EQ Bank account and earn 2.5% every day interest. And if you already have an account, take the next step that thousands of our customers have done this year and redirect your payroll into your EQ Bank account. This action will allow you to earn 3% of what is effectively a high interest checking account and offers all the additional benefits of operating in the EQ Bank ecosystem.

Thank you for participating, and have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a lovely day.