Canadian Western Bank (TSX:CWB), in its first quarter earnings call of 2024, reported positive operating leverage, attributing the performance to disciplined expense management and targeted lending in the general commercial portfolio.
Despite an increase in gross impaired loans due to higher interest rates affecting cash flows for commercial borrowers, CWB expects its provision for credit losses to remain within the historical range. The bank's net interest margin remained consistent with the previous quarter and is anticipated to rise gradually over the year.
CWB's financial outlook for 2024 remains unchanged, with a strategy to capitalize on lending opportunities and create value for investors. The bank's ticker is CWB.TO.
Key Takeaways
- CWB experienced positive operating leverage in Q1 2024, backed by disciplined expense management and targeted commercial lending.
- The general commercial portfolio is identified as a significant growth opportunity, with the new Toronto banking center adding to this momentum.
- Franchise and term deposit growth exceeded expectations, leading to temporary high liquidity, which is expected to normalize as funds are channeled into new lending opportunities.
- Gross impaired loans rose due to the impact of higher interest rates, but the provision for credit losses should remain within the historical range of 18 to 23 basis points.
- Net interest margin stayed consistent with prior quarters, with an improvement expected in the following quarters.
- Despite a slower start, particularly in construction lending, CWB anticipates loan growth to meet annual expectations.
- The bank's management is prioritizing organic growth and franchise support, with potential consideration for stock buybacks if suitable opportunities arise.
Company Outlook
- CWB forecasts a stable financial outlook for 2024, with no changes from previous projections.
- Loan growth and liquidity normalization are expected to be driven by the deployment of current liquidity into new lending opportunities.
- The bank remains committed to delivering a differentiated experience to Canadian business owners and managing expenses to support future revenue growth.
Bearish Highlights
- The increase in gross impaired loans reflects the pressure of higher interest rates on cash flows for commercial borrowers.
- A slower start to the year in loan growth, especially in construction lending, though it is expected to align with annual projections.
- The market slowdown has intensified competition, but CWB is not compromising on underwriting standards for growth.
Bullish Highlights
- Stronger-than-expected growth in franchise and term deposits, contributing to a robust liquidity position.
- A disciplined approach to expense management has created optionality for future reinvestment.
- Positive recovery trends in assets backing loans, with no significant impact from valuation decreases.
Misses
- A relatively flat overall account count due to new accounts being offset by account closures.
Q&A Highlights
- Net interest margins are expected to improve in the second quarter due to higher asset spreads and selective deposit management.
- Confidence in loan growth outlook, supported by a strong loan pipeline and good forecasting capabilities.
- Clarification that the provision for credit loss guidance of 18 to 23 basis points is comprehensive, with the majority expected to be impaired loans.
The management team at CWB emphasized their commitment to maintaining a disciplined underwriting structure and resolving challenges that are specific to individual business models and clients, rather than systemic issues. The bank's strategy of targeted commercial lending and expense management appears poised to navigate the economic backdrop effectively while seeking to enhance shareholder value.
Full transcript - None (CBWBF) Q1 2024:
Operator: Good morning. My name is Judy [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's First Quarter 2024 Financial Results Conference Call and Webcast. [Operator Instructions] I will now turn the call over to Chris Williams, Assistant Vice President of Investor Relations. Please go ahead, Chris.
Chris Williams: Good morning and welcome to our first quarter 2024 financial results conference call. We'll begin this morning's presentation with opening remarks from Chris Fowler, President and Chief Executive Officer; followed by Matt Rudd, Chief Financial Officer; and Carolina Parra, Chief Risk Officer. Also present today are Stephen Murphy, Group Head of Commercial, Personal and Wealth; and Jeff Wright, Group Head of Client Solutions and Specialty Businesses. After our prepared remarks, they will all be available to take your questions. As noted on Slide 2, statements may be made on this call that are forward-looking in nature which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be a useful in assessing underlying business performance. I will now turn the call over to Chris Fowler, who will begin his discussion on Slide 4.
Chris Fowler: Thank you, Chris and good morning, everyone. CWB's focused performance continued in the first quarter with positive operating leverage driven by disciplined expense management while targeting new lending opportunities that met our risk-adjusted return expectations. As expected, growth in the Canadian economy remained muted as elevated interest rates continue to slow consumer spending and reduce inflation. In this environment, our team's focus remained on executing our strategy and winning full-service clients within our disciplined risk-adjusted pricing criteria, while providing exceptional service to our clients. Our people take the time to understand our clients and their businesses and we work as a united team to provide holistic solutions and advice for them. This differentiates us from the competition and along with our strong balance sheet, has us well positioned to capitalize on the growth opportunities in front of us with an economy that we expect to gradually shrink in the back half of the year. As shown on Slide 5, our loan growth has been strategically targeted in the general commercial portfolio. Clients in this category include a broad section of the Canadian economy that's underserved by the other banks and they represent a significant opportunity for CWB to provide a full suite of lending and business banking services deepening our relationship with the client and our returns for our investors. In the last year, we delivered 8% general commercial loan growth. We've taken a highly disciplined approach to lending in the current environment, focused on appropriate financial returns relative to the underlying risk in a higher interest rate environment. This [indiscernible] origination volumes across our commercial real estate portfolios. The credit performance of these portfolios has been strong and our overall balance of commercial real estate exposure has been reduced by scheduled repayments and payouts at project completions. Our prudent risk appetite and underwriting standards reflects a consistent and long history of strong credit performance. We remain comfortable with our current exposures while weakening -- the weakening economy has returned us to historic provisioning levels. We've driven strong growth in Ontario with support from Mississauga and Markham Banking Centers, especially in the strategically targeted general commercial portfolio which we've grown by 11% over the last year. Grand opening of our new banking center in Toronto's Financial District in January is creating greater awareness of CWB in the GTA and we look forward to continued growth momentum with the opening of our Kitchener branch later this year. I'll now turn the call over to Matt, who will provide greater detail on our first quarter financial performance.
Matt Rudd: Thanks, Chris. Good morning, everyone. I'm starting on Slide 7. We delivered stronger growth in franchise deposits than we expected this quarter and that was especially in demand and notice deposits which increased 2% sequentially, that reflected growth from both new and existing clients. We also delivered growth in term deposits of 4% compared to last quarter that reflected the continued preference for term deposits in the current interest rate environment. Stronger-than-expected franchise deposit growth has resulted in a temporary bulge in our liquidity levels and we expect liquidity to normalize over the next quarter as we'll deploy it to new lending opportunities that meet our risk-adjusted return expectations. Compared to the prior year, franchise deposits increased 3%, as a 12% increase in fixed term franchise deposits was partially offset by a 2% decline in demand and notice. Lower demand and notice deposits primarily reflected a reduction in account balances as clients utilized excess savings over the past year and also converted into term deposits. We commenced the initial launch of our new commercial digital cash management platform and plan to roll it out to customers in a phased approach starting next quarter. We expect the rollout to dampen franchise deposit growth in the near term as we focus on transitioning existing commercial clients onto the new platform before mobilizing our sales force to onboard new clients. We expect positive momentum in franchise deposit growth in the back half of the year and continue to expect to deliver mid-single-digit percentage growth on an annual basis. Our performance compared to the same quarter last year is shown on Slide 8. In Q1 of last year, we recognized a large, impaired loan recovery that provided a boost to net interest income and drove the unusual outcome of our provision for credit losses being in a recovery rather than an expense position. With our provision for credit losses returning to normal within our normal range this year our common shareholders' net income decreased by 7% and diluted EPS decreased by $0.08 compared to last year. Our focused operating performance delivered pre-tax pre-provision income growth of 14% compared to last year. Adjusted EPS decreased by $0.09 from the same quarter last year. In the prior year, we benefited $0.13 from the reversal of a previously recognized impaired loan write-off which reflected the combined impact of a reduction in the impaired loan provision for credit losses of $0.10, an increase net interest income of $0.03. Excluding these impacts, higher net interest income increased EPS by $0.16, primarily reflecting the benefit of an 8 basis point increase in net interest margin. Higher provision for credit losses decreased EPS by $0.11, as our provision for credit losses has now returned to being within our normal historical range from the unusually low levels in the prior year. As shown on Slide 9, our common shareholders' net income increased 14% and diluted EPS increased $0.11 compared to Q4. Pre-tax pre-provision income increased 3% on a sequential basis. We incurred reorganization costs, primarily in the prior quarter, that reduced EPS by $0.12 compared to the current quarter. Our reorganization activities are now complete and these costs have been removed from our adjusted performance metrics in both periods. Adjusted EPS decreased by $0.01 from the prior quarter. Lower adjusted noninterest expenses contributed $0.05 to EPS, primarily due to lower people costs and lower spend due to the timing of ongoing strategic activities. Higher net interest income increased EPS by $0.02 and a decrease in noninterest income reduced EPS by $0.04. The provision for credit losses this quarter reduced EPS by $0.06, reflecting a return to within our normal historical range as expected. As shown on Slide 10, total revenue decreased 1% on a sequential basis. Net interest income increased 1%, primarily driven by an increase in average interest-bearing assets. The 13% decrease in noninterest income was primarily due to lower foreign exchange revenue due to a weakening U.S. dollar this quarter compared to a strengthening U.S. dollar in the prior quarter. Turning to Slide 11. Our NIM was consistent with the prior quarter. Profitability of our assets grew as expected as the growth in asset yields strongly outpaced the increase in funding costs which drove 7 basis points of NIM benefit. Stronger-than-expected franchise deposit growth caused a bulge in liquidity and that reduced NIM by 5 basis points and our funding mix reduced NIM by 2 basis points from last quarter. We continue to anticipate a relatively stable policy interest rate in fiscal 2024, with the potential for interest rate reductions in the latter part of the year. We continue to expect our net interest margin to gradually increase over the remainder of the year and reflects the benefits of normalized liquidity levels, growth in fixed-term asset yields continuing to outpace growth in funding costs and loan growth that's targeted to optimize risk-adjusted returns. Our capital ratios and the drivers of our CET1 improvement are shown on Slide 12. Our CET1 ratio increased 30 basis points to 10% this quarter, primarily reflecting retained earnings growth, a reduction in accumulated other comprehensive losses associated with an increase in the fair value of our debt securities and a decrease in risk-weighted asset. No common shares were issued under the ATM program again in this quarter and we do not expect any further issuances under our ATM program. Our Board declared a common share dividend yesterday of $0.34 per share which is consistent with the dividend declared last quarter and up $0.02 from the dividend declared last year. I'll now turn the call over to Carolina, who will speak further on our credit performance.
Carolina Parra: Thank you, Matt and good morning, everyone. Turning to Slide 15. Total gross impaired loans increased $43 million or 16% from prior year and represented 86 basis points of gross loans, 11 basis points higher than prior year. As you know, gross impaired loans can fluctuate and this quarter, they increased 19% sequentially after declining 6% sequentially in the last quarter. The increase in gross impaired loans this quarter was in line with our expectations within the economic backdrop and reflects the impact of higher interest rates pressuring the cash flow of our general commercial borrowers partially offset by resolutions. In debt commercial real estate loans were relatively stable compared to the previous quarter. Our strong current risk management framework, including well-established underwriting standards, the secured nature of our lending portfolio with conservative loan-to-value ratios and a proactive approach to working with our clients through different periods [ph], continues to be an effective in minimizing realized losses on the resolution of impaired loans. This is demonstrated by a history of low write-offs as a percentage of total loans, including some past periods of economic volatility. We also continue to have minimal exposure to unsecured personal lending or credit cards. We expect a total balance of gross impaired loans to continue to fluctuate as the overall loan portfolio should be regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends. As shown on Slide 16, the performing loan allowance was relatively consistent with the prior quarters as increased downside risk reflected in our economic outlook was offset by a decline in total loans. And the outperforming loan provision was 3 basis points lower than last quarter. Composition for credit losses on impaired loans increased to $17 million or 19 basis points compared to a charge of $7 million last quarter and a large recovery last year. Looking forward, the sustained impact of higher interest rates, is expected to continue to result in elevated loan default rates and impaired loans over the remainder of the year. Consistent with our experience in prior periods of economic volatility, our product lending approach supports our expectations that our provision for credit losses will remain within our historical normal range of 18 to 23 basis points on an annual basis. I will turn the call back to Chris Fowler for his closing remarks and outlook.
Chris Fowler: Thank you, Carolina. Turning to Slide 16. We've maintained our focus to open the year with solid results, supported by large, positive operating leverage. Our balance sheet is strong and the differentiated client experience that our team provides supports the continued delivery of solid results. Our teams remain focused on executing our strategy and winning full-service clients within our risk-adjusted pricing criteria and we anticipate our momentum will build as the year progresses. While we continue to execute our strategic priorities as planned, we will carefully monitor and manage our expenditures and deliver a differentiated experience to Canadian business owners. Our financial outlook for 2024 is unchanged and we're well positioned to create value for our investors in the year ahead. With that, operator, let's open the line for Q&A.
Operator: [Operator Instructions] Your first question comes from the line of Doug Young from Desjardins Capital Markets.
Doug Young: Maybe we can just start on credit. And I guess 2 questions. Like the increase in new impaired loan formations and I get they can be volatile and maybe not lead to actual losses. But can you provide detail in which buckets were you seeing that impairment, or those impairments come through?
Carolina Parra: Absolutely. Yes. So the new formations were mostly in our general commercial portfolio. And we're not seeing any impact on specific industries. It was well diversified and we're not really be concerned with any specific bucket but overall, the general commercial with the pressure from the interest rate increases.
Doug Young: Was it in any particular geography or…?
Carolina Parra: No. We don't have any significant geography. We saw a little bit of an increase in Alberta, as you saw but it was a very functional borrower, very idiosyncratic case that does not really cause any impact or any constraint from the over-the-market item.
Doug Young: Okay. And then just on the -- I just want to confirm the provision for credit loss range of 18 to 23 basis points, is that on an impaired or total, and has that changed?
Matt Rudd: It was on a total basis, Doug, and primarily weighted more to the impaired loan rather than performing and we have not changed our outlook on either.
Doug Young: Okay. I just want to confirm that. Okay. And Matt, while I guess I have you. NIMs is the topic du jour and I just want to get an idea of the evolution of NIMs. And again, it's one metric and -- but it's one that people are absolutely focused on. Is this more -- you see a gradual improvement coming through? Is it more back-end weighted? Can you talk about what you're seeing so far in the second quarter? And you did have a decline sequentially in the capital market deposits by a decent amount. I assume those are higher cost deposits but there wasn't really, it doesn't seem like there was a big impact on NIMs this quarter. Or is that more of a second quarter item that would come through?
Matt Rudd: Yes. Actually, so NIM, the primary driver there would be the spreads we're getting on our assets. And we actually saw pretty good kick-upwards this quarter in that. So what we saw in loan profitability, what we saw in our securities portfolio just rolling over and issuing new securities at the higher rates, everything there was as expected. Overall cost of deposits, a bit lower than what we were expecting actually. So that 7 basis points I highlighted of just asset yields relative to funding costs, that would have exceeded forecast I would have had last quarter. Couple of reasons for that. I think we were very selective on the deposits we originated. You're right, we did have a decline in capital market deposits but we did do an issuance, it was a smaller issuance to offset a larger maturity. And the reason why we did it, it was at a time where it was basically at parity, in fact, maybe even a little bit cheaper than broker deposits at the time. It was just a very opportunistic trade. And I think you'll see us be very disciplined on deposits and managing that cost. So happy with the torque we're seeing in asset spreads, where I'd say we had the pressure on NIM this quarter that brought us back to neutral. I mean that was a liquidity story. It was a good news, bad news. The good news is that we had more franchise deposit growth than what we expected. And where we were surprised there which would be a reversion of the trend we've been seeing is that demand and notice deposits grew and it grew from existing clients in addition to new, that's not something we were expecting. On new liquidity coming in, you'll look at our financial disclosure from year-end and see when we bring in liquidity and we invested in securities temporarily before it gets into loan growth. Securities yield quite a bit less than loans. We don't take on any credit risk in that securities portfolio. It's basically federal and provincial bonds. So when we reinvest that into loan growth, it's a pretty significant amount of yield increase and that gives us torque to the NIM. So that's why we're very constructive on net interest margin into the second quarter, I’d expect growth there, likely more growth in the second quarter than what we'd see maybe in Q3 and Q4 but we'd expect to see continued growth through the year but I look at Q2 and I'm quite constructive.
Doug Young: And are you seeing that so far? And I don't know if you want to comment on that but like you've got good visibility, I would say, daily, weekly on that particular metric, is that fair to say?
Matt Rudd: Yes. The -- I guess, the catalyst of do we see more significant NIM expansion or is it in the neighborhood of something smaller like in a couple of basis points. The big driver of that is going to be the strength of our loan growth and bringing down that liquidity level and redeploying it to loans. With loans pipeline looks good and strong in second quarter, so if we execute well and deliver the growth that we believe is in front of us and achievable, then NIM will be a positive story in Q2.
Doug Young: I guess that's where I was going next is like what are you seeing in terms of loan growth? Is it similar to what you're seeing -- what you saw and what you had in Q1? And how is that deposit-to-loan growth ratio kind of unfolding so far in Q2?
Matt Rudd: Stephen, do you want to touch on growth and what you're seeing, I'll circle back to loan-to-deposit ratio?
Stephen Murphy: Sure. We're pretty much seeing what we expected to see. So we had talked about that it was going to be a gradual build through the year and what we see through the activity to date and in the pipeline, that's what we're seeing. So we knew it was going to build throughout the year and that the growth was going to start in the second quarter and that's consistent with what we're seeing. So, as we look at -- it was probably a little bit slower start to the year than we were expecting on the lending side but we expect to be in line with the guidance that we have previously issued.
Matt Rudd: And then on loan-to-deposit ratio, I mean, this quarter, we saw a notch downwards. Again, that we wouldn't have expected and we weren't necessarily structurally planning for. So I wouldn't expect the ratio you compute this quarter to be a running range. We'd expect for next quarter stronger loan growth and lower deposit growth in this quarter would be our base case expectation.
Operator: Your next question comes from the line of Lemar Persaud from Cormark.
Lemar Persaud: I want to start off with an answer on the previous set of questions there just on credit. Matt or Carolina, maybe you could clarify, maybe I heard this wrong but the PCL guidance, that 18 to 23 basis point guidance, do you say that's total or impaired? I guess, your Slide 15 suggests that's impaired but then your Slide 16 seems like it could be total. So I just want to make sure.
Matt Rudd: Just for absolute clarity, it's total. But I guess the majority of it, we expect to be impaired.
Lemar Persaud: Okay. And then performing, would that kind of follow balance growth? Is that kind of the way we should think about that?
Matt Rudd: All else being equal, yes, borrowing [indiscernible] shift in economic forecast.
Lemar Persaud: Okay. And then one of the things that some of the banks have been suggesting throughout this earnings season on credit, is that you could possibly see PCLs kind of bump up in the first half of the year and then some relief in the second half of the year. So is it possible just given the step-up in impaired that we saw this quarter, it sounds like they can probably move up in the near term? And then maybe that could drive PCLs even above that 18% to 23% and then relief in the back half of the year. So maybe Carolina, talk about the path of how you get to that 18% to 22%, that would be helpful.
Carolina Parra: Absolutely. So we expect to continue to see a trend as we're seeing -- as we continue to work with our clients. The PCLs of course, are lagging from when we get the impaired and as they reflect the impact of the interest rates and inflation. So we do think the first half of the year would be where we start to see a little bit of an increase. But we're getting resolutions at the same time as we're putting in the PCL. So I think the net effect will be definitely lower and we do not expect to just go well outside of that range what we're seeing. And overall, at the end of the year, we are very confident we will be within the thresholds that we're mentioning.
Lemar Persaud: Okay. So it's not that we should expect like something like 25% and then a move down like, nothing like that.
Carolina Parra: We don't expect that.
Lemar Persaud: Okay. No, that's fair. And then I guess I've covered the stock for a couple of years and I know you guys typically have better insights into your -- the loan growth outlook. Like, what gives you the confidence in the ramp up that of -- that loan growth starting in Q2 and for the balance of the year, like, how you guys meet that mid-single-digit percentage growth?
Stephen Murphy: Yes. Well, we have a pretty good line of sight into our loan pipeline. And we also -- when you look at the numbers, we have pretty good forecasting. If you look at the net effect of growth in the quarter, you've got to look at the commercial real estate side and some of the repositioning we've had in that portfolio as we've been selective on that side. And so we can predict as things were new or projects are in the pipeline on the construction side, where those -- because that's been a drag on the net growth and then we can see all of the new activity that's in there and that we're booking for funding looking out. So we've got pretty good line of sight on that. It can -- kind of in a particular month, you might have things move around a bit depending on what's happening in the market but we can see the trend line and we feel good about our expectations playing out the way that we thought for the year and the way we've previously talked about it.
Lemar Persaud: Okay. And are some of your commercial borrowers? I'm thinking more on the commercial side of it. Just kind of waiting to see how these rates -- how rates evolve? Is that why there's some hesitation right now? Or is it just more so when these projects come online? So just timing rather than concern around the path of rates.
Stephen Murphy: Yes. Particularly, if you look at construction lending, like that's absolutely happening. And generally, I'd say, overall, there's probably a little bit of a slower start to the year because of that point. But we also still see activity happening and we see that we can see as we look forward to the rest of the year, I think it's playing out the way that we thought; but that's a fair point.
Lemar Persaud: And then the final for me, just on expenses. I'm okay when I see the bank's low expense relative to even the low to mid-single-digit range. But when it tips into negative territory, I started to ask myself the question, is the bank underinvesting in growth and basically trading off the future to put up good earnings today. I suspect you're going to tell me that's not what's going on here at CWB. So just tell me why that's not the right way to look at this very low expense growth.
Matt Rudd: So a couple of things. When we talked about expense trajectory last quarter and the reorganization we did, I mean, it really was to give us a lot of optionality. It was first the reduction of the expense run rate but it absolutely was meant to be predominantly a reinvestment of those costs. But the timing of when we make those investments is within our control and something we wanted to time with when we wanted to start really driving the revenue growth and make sure that we make good on our commitment to positive operating leverage. So just structurally, that's how we thought about the year. We talked about mid-single-digit growth of expenses and I'd say that outlook remains consistent. And the weird thing about first quarter, typically for us, perhaps with others too, it's a lower level of expenses usually relative to the rest of the year. A lot of you, if you don't have CPPI on your employees, just activity levels usually a bit lower. And when you look back at our historical trend from Q1 to Q2 in terms of structural expense growth, you can always see a bit of an uptick. Last year was a bit of an anomaly. So if you look at Q1 NIEs, last year, we would have had double-digit NIE growth. In the second quarter, that is when we started talking about and enacting expense containment actions because the growth outlook started to soften. So we took early action there. Our trajectory pretty rapidly went from double-digit expense growth to mid-single-digit. So that's what we're lapping in Q2. So it's a bit of an easier comp here in Q1 as well to deliver the reduction. So I would not expect us to continue to reduce NIEs, as tempting as it is if you put it into my accountants hat on, it's not realistic and not how we want to run the business and we'll be back I'd say, on that mid-single-digit expense trajectory next quarter.
Operator: Your next question comes from the line of Gabriel Dechaine from National Bank Financial.
Gabriel Dechaine: Capital, I'll start with that one. Your -- the silver lining to flat or negative loan growth as your core Tier 1 ratio goes up and you're at 10% now. I know you're not a big buyback story, whatever you want to call it. But given your excess capital position and given the loan growth picture which -- you sound optimistic but it's probably going to be weaker than the typical years you target. Why wouldn't you consider buying back some stock here, especially trading below book value?
Matt Rudd: Yes. Again, if I put on my financial hat, it's awfully tempting, the economics on that looks very compelling actually. Our preference in deploying capital, if we get to the point where it's time to start deploying we have good look through the economic cycle. And our preference and we've been consistent on this, it's to grow the franchise. Organic and we've got lots of opportunity in front of us and coming out of cycles, you can look back historically and see we do quite well. When it's time to put the foot on the gas and grow, we generally outperform in those sorts of environments. So having the dry powder to support that, we like that optionality, inorganics and auction, too. And I mean, obviously, we continue to look at things but that would be our second preference. And then, yes, you're right, Gabe. Like if we don't have compelling good risk-adjusted return opportunities on those first Q then we're looking at other ways to engineer returns for our shareholders. But our preference is, obviously, grow and support the franchise first.
Gabriel Dechaine: I get it. It's just the -- I know the ATM was a bit of a sore spot for some investors a while ago. It's no longer the case but where our sitting today might be a good opportunity to go in the other direction. That's just my two cents. But yes, next question would be on loan growth. And then I do want to delve into that a little bit more. You do sound more optimistic. What was holding back loan growth? Because I've seen this on the bank before where you load up on excess liquidity and then there's just a timing issue that the loans didn't actually get advanced and might be just the next day into the new quarter and things that are back to normal spreads, if you will. What was the factor holding back loan growth just from a timing standpoint? Or was there something else going on? And underlying that question too, how much is -- how much are high depressing loan growth? I got to imagine there are some borrowers that are just sitting on the sidelines, expecting like many of us that rates are going to be lower by the end of the year?
Matt Rudd: Yes. So I'll start and then throw to Stephen. I guess the maybe the difference this quarter compared to other previous times where we found ourselves on excess liquidity. If loans weren't necessarily the largest component of that. I mean, we went into this quarter, we weren't expecting robust loan growth for a number of reasons, economic backdrop, just what we're seeing in commercial real estate and our focus there. It was a branch-raised deposit story, where we just had more growth there than what we were expecting. so that's the one difference I wanted to highlight. I think that's important. But then just for loan growth and more commentary there, I'll throw it to Stephen.
Stephen Murphy: Yes. I think typically, the first quarter is a slower quarter for us anyway. But I think as Matt said, there's a lot of other factors going on impacting that but we had expected it to be kind of a curve of growth through the year, kind of getting us to our full year guidance. And we're seeing what we see in our pipeline building growth throughout the year.
Gabriel Dechaine: Okay. Then ECL, I just want to revisit that one. You said, one of the big driver of the impaired was one specific account. You can't tell us the industry. I know there was a transportation sector trend, if you will, across that hit a few banks. Is it related to that at all? Or is it something else entirely?
Carolina Parra: No. I just want to make sure. So it was not one specific accounting or it was idiosyncratic things, not just general idiosyncratic things but just general things happening in specific industry. I think it's quite diversified. And so just want to count that cost like the big increase, I think it's just a quite diversified across various industries.
Gabriel Dechaine: Okay. And then lastly -- yes, sorry, go ahead.
Carolina Parra: General commercial, sorry.
Gabriel Dechaine: Okay. Then lastly, on expenses. I think all of us are going to be kind of thinking the same thing here and I say us, the people asking the question today. You have negative growth in the first quarter year-over-year. You're targeting mid-single digits over the course of the year. That's a fairly broad term range. But the thinking kind of goes in the direction while there's going to be a bit of a ramp-up over the next 3 quarters that gets you to the mid-single digits sort of the makeup for the drop we saw in Q1. Is that -- so we could be upper in the mid-single digits or something like that?
Matt Rudd: Yes. If we see the growth in revenue that we expect, then we'll go [ph]. If we do not and something knocks the revenue off that track, then you would see us be a bit tighter with expenses. So that's the way we wanted to manage the year. I mean we made a commitment to positive operating leverage. We've left ourselves a lot of levers to hold to make good on that commitment.
Operator: And your next question comes from the line of Sohrab Movahedi from BMO Capital Markets.
Sohrab Movahedi: Maybe I can just start on that op lev commentary. I assume as a management team, when you say we're committed to op lev, you're thinking about it on a, I don't know, full year basis, not necessarily quarter in quarter out. Is that accurate to what I'm saying?
Matt Rudd: Correct. You definitely can have a bit of ebbs and flows in a quarter, like the 7% we put up this quarter, I would not look at that as sustainable, obviously, for reasons we discussed today. But I mean that's our goal going into a quarter as we want to structurally going into it, have really a high derivative confidence that we're structured for positive leverage. And then whether you end up neutral to moderately positive or significantly positive, depends on how the quarter plays out. But on a full year basis, you're right. I mean that's structurally the way we set up the year. And I guess for abundant clarity, it was not to deliver 7% operating leverage but just good solid positive operating leverage with a lot of different ways we can deliver it.
Sohrab Movahedi: Yes. No, I understand. I mean and I think operating leverage is probably more of a full year target anyway because of the seasonality in expenses and revenue recognition and the like. The -- on the loan growth, I just wanted to better understand, is the environment such that growth is available but not fitting your risk appetite? Or is that a governor on the kind of growth rates we're looking at? Or was it -- there was just nothing available period?
Chris Fowler: Well, I'll start that. Thanks, Sohrab. The -- I would say that what we've done is look at in the different buckets, we've got, say, our commercial mortgage portfolio which is still very competitive with other FIs. And what we've chosen to do there is be very specific on which loan we choose to renew or look to underwrite based on risk adjustment returns. So that book then has declined slightly. The real estate project lending success there is that loans pay out. And we have -- we did see payouts occurred there. What we're not seeing is a big rush to the table with new projects but we are seeing some. So we do see that happening as the interest rate environment is evaluated, housing supply is being tested in terms of different markets. So more products we expect to come online there. And then on the general commercial side, that's our opportunity really for capturing market share. And we do look to cherry-pick clients from the large banks as being ones that really meet our risk appetite, meet our industries that we're looking to focus on. And so that, again, is an open an opportunity for us as we look to the future. And equipment finance typically has a bit of a seasonal slowdown in the Q1 and picks up in Q2, Q3 [ph]. So as we think about loan growth, it's -- we are focused, that's the big driver of our business and we make sure that we think about a very disciplined approach to underwriting and focused on those markets that we know very well.
Sohrab Movahedi: Okay. And maybe if I come at it a little bit differently. Can anyone talk a little bit about what the competitive dynamics are like? And when the growth you pick the sector, general commercial, commercial real estate, whatever, when those types of opportunities are present. Do you -- are you finding it as competitive as ever, even more competitive and I just want to get a feel for when you think about the net interest margin outlook are we factoring in asset yields that are likely to come down. That's why I'm just trying to kind of get a sense for.
Matt Rudd: Yes. I would say the market is a little bit slower. And so that would create more competitiveness, particularly in the stronger risks. And so -- and of course, we're looking to be selective. But I'd say in our model, people that are choosing us are generally choosing us as an alternative to the other banks for how we bring our service and advice to them. And so in cases like that, it's not necessarily a bidding war kind of situation. So we see, depending on how much activity is happening out there. You can see competitive dynamics. But I don't think in our model, at our size and with -- as we project, we are about kind of looking to take business away from our competitors, we're not quite as sensitive to that and the kinds of business that we're taking on.
Sohrab Movahedi: Okay. And so I mean, Chris, in the years drive that I've attention to your stock and your business. I can't think of any time you would have compromised on your underwriting standards for growth. Is there any reason why that may be different this time around?
Chris Fowler: Well, we have no intention of compromising our underwriting standards from growth, I mean we like the markets we operate in and we've generated great expertise in the different verticals. And our view is just to continue to execute in our very structured approach for underwriting loan management and stress testing.
Sohrab Movahedi: And continued secured underwriting such that like any other previous cycle gross impaireds may look large but net impaireds will be de minimis.
Chris Fowler: 100%. That is our focus, yes.
Operator: Your next question comes from the line of Paul Holden from CIBC.
Paul Holden: I want to ask a couple more questions on the impaired loans, I guess, to give people more comfort around the risk there. So first question is, can you give us a sense of provisions and asset recovery expectations around the loans that went impaired this quarter.
Carolina Parra: So yes, from a provision perspective, so what -- in the new information we've, we had certain loans that in which we had provisions coming. However, we manage in general terms, very strong loan-to-value. So when we look at our valuations, the provisions are not significantly. At the same time, there were quite a few important recoveries as we work with our clients and their payments but also support the work that we're doing and the credit risk management and collateral management, we have of our impaired portfolio.
Paul Holden: Okay. So I think that's an important point with respect to an offset specific to this quarter, you're seeing some recoveries on previously impaired loans that helped offset the need to increase provisions for the Q1 impaired loans, correct?
Carolina Parra: That's correct.
Paul Holden: Yes. Okay. Okay. That's helpful. And then continuous line of questioning. I mean, you mentioned that impaired loans are expected to be volatile from quarter-to-quarter. I understand that. Maybe you can help give us sort of a near-term feel on what you think GILs might do next quarter or two. Again, just to avoid any negative surprises like we saw this quarter. You did mention that you expected impaired to go higher this quarter. So what do you expect again, next quarter, next couple of quarters, is there visibility, any visibility there?
Carolina Parra: Well, I think given the economic backdrop, we do expect these events to continue to increase. I don't think we have reached the peak. And of course, because it's lagging from when the impacts take place. So we expected that within the next quarter or two to continue to increase before we start seeing some of it to down again.
Paul Holden: Okay. And given that's within your expectations, I'm assuming you've already provisioned or partly provisioned for that expectation?
Carolina Parra: Correct. So as you've seen over the last 7 quarters, we've increased our performing loan allowance, just taking -- like understanding what we expect the portfolio to perform. And so even though this quarter, the performing loan allowance did not increase significantly over the last 6 quarters, we had built quite a bit of it. And we think we have good coverage as well, as those loans become impaired -- just transition some of that into impaired provisions as well.
Matt Rudd: Yes. The only unusual thing we saw relative to what our models would have otherwise predicted was really through last year, impaired loans remaining so benign and credit losses remaining so benign, like relative to economic conditions and what we would have expected, like that was the unusual piece, whereas now it's looking a lot more aligned with what our models might have predicted for this sort of environment. So nothing big we're seeing as...
Paul Holden: Yes, understood. That's all very helpful. And last question, Matt, I'm going to jump in, I'll continue with you. Going back to sort of Gabe's line of questioning on share buybacks versus organic growth. I think we can all do the math based on current ROE and price-to-book, sort of what the economics look like on a buyback. Maybe you can help us with the economics on organic growth and obviously, it implies something higher than your current ROE? What are sort of your ROE expectations as you layer on organic growth?
Matt Rudd: Yes. So if you're thinking what sort of return relative to the risk do we need to see to put the foot down and really accelerate growth, like we're looking for things that are accretive to ROE relative to current levels. So if you're seeing us accelerate growth and really start consuming capital and throwing capital against growth, we want to do that on the basis of expanding our ROE. And we laid out a path, obviously, there was a different backdrop. And at our Investor Day, we laid out all sorts of ways that we could contribute to higher ROE loan growth in the right portfolios with the right capital against it and spreads returning back to more normal levels, so it's a key ingredient in that recipe. And we think there's more torque in doing that than buybacks on pound-for-pound, dollar-for-dollar capital basis.
Operator: Your next question comes from the line of Darko Mihelic from RBC Capital Markets.
Darko Mihelic: I hate to be that guy. I'm going to ask a bunch of detail sort of individual questions, Matt. I hope you don't mind. But before I get there, just following up on the question, Carolina, with respect to your response in terms of sort of near-term visibility. You mentioned economic backdrop. You spoke about models. But I'm more curious about what is the watch list telling you? And did anything sort of get impaired this quarter that wasn't on your watch list last quarter?
Carolina Parra: So as expected, our watchlist has been increasing in the -- with managing it, actually to maintain it flat. So new coming in but a lot of our solutions coming out as well, both going back the business with good restructurings. And so anything that came into impaired outside of watch list, there is very little and we're trying to keep a very tight outlook and look into our portfolio with a lot of conversation with the business line to just make sure those are moved into watch list and into our SAMU, our special asset management unit to be managed properly. And so that transition and that communication is really strong in the bag and that's what helped us really to move ahead and be able to manage the accounts promptly and that helps us, of course with our solutions and recovery.
Darko Mihelic: Okay. That's helpful. And so -- but I did hear in there that your watch list is growing. Is that a fair characterization?
Carolina Parra: Probably, like, so we got new accounts coming in but we also have like a good chunk of accounts coming out. So relatively flat, I would say. But of course, new formations seem to watch -- are happening.
Darko Mihelic: Okay. And then just with respect to recoveries, are there any surprises there with respect to, I don't know, the value of assets backing loans process? Is there anything happening on that end that would lead to maybe a thought that the loss on impaired might change going forward?
Carolina Parra: So far, we've seen really good trend of recovery. It's very similar to what we've had in the past. When we look at some of the valuations, while some values might be coming down is not a significant impact on what we're seeing. And we have pretty strong loans developments on the -- originate. And as we manage with them, we're not seeing that really reflected in shortfalls when we look at security coverage. So overall, the story is still positive and we continue to manage it like that. I think front movement into dealing with our clients is what really help us get the best value in the recoveries.
Darko Mihelic: Okay. That's very helpful. So just now getting to my little detailed questions, sorry for Matt, for these but want to dive into it a little bit. When I look at -- you mentioned that the quarter had elevated -- or sorry, a drop in FX prior quarter had an elevated sort of FX. And so when I look at your supplemental and I look at looking specifically at Page 5 or the 5 on the bottom of the page, I guess, 6 in the PDF file. Is that any other line there? Is that what I'm seeing the -- is that where the FX is rolling through?
Matt Rudd: Yes, exactly. It's in the other category of noninterest income, what you should see in that each quarter, like if you had no change in U.S. dollar exchange rate, you should see somewhere between $0.5 million to $1 million of kind of other fees in there. It's the foreign exchange on our -- we have a net asset position in the U.S. dollar balance sheet, not a big one. But that's why you've seen that shift from last quarter to this quarter. You went from strengthening U.S. dollar to weakening U.S. dollar and that's what drove the swing.
Darko Mihelic: And so all that bouncing around that I see in that line item from quarter-to-quarter is all FX. Would that be a fair characterization?
Matt Rudd: It is predominantly FX.
Darko Mihelic: Okay. And so then following along that line, when you mentioned the balance sheet, if I go up 1 page, so looking at now Page 4, the interest rate-sensitive GAAP reversed in the quarter. Can you -- what does that practically mean? And how should we think about that with respect to your interest rate position?
Matt Rudd: Yes. I wouldn't look too far into that. It's nothing structural, we were trying to do. We weren't trying to make a big bet on interest rates decreasing, really, we had an increase we weren't expecting in notice and demand deposits. Those are predominantly [indiscernible]; so directly like 100% interest rate sensitive and that's what caused that positioning to change. I'd expect that to revert back, looking a bit more like normal as early as next quarter.
Darko Mihelic: Okay. And then so sticking with that discussion on deposits, I'm going to ask you a weird question. In your slide deck, it seems as though you're now referring to them as franchise deposits. In the past, I think you called them branches. Is there actually a difference? So as you may be expanded conceptually the type of deposits that you're targeting, so you're now calling them franchise? Or is the new wording just I don't know, cooler sounding or something like -- can you give me an idea?
Matt Rudd: That'd be the first time in my professional career, I've been accused of making something sound cooler. No change in what's in it. It was a complete wording change only. Two reasons for it. One, we don't call them branches anymore. They're banking centers. And two, with the launch of the digital cash management platform, we'll have clients that may not necessarily be clients of a banking center or have a banking center accumulate the deposit. It may come through that platform, in a geography outside of our banking center footprint. So it was just time to broaden out the definition but it was a pure wordy change and that's why.
Darko Mihelic: Okay. Great. And then last question, again, one of these pesky ones. Just looking back at your supplemental and again, sticking with Page -- well, I'm going to flip it back and forth. Page 4. When I look at the wealth management assets [indiscernible] assets under advisement, they're showing good growth. But then when I look at the actual underlying revenues, it's not tied, like it's not growing at the same pace. Is there any -- I mean, I realize it's not a huge part of the income statement. I'm just curious as to what's going on there.
Matt Rudd: Yes. Sometimes a bit of a lag there. So you'll have the asset growth 1 month and then the fees come the next month. And a big chunk of the asset growth was market-driven. And on that, we have clients with larger positions, it does attract a lower fee intensity than someone with a smaller balance too. So it's a bit of a mix story as well. But it puts us with a bit of wind in our sales looking in next quarter on, on growth in that fee line for sure.
Operator: And your next question comes from the line of Meny Grauman from Scotiabank.
Meny Grauman: Just wanted to go back to credit which is a popular topic this morning. The guidance range you're providing of 18 to 23 basis points. So that's a historic normal range. So really, the question is what gives you confidence that we're in this normalized range and not something more negative, I would say, given the speed of the ramp-up in the impairments quarter-over-quarter? What are you seeing beyond maybe -- obviously, we have rate cut expectations still built in to some extent but anything in your business that you're seeing that you could highlight, that gives you confidence that really what we're seeing here is normalization and not something more negative potentially?
Chris Fowler: The approach that we've always taken in underwriting [indiscernible] and structure that cash flow in assets we -- and really we think about [indiscernible] or it was unusually low. [Indiscernible] announced that the tonality of it is. So as we look at the macro environment on our clients, we do see a return to what we believe in 23 basis points will drive [indiscernible] are potentially where the losses might [indiscernible]. So, it's really just -- view of the underwriting structure into the mix of assets where these are going.
Carolina Parra: I think it's the matter of to start [indiscernible] it in action but also the good security coverage we have and coming from a very, very low base of both impaired and PCL. So I think we're very comfortable with that range as an outlook.
Meny Grauman: I mean, it's more a function really of your underwriting and how you make your loans and the type of loans you make rather than really a commentary about the macro environment. And so maybe there, what I'm wondering is as you speak to your clients and what you're seeing more broadly, like is that consistent with a recession? What are you hearing on the ground in terms of just how significant the pressure is on clients, even if it maybe doesn't necessarily lead to losses in your book. If you could comment on that, give us some perspective from what you're seeing.
Chris Fowler: I think the macro environment is always a factor, of course, right, in terms of generation of sales, maintenance of costs and then cost of course are impacted by the higher interest rate environment we're in. So when we look at our accounts that we have seen more challenges with, we're not seeing anything systemic. So it's not like in -- focus in one particular area. It's just a number of different issues that have arisen. So to what Carolina said, it's very idiosyncratic to individual business models and individual clients. And we will continue to work on that. But we -- as I said, we have come into these credits, we had the very disciplined underwriting structure that we have in place, we have secured lending. So we look to find ways to resolve. We've got a very strong team that works on that. Our goal is to be very active in that resolution structure. And as Carolina also said, we do -- we are seeing a lot of resolutions occurring both as loans that have come in to the watch list but also on the impaired loan side. So it's an ongoing, highly-managed process that we undertake to make sure that we manage this very effectively.
Operator: And your next question comes from the line of Nigel D'Souza from Veritas Investment Research.
Nigel D'Souza: Two quick ones for you. First, your comment on an expectation for liquidity normalization next quarter. I just want to confirm, does that imply that you're expecting the build-up that you saw in deposits this quarter to reverse next quarter? Or is it purely an asset side function where you expect loan growth to increase next quarter?
Matt Rudd: Yes. It's loan growth driven. It's how we want to use that liquidity. That's our intent. That's what it's there for. But I think on franchise deposit growth, for all the reasons we mentioned, we do see that moderating next quarter as well. So it's really the combination of those two things. And I think the other thing, if we're going into a quarter with an excess liquidity position, there's -- I mean, outside of our branches as well as our lending opportunities. We have other external sources of funding that will manage appropriately as well. So you may see us, for instance, take down broker deposits quarter-over-quarter as well to, again, as a way to reduce deposits if we do see another quarter of unexpected strength in deposit growth from our franchise.
Nigel D'Souza: Okay, that makes sense. And the last question I had was on the CEBA repayments that we saw the deadline coming to force this year. So did it have any impact on credit experience for your portfolio? Do you expect it to have any impact on credit experience, or are CEBA repayments really not an issue here?
Carolina Parra: No, no, we haven't had any impact, obviously, with CEBA payments on our portfolio.
Operator: Thank you. And ladies and gentlemen, our Q&A session has now ended. I will now turn the call back to Chris Fowler, President and Chief Executive Officer, for closing comments.
Chris Fowler: Thank you, Judy [ph]. Thank you all for joining us today and to our shareholders for their continued commitment and support. We look forward to reporting our second quarter financial results in May. Have a great day. Thank you.
Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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