EQB Inc. (EQGPF) Q4 2022 Earnings Call Transcript

EQB Inc. (OTCPK:EQGPF) Q4 2022 Earnings Conference Call February 17, 2023 8:30 AM ET

Company Participants

Richard Gill – Vice President, Corporate Development and IR

Andrew Moor – President and CEO

Chadwick Westlake – Chief Financial Officer

Ron Tratch – Chief Risk Officer

Conference Call Participants

Meny Grauman – Scotiabank

Étienne Ricard – BMO Capital Markets

Lemar Persaud – Cormark Securities

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank Financial

Stephen Boland – Raymond James

Operator

Good morning, ladies and gentlemen. Welcome to EQB’s Earnings Call for the Fourth Quarter of 2022 being held on Friday, February 17, 2023. At this time, you are in a listen-only mode. Later, we will conduct a Q&A session for analysts and instructions will be provided at that time on how to queue up.

It is now my pleasure to turn the call over to Richard Gill, Vice President, Corporate Development and Investor Relations at EQB. Please go ahead, sir.

Richard Gill

Thanks, Michelle. Your hosts today are Andrew Moor, President and Chief Executive Officer; Chadwick Westlake, Chief Financial Officer; and Ron Tratch, Chief Risk Officer. For those on the phone lines only, we encourage you to log on to our webcast as well to review our accompanying quarterly investor presentation.

The presentation includes on slide two EQB’s caution regarding forward-looking statements, as well as slide three outlining the use of non-IFRS measures on this call. All figures referenced today are adjusted where applicable or otherwise noted.

It’s now my pleasure to turn the call over to Andrew.

Andrew Moor

Thanks, Richard, and good morning, everyone. Given the accounting complexities involved in reporting on an acquisition, I am going to keep my remarks very brief to allow Chadwick to help investors and analysts on our call assess the various one-time impacts adjusted in our Q4 results. That said, a lot of great things have happened since our Q3 results call in November and we will cover those highlights today.

To my mind, it is the long-term consistency of performance that really matters to us and to fellow shareholders and it’s what EQB has proudly delivered for the past 18 years. Each and every year during that period, we have grown EPS including in 2022 with an ROE average over that period of 16.4%.

EQB’s value creation method, which we have again outlined in our MD&A applied with discipline and executed with excellence provided these differentiated and industry-leading results.

Speaking to the here and now, what EQB demonstrated in Q4 is solid margin expansion year-over-year and very low realized loan losses. Based on our consistent and effective risk management processes and practices, we should emerge from this period of Central Bank tightening without unusual credit losses. You can see our confidence reflected in the 2023 guidance we released in November and are reaffirming today.

As it relates to Concentra Bank, the acquisition added complementary asset growth diversifying our sources of revenue and funding and providing greater distribution capabilities across Canada. But for me the takeaways this quarter are, with the substantially increased scale and our integration plans taking flight, we are on track to realize the synergies we projected.

Our engagement with Credit Union partners are getting off to a good start with progress across a number of initiatives and we have succeeded in bringing great talent to Equitable Bank. It’s been an absolute pleasure seeing teams come together and collaborations take shape. Best of all, we know we have much more to accomplish and we have the people to do it.

With the underlying momentum, as well as the advantages of enhanced scale and business positioning, I feel more optimistic about our future than ever for three reasons. Our opportunities to grow with diversification, the market presence and capabilities of EQ Bank, and third, our bench strength.

Taking each in turn, we have a wide range of incredibly valuable opportunities ready to serve Canadians across our diversified commercial and personal banking operations. It’s important when I make that statement for everyone to appreciate the level of diversification, scale and significance of our commercial banking business lines, which collectively represent about half of the bank’s earnings. I encourage you to consult our updated MD&A for details.

In our personal banking operations, there are many reasons for optimism, as well as including with EQ Bank, which to my mind, has reached a tipping point in broader consumer acceptance. I think The Globe and Mail’s Rob Carrick captured in his recent color about the EQ card — bank’s card offering and titled this practical new spend on the savings account might just peel away –you away from your big bank.

Frankly, I see no reason why it shouldn’t peel you away from a traditional bank outlined bank now and our team is certainly focused on making that headline a reality for more and more Canadians. It’s taken seven years of immense progress to establish our market presence as the top digital bank in Canada. We have done that by enriching people’s lives with innovative digital solutions at every turn.

The story continued in December with the launch of EQ Bank in Québec and in January with the introduction of the EQ Bank Card. Both are game changers and we are seeing there’s new account sign-ups and product usage as more Canadians choose to make bank with us.

If you are not one of the nearly 35,000 customers who have already subscribed to the EQ Bank Card over the past month, I encourage you to do so, as it translates all of the Savings Plus accounts benefits into an everyday payment solution that works on a fee-free basis from any ATM with no charges on foreign exchange purchases plus cash back on all purchases. If you are traveling internationally this year, there is simply no better way to pay and save than with the EQ Bank Card.

We have a deep understanding of how technology is changing banking and EQB is uniquely positioned to take advantage of that in the Canadian market with a true cloud-native digital platform. This platform allow — positions us to wow our customers with faster delivery of new services. You will see us capitalize on and accelerate our investment in this advantage as we move forward.

Our team most recently visited Microsoft headquarters in Redmond, Washington, to understand how we can best utilize our technology stack for competitive advantage. We all came away confident that we are on the right track with many opportunities for value creation ahead.

Most of all, our optimism comes from working with almost 1,700 challengers across Canada, who not only deliver in 2022 but are absolutely capable of tackling even more ambitious challenges in the year ahead. We are recruiting great talent, nurtured great talent within, have dedicated programs in place to develop our raw talent.

As a consequence, EQB has both tremendous bench strength and the means to advance next-generation thinking and innovation. Together, we will approach all of our opportunities with a clear-eyed focus on customer service and in full alignment to our value creation method.

Speaking of great talent, it’s now my pleasure to turn the call over to Chadwick, whose contributions to our success have been many and include developing a first rate team of professionals who worked incredibly hard to bring you today’s integrated financial information. I think our shareholders deserve to know how good that team is and I sincerely thank them for their efforts. Chadwick?

Chadwick Westlake

Thanks so much, Andrew. Well, 2022 marked another consecutive year of EQB setting clear guidance and then delivering the results. We say it every quarter and we will again. Our North Star in capital allocation priority is return on equity and we delivered 15.9% in Q4 to round out the full year at 15.7% compared to guidance of 15% plus. The great outcome even in the context of our outstanding track record.

Considering we added incremental common equity in Q4 to fund the Concentra Bank acquisition. Today, I will jump right into four key themes; first, the impact of closing Concentra in Q4; two, margins and revenue; three, credit risk management; and last, 2023 guidance.

As we talked about in past quarters, including on the Q3 investor call in November, we booked several one-time adjustments to our reported results in Q4. There are no surprises here for us and more than a third of the adjustments are related to required accounting for credit loss provisions. Noise created by closing the Concentra Bank acquisition.

Our adjusted earnings achieved guidance, including book value per share and capital, which are not adjusted. Book value per share grew 13.4% year-over-year after accounting for the 6% increase in weighted average common shares outstanding in Q4 reflecting the conversion of the subscription receipts. That average share account will increase further in Q1 to fully account for the sub-receipts.

Now, I will unpack a few points on the one-time charges and the $1.27 per share difference in reported versus adjusted diluted EPS for Q4, but 30% of the total difference is a day two, an acquisition related ECL from closing Concentra, which does not impact our total capital.

Under IFRS, we are required to establish an ECL after having eliminated Concentras as part of their fair valuing of their assets and liabilities upon closing. The provision for losses was booked as Stage 1 performing on the entire Concentra portfolio followed by any migration from Stage 1 to Stage 2. After this quarter, provisioning will follow our normal robust process.

About another 30% of the difference in Q4 is software-related write-offs and write-downs with these decisions mostly driven by the acquisition and some consolidation and vendors we have decided to no longer work with as an outcome.

Then 20% is from planned severance with significant changes that were completed in the first 60 days following closing as part of our synergy planning.

And then the remaining 20% of the difference was tax and other integration-related costs. These points are in our MD&A.

We do not expect any further material one-time charges related to the integration of Concentra, but there will be some more spends here. We will continue to report adjusted results.

When we announced the acquisition in February 2022, we estimated integration costs in the range of $45 million to $50 million and we remain on track. That excludes the accounting-based impact from the day two an acquisition-related ECL and the interest cost that we are booked as an offset to interest income prior to conversion of the subscription receipts to common shares.

At announcement, we also stated that our anticipated annual run rate synergies should be in the range of $30 million and I think would be substantially achieved by the second full year of ownership. Overall, our expectation has been mid-single digits adjusted EPS accretion in the first full year post-closing increasing thereafter. I can confirm we are on track to achieve this guidance.

Now, I will move over to point number two. Context on our strong revenue growth driven by margin strength and stability. Our guidance for 2022 was flat to moderate expansion from the 1.81% NIM in 2021 and we delivered 1.87% ahead of guidance.

Going forward, we will not publish standalone financial statements for Concentra or separate contribution of Concentra to EQB especially as we continue to integrate the banks. However, you see net new disclosures in EQB MD&A including average yield on consumer lending assets plus points like disclosures on Credit Union deposits.

What I can say is that in Q4 if we had not acquired Concentra, EQB NIM would have continued to expand sequentially from 1.94% in Q3. The consolidated margin of 1.87% we reported for Q4 positioned us well for momentum into 2023.

We highlighted last quarter that with our diversified funding mix and our flagship EQ Bank deposit base, we manage a lower deposit beta with funding costs moving up at a lower velocity the Bank of Canada increases. This advantage has continued to strengthen.

Our EQ Bank customers are winning with a very high everyday rate of 2.5% plus new offerings including in Québec and with our EQ Bank Card that Andrew referenced, which further scales up our customer engagement. With Concentra, we had more diversification here and we expect to continue our covered bond program with another issuance in 2023.

Also, we announced that at the end of November, we have more tailwind in funding costs due to the benefits of achieving a credit rating upgrade to investment grade for Equitable Bank by DBRS Morningstar. It’s a historic milestone in the growth of the Bank and we have conviction that there is more upside with our rating still not reflecting our operating model diversification capital and liquidity.

Now, over to credit risk management. I noted the one-time provision for credit losses in Q4 due to Concentra, which was about $19 million. If we excluded this, our PCL book for Q4 would have been approximately $7.8 million or 7 basis points ratio, which is moderately elevated from the $5.3 million or 6 basis points ratio in Q3.

This is higher than Q3 as expected because of a couple of key factors. While delinquencies are stable, there is broad deterioration in macroeconomic variable forecasts compared to forecasts at the end of Q3, including unemployment, GDP, HPI and the commercial price index. These forecasts triggered model-driven changes with Stage 1 to Stage 2 migration, which represented nearly three quarters of the Q4 PCL excluding the one-time items.

With Concentra, we added some new assets with different risk profile, but also higher yields, including nearly $900 million in diverse consumer lending assets, which you now see as part of the personal banking portfolio. Plus, we added more than a $0.25 billion in additional prime quality equipment financing assets to the commercial banking portfolio.

These respective asset classes generate a higher yield, but also a higher probability of default and loss given default factors and a corresponding higher ACL. This was reflected in our net ECL as a percentage of lending assets, increasing from 15 basis points to 18 basis points sequentially. But again, these translate to higher earnings and higher ROE creation.

Our gross impaired loans increased $50.6 million or 58% sequentially in Q4. Last quarter, we referenced that over 25% of impaired loans related to one loan that we expected to fully recover. That was true and we did.

Similarly, in Q4, about $43 million around one-third of our net impaired loan assets relate to one loan in Québec. We expect to fully recover our exposure. In the coming quarters, we are prepared to see an increase in our impaired loans in this economic cycle, but we continue to expect to recover these positions if and as they transpire.

A few other reminders on credit risk that you will find referenced in our financial statements in the supplementary pack. Nearly all assets are secured and we only take first-lien positions. Our average uninsured single-family residential portfolio LTV is 65%. The average Beacon score in uninsured single-family residential is a strong 713, 44% of on-balance sheet commercial loans are insured and we won’t look at new commercial mortgages about 75% LTVs unless they are insured.

Fundamentally, nothing in our results indicates increasing credit impairment. The risks are real and present in the economy, but we always actively manage to our principal, lend and not lose money.

Moving to 2023, we are reaffirming the guidance we provided in November, with our focus remaining on our adjusted 15% plus ROE North Star. For the full year 2023, this includes diluted adjusted EPS growth of 10% to 15%. The respective guidance by metric and asset class is in our Q4 MD&A. We expect portfolio growth will be more muted in the first half of 2023 increasing towards these targets in the second half of the year.

Note, this is 12 month’s guidance and we will end up calibrating it to account for the change we announced to move our financial reporting year from ending December 31st to a fiscal year ending October 31st. That means, November 1, 2023, will be the start of our fiscal 2024.

Aligned with industry practice for Canadian banks, our Board of Directors has approved this change to improve the timing and comparability of our bank in Canada. More details will follow at our AGM in May.

In closing, we believe our value creation method and impact on enriching people’s lives will continue and broaden momentum. Consistent long-term performance is validating our Challenger Bank strategy.

We have proven expert credit risk management, increasing diversification and sources and uses of the capital, strong diversified Personal and Commercial Banking business lines, the top digital bank in the country and scaling distribution tailwinds.

Now, we would be pleased to take your questions. Michelle, can you please open the line for analysts?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Your first question will be from Meny Grauman of Scotiabank. Please go ahead.

Meny Grauman

Hi. Good morning.

Andrew Moor

Hi.

Meny Grauman

I just wanted to start off just with a question on the loss on loans and investments, about $6 million, little bit more than I expected. We have talked about this in the past starting in Q2. Is this just the same dynamics that we have been seeing for most of this year in terms of those fintech investments being marked down or is there anything else in that number this quarter?

Andrew Moor

Yeah. That’s exactly it, Meny. I mean, we are certainly hoping we are sort of at the end or close to the end of that, but that’s — so if we think that will be a bit of a as Chadwick said tailwind going forward that we wouldn’t expect this to repeat in 2023 as a whole other, of course, cost always be Equitable ones, but it’s — it seems like we might have borne most of the pain on that.

Meny Grauman

Yeah. Got it. And then just another sort of more detailed question, relatively small portfolio, the insurance lending portfolio, you talk about repayment activity being impacted by increase in prime interest rates. I am wondering if you could just provide a little bit more detail on what the dynamic is there and I see that the expectation for 2023 is pretty strong in terms of growth. Just wondering how you see the rate picture impacting that business next year or this year in 2023 as well?

Andrew Moor

Yeah. Thanks, Meny. I mean, as a reminder, the insurance lending business is part of our broader play on to keep to accumulate — our accumulation business where we have this thesis that retired Canadians not particularly well served by the major Canadian banks and this is an important plank in that, that we do compete with the big insurance companies and providing policy loans.

As rates moved up, we found that their offering rates didn’t move up as fast as we would think it should have done with the underlying rates. In general, they are priced above us and we would expect this year that will serve.

So what happened to some of the assets we had moved back to the insurance companies, because they were offering a more competitive rate. That shouldn’t be for regulatory reasons, the long-term position. So we are quite optimistic for this year that they will revert to a position almost by say a little bit of higher growth in that portfolio.

I would say it’s still a fairly small portfolio. I am very excited about the potential of the business, but I think we are still going to unpack that a little bit and get it to the couple of efficiency that we need to be truly successful over the long-term.

Meny Grauman

Thanks, Andrew. And then a little bit bigger picture question in terms of competitive dynamics that you are seeing. The larger banks are dealing with higher capital requirements and maybe that’s going to go up, obviously, that doesn’t impact you directly. But I am wondering if you are seeing any or expect to see any impact indirect, especially in the commercial side of your business in terms of competitiveness and is there any opportunity there for EQB in this kind of environment?

Andrew Moor

Certainly. We really respect the skill the treasury teams and the big banks and how they would try to price loans to yield the right returns for investors, so presumably as they need more equity on their balance sheet to — for regulatory reasons that there will be a bit of price push through there, which might — the margin make us a little more competitive.

It is a broader issue for us, though, generally and competing with the big six is that we are not an ARB [ph] bank at. We continue to be aggressively pursuing that program and that will be helpful to us once we get there, but as we have noted before that’s a couple of years away.

Meny Grauman

Thanks.

Chadwick Westlake

Thanks, Meny.

Operator

Your next question comes from Étienne Ricard of BMO Capital Markets. Please go ahead.

Étienne Ricard

Good morning. On the EQ Bank deposit growth guidance, how much of the 2022 30% growth we expect to come from first, new customer acquisition, whether that be in Québec or in other markets? And I presume the second part is, how much will come from existing customers depositing more as a result of your recent initiatives?

Andrew Moor

Yeah. It’s virtually all coming from new customers. So we are not expecting the average balance per customer to go up, which just to give you some sort of sense about $25,000 per customer somewhere around the $20,000 to $30,000.

So we are not expecting that to move very much and in fact as we acquire more customers who are using EQ Bank has an everyday bank depositing their payroll using the payment card to make the payments, if anything, the average might sneak down a bit.

So but we are seeing very strong customer acquisition now with these our big bank campaign that the broader value proposition with the payment card. The problem that we have been trying to solve with the payment card is that if you have your payroll deposited in EQ Bank, historically you wouldn’t be able to go to a point of sale, let’s say, the grocery store to spend that money and now we have sold for that.

So we are really optimistic about it becoming more and more on everyday bank solution and that’s going to be the message for the year and we really optimistic that we can drive that message home and ready to deliver a new level of available functionality in the Canadian market.

Étienne Ricard

And how is the launch in Québec progressing relative to your plan?

Andrew Moor

In Québec, it’s very good, Étienne. We are — what we know about the Québec market is particularly more inclined than the rest of Canada around sort of digital solutions and we are making good progress.

Now, just to be clear, we — in order to deliver great service, we launched with a slightly limited — more limited product set in Québec, just to make sure that we didn’t have any sort of flaws with the stack and everything that we offered was working well, which is the case. And now we are going to be rolling out the full product suite in Québec, but that’s going to take — that project can take much of the year.

So as we sort of ramp up that functionality, we would expect to see more gain and more traction in the market. But I am very encouraged with the start we have had and I think all of our market research that suggests that this is particularly a good market for digital bank and is proving to be true so far.

Étienne Ricard

Understood. And lastly, how should we think about the mix of Credit Union deposits as a percentage of your overall deposit structure now that Concentra is closed? And could you remind us how the cost of those deposits compared to other sources?

Chadwick Westlake

Yeah. We — I wouldn’t expect material growth in the Credit Union deposits as a part of our funding stack right now. I’d say it’s early days and we have some positive early momentum with our Credit Union partners and figuring out how we offer them the best solutions.

The rates — we have not disclosed those Credit Union deposit rates, but you can say they are on par with some of our benchmark nominee board rates and it sort of depends on the campaign at a certain period of time.

But just look at it for now, it’s added a new grade ingredient into our funding stack into diversification and probably over the next few quarters, we will get a better sense of the real opportunity for us of that.

Andrew Moor

So I think that’s how we see it.

Chadwick Westlake

Yeah.

Andrew Moor

And we — just to be clear, we really didn’t have the chance to reach out to the Credit Union system though we would like to before the deal closed. So now we have — I think, we will have a better — we will probably be able to answer that question even better in the next couple of quarters when we have more and more conversations with those important partners of us.

We are really trying to be really helpful with Credit Union system and solutions we can offer if we can do that, and clearly, I think, more deposits will come with it. But it’s a holistic really learning how to work with a really important part of the Canadian financial ecosystem.

Chadwick Westlake

That’s right. Like I remember too, I guess, just on the close-up. Well, we reported $2.4 billion from Credit Union deposits. Remember, the whole market in Canada, it’s about $400 billion. There’s certainly a lot out there, but we need to figure out what makes the most sense as we serve the Credit Union general members.

Étienne Ricard

Thank you very much.

Chadwick Westlake

Thank you, Étienne.

Operator

Your next question comes from Lemar Persaud of Cormark Securities. Please go ahead.

Lemar Persaud

Thanks. Can you guys hear me okay?

Chadwick Westlake

Yeah.

Andrew Moor

Absolutely, Lemar. Yeah.

Lemar Persaud

Okay. Fair enough. I dropped off there for a little bit. I probably need a new headset. So I apologize if one of my questions have been asked and answered already. So I just wanted to come back to the consolidated NIM next quarter given the full impact of Concentra, should we expect it to increase sequentially just given the momentum in the underlying business, net of the drag from Concentra? I think I heard you mentioned Chadwick that margins ex-Concentra moved higher and that jives with my crude estimate. But I am really trying to figure out what the Q1 baseline should be?

Chadwick Westlake

Yeah. That’s fair, Lemar, and good morning. It’s — one thing that — one way to think about it is, we had two months of impact from Concentra and we were open about the fact that we were bringing in a lower margin business and going into integrated into our business. So it takes a little bit of time to see that margin increase.

So that two months will go to three months in Q1. So there is potential for a little bit more dilution. But we would still expect to see some consistency and potential expansion from our consolidated NIM at the end of 2022 overall by the end of 2023. So look at it a bit of a curve through the year.

Lemar Persaud

Would you say that…

Chadwick Westlake

Does that make sense? Yeah.

Lemar Persaud

Yeah. Well, I am just trying to gauge it relative to Q4, like should I expect in Q1 for it to move up just given?

Chadwick Westlake

No. I would say a down a little bit, Lemar…

Lemar Persaud

Down a little bit…

Chadwick Westlake

So because we didn’t have the full impact of Concentra in Q4. So there is a full three months of impact of that margin and then in Q1 you could see all things kind of — all things equal, where we still see that consistency in the overall EQB business. Just you will have the full impact of Concentra. It takes a little bit of time and then I’d say some expansion by more in the second half of 2023 is the way I would think about it.

Lemar Persaud

That’s helpful. And then I want to move on to the — your portfolio growth targets here and I want to just focus in on the Alt-A mortgages, 3% to 5% for 2023 seems it really quite light relative to what I would expect, like is it bank intentionally slowing growth in that portfolio? I mean, Royal talks about mid single-digit growth in their portfolio, which is prime for 2023, but I was under the impression that with the pressure from higher rates, the pool for Alt-A borrowers should move higher. So I guess kind of why lower target on the Alt-A mortgage growth?

Andrew Moor

Yeah. I think it’s a bit of a tough one for us to be precise about and we do tend to want to under promise and over deliver. Clearly, we have housing market that’s quite slow as we speak. I’d be fairly optimistic, frankly, over the next three months to four months it’s going to come to life once people are kind of comfortable the interest rates have peaked.

But even to get that — to get to the kind of numbers to figure out what you want to communicate to the market, you really need to sort of have some views on how the housing market is going to move, we are certainly expecting a much stronger second half of the year than the first half of the year and I am pleasantly surprised by the level of activity on the underwriting floors were today, especially in Western Canada.

So there may be an opportunity to exceed that. But I think we are captured that fairly conservative terms viewing that a slowing housing market is going to be, it’s still a bit of a march uphill rather than a tailwind for sure. But there may be opportunity and it will be interesting to see how the market changes vis-à-vis the prime market for sure, as you pointed out.

Chadwick Westlake

Yeah. I will just add two points, Lemar. So, one is growth out there. You mentioned RBC’s prime uninsured portfolio. Sure, there’s growth, and there’s growth in all market but we are not going to chase growth, we are going to stick to growth that fits our risk appetite framework and fits our consistent business operating model. So we are in this environment, we are being very consistent where others may or may not.

And a two, I’d say as well reminder that we just closed Concentra a couple of months ago. So that increased the asset base as well. So we also changed our perspective of relative growth. So the whole portfolio is bigger, but that’s just — that will look different for a few quarters, given the layer on of that portfolio.

Lemar Persaud

Yeah. Makes sense. And then the final one for me. Just wanted to revisit the synergies discussions for Chadwick. I think last quarter you said you provide some updates there. So now that Concentra has been under the belt for a little over two months, are you feeling relative to that $30 million-ish of guidance, do you think it’s going to be easy to achieve and is that frankly the low watermark with potential upside from there?

Chadwick Westlake

Well, I’d say, nothing is easy to achieve in banking. But, no, we are working very hard and we are — as Andrew had commented on, we are pleased with the progress out of the gates. Still — it is still early days.

But I would say is, we have great velocity. You saw that in some of our Q4 results. I’d say our optimism has increased that we will achieve those synergy targets and I do think there’s some upside potential.

Remember that $30 million was cost synergies and there we may be able to explore some more here on the topline as well. So we will continue to update you on that quarter-by-quarter, but it’s looking pretty good.

Lemar Persaud

And what is it that on the cost synergies, like systems transformation, kind of systems consolidation, like what is that?

Chadwick Westlake

Yeah. All of that that you saw on the one-time charges, Lemar. So the software integration and contract terminations, severances, real estate, it’s all those standard. There is really a combination of people, process and technology costs.

Lemar Persaud

Thanks. Thanks for the time.

Andrew Moor

Thank you, Lemar. Appreciate it.

Operator

[Operator Instructions] Your next question will come from Graham Ryding of TD Securities. Please go ahead.

Andrew Moor

Good morning, Graham.

Graham Ryding

Sorry, I had to turn off my mute there. Maybe we could talk about the NIM first, just what actually wasn’t that drove the higher NIM in 2022 for you relative to your original forecast? Just want to figure out whether it’s deposit cost inflation, it was maybe less than expected or was it more asset mix?

Andrew Moor

I think it’s mostly, Graham, related to — a significant contributor was the lower beta that we expected on the EQ Bank deposits, And, of course, coming into last year when we were giving you guidance, we — it wasn’t clear to us the Bank of Canada will be moving aggressively on the prime rate fall short on our rates. So we gained a bit through deposit beta there.

And then, of course, I think, our treasury team are particularly astute and clever about balance about hedging the risk to making sure we are going to match book across the rest of the asset liability matching process.

So unlike others, we didn’t see the broader NIM is getting pushed through that — through rapid moves in interest rates upward tend to — we tend to be things slightly less tightly managed balance sheet. So you see a margin detraction. We didn’t observe that. So combination of great treasury management plus the beta from EQ Bank, I think, is — both of those things were not quite what we forecast and give you a guidance.

Chadwick Westlake

The last thing I will just note for back to even the Investor Day, Graham, remember the ROE calculator and our focus on ROE and Andrew is the pioneer here right of creating this as we stick to our ROE calculator that he designed with the team 15 years, 16 years ago and that’s continue to play out and that plays out rate in a quarter like this as well, so that those funding benefits from ROE calculator you will see translate in to our margin.

Graham Ryding

Okay. Understood. And then I hear your message about some dilution to NIM in Q1 as you get a full quarter of Concentra, but then I think you are suggesting there should be some NIM expansion in the second half of 2023. So what is it that’s driving that, is that — maybe some color there?

Chadwick Westlake

Well, there is a combination of factors, right? So there’s — we have been looking at the pricing on the asset side of the portfolio and then also leveraging the pricing capabilities on our funding stack are the two elements to consider in terms of what will improve the margin over time. And it’s just there has been, as we manage our book a little bit differently from a treasury perspective some that just takes some time to cycle through as well.

Andrew Moor

Yeah. There is some sort of nuances sort example some of what we think is variable by rate liabilities are actually SEDAR.

Chadwick Westlake

Yeah.

Andrew Moor

So they have got…

Chadwick Westlake

Yeah.

Andrew Moor

They have got a one-month or three-month term as we move to a core driven swaps, which are more of an overnight rate, you will see less of that. But in general, that’s going to help with margin expansion as booked historically rolls off.

Chadwick Westlake

Yeah.

Graham Ryding

Okay. And then maybe just on the credit side. There was some migration higher in arrears. I wouldn’t call it alarming, but we saw some push higher both in the single-family and the commercial side.

So maybe just some color on what you think it is driving the higher arrears on the single-family side. Is it the housing market is not as liquid right now and people are unable to sort of get out of default situations as easily or is it just employment, maybe just some color there first?

Chadwick Westlake

So the increase that we have seen in arrears. I would note that the 30-day to 80-day, 90-day category, we have seen the trajectory of that increase reduced a fair bit in the quarter. So that’s very encouraging as we look forward. The increase in actual impairs is a situation where the prior quarter’s increase in delinquency roll through.

What we are seeing with respect to that I think is a little bit less liquidity in the market when it comes to the opportunity to refinance out. We know that certainly some of the mix and whatnot have a little bit less liquidity. So I think that’s the dynamic you are seeing on the impairs.

But with respect to that near-term delinquency, it’s difficult to pinpoint because we are at levels now that are just returning to historical norms. So as you will recall there, they have increased from what were historical lows coming out of the pandemic. And so because of that, we aren’t seeing anything really unusual like the three or four different factors that you just referenced. So we can point to as causation for increase at this point.

Andrew Moor

And clearly, unemployment is not part of this. We typically see a seasonal — seasonally towards the end of the year a little higher, but it looks pretty good. We are not seeing in terms of losses at least in our view and we still do a deep dive as much easier on the commercial side to take it slow and look at them loan-by-loan. We continue to believe that losses are going to be, well, not going to be particularly elevated in with higher interest rate scenario.

Graham Ryding

Okay. That’s helpful. Maybe if I could just finish on that, then the commercial loan that you flagged. One is, what’s the nature of that $43 million commercial loan, like, what’s the — what kind of asset, is it once the loan to value and do you expect that you won’t have any losses this year?

Andrew Moor

Yeah. It’s a multifamily building. It’s got a large being up behind it with a partner that we have worked with for long time as part of a broader issue with I think almost every bank in the country is involved in the CCAA.

When we look at loan-to-value coverage, we are very well covered, but we won’t realize a loss there, whether it will get resolved before the end of this quarter, is another matter. So you might still see it well during Q1, but — at the end of Q1. But I am extremely confident looked at the loan file in some detail and I am extremely comfortable with whatever it was.

Chadwick Westlake

And if I could just add on what Andrew said, the loan — the assets that we have ourselves is a solid asset. The issues see stability or more at the sponsor level at the top of those and so that’s why we can assert real confidence in our asset working its way through.

Andrew Moor

So I think you could just generally think about that in terms of arrears. Sometimes we are lending on a very good asset that are cash flow multi to a group that has got others say development activities.

Now you may end up with the group itself run into some challenges, but don’t forget we have a first lien on the cash flow multi the loan to values we lend that generally you can look at — you work your way out of those things, no loss, but it can look like a bit of an arrear for a while.

Graham Ryding

Okay. That’s it from me. Thank you.

Chadwick Westlake

Thank you.

Operator

Your next question comes from Jaeme Gloyn of National Bank Financial. Please go ahead.

Jaeme Gloyn

Yeah. Thanks. First question, maybe for Andrew, just in terms of the Concentra Bank business and its portfolio of loans, after two months of getting your arms wrapped around it. Are there any portfolios or types of loans that you like more or like less than originally expected and you are looking to maybe shift or push further into or pull back, are there any comments on that?

Andrew Moor

I think it. Yeah. Thanks, Jaeme. I mean we have identified a few loans, a few parts of the portfolio, we weren’t concerned about from a credit loss perspective, I think, but we don’t want to continue to be in those businesses, it’s our deliberate strategic decision. So those — that continues to be our position on those things. We haven’t really seen anything that’s more attractive as a result we are looking at it deeper.

We are still looking away and it takes a long while to really get your arms around the loan book, but seeing nothing negative at this point, pretty much right what we expected. I think was the number we looked at like 30,000 documents or something crazy before we actually put the bidding on this asset. And I think that investment in time early on is really paying off in terms of actually having a pretty good view on this portfolio. So I would say, in general, no surprises.

Chadwick Westlake

Yeah.

Jaeme Gloyn

Okay. And I am sorry I missed the first part of that answer that you say there were some portfolios that you would look to maybe exit or diminish, did I understand correctly and so…

Andrew Moor

Yeah. Exactly. There were some that we determined before we bought Concentra, we wouldn’t be continuing. One is what they call the high yield portfolio. It’s lending to some commercial entities. Each asset is look fine to us at this point, but it’s not a business we want to be into. We don’t believe we can scale it safely.

There are a modest number of hotel loans, we don’t — we generally don’t have a good — don’t have a good understanding in hospitality vertical and we don’t want something that we think are strategic direction, we want to be putting more capital into those that kind of business.

So those two are both — now there is work, just to be clear, in case some of those customers listing, we will continue to support customers of Concentra Bank. We are not somebody that switches and changes, but those are not businesses that we want to lean into to expand from here.

Jaeme Gloyn

Okay. Understood. If I look at the consumer lending portfolio, nice yield of 9%. That’s been pretty consistent from Concentra going back in their years — their financials as well. Maybe if you can provide a little bit more color as to what’s behind those loans and the potential growth trajectory for consumer lending?

Andrew Moor

I think it should grow quite nicely. Mostly a big chunk of that is home improvement loans and equipment like that. So it seems to be working with good partners, pretty comfortable with it. Again, it’s one way, I think, we are excited about the portfolio in a positive way. I wouldn’t like to give you too much projection for growth until we have a deeper understanding of those partners and really — I think we are getting there. But just another couple of quarters we will have a more comfort around those portfolios. But our general view on them is very positive at this point.

Chadwick Westlake

Yeah.

Jaeme Gloyn

Okay. Understood. Last one for me, maybe more of a question for Ron. Just thinking about the credit provisions and in your closest peer talked about higher renewal rates or higher mortgage rates for renewed mortgage business being a driver of higher provisions this quarter. Not looking for your comments on what they have done, but more just philosophically, like how would a higher rate on a renewed mortgage impact, how you think about expected credit losses and a provision that might be taken on that renewed mortgage, any color on that?

Andrew Moor

Sorry, I didn’t hear the Ron back talking about that on the call. So, but certainly, it’s a valid question in terms of what higher rates mean for our book. So, I don’t know, Ron, if you could address that more generally?

Ron Tratch

Well, look, I mean, obviously we have a very strong handle on it and with respect to our competitors, we look at our own book than in the context of our own risk appetite. And that we have seen it for many, many quarters the quality of our book the strength evidenced by LTVs, the Beacon scores, et cetera, et cetera, and so it’s actually a relatively small number of loans. But you would be in to areas of total debt service that are exceeding say 50% and those loans are also have very, very strong payment history today.

So when you take all that was in context in terms of the number of loans, the quality of the book where our risk appetite is played, Chadwick talked about how we are designed to go through cycles and the book is positioned to take you through a cycle.

I am quite confident that the provisions that you see today are reflected in what would be in the next six months the renewal cycle and it’s reflected in that we have taken nominally or marginally higher reserves incrementally as the economic outlook has changed and so I certainly would not expect to see any increase in provisions specifically for that factor over and above what we have in the books today.

Jaeme Gloyn

Okay. So if I understand correctly, the — where there are loans that maybe have a total debt service ratio exceeding 50%, that by itself might be a reason to maybe increased provisions from an expected credit loss perspective, but given the LTVs, given the payment history, given the underlying, I guess, maybe FICO or quality of the forward, those are all offsets were provision. You can sort of tweak that down a little bit, is that summarizing factor?

Andrew Moor

That’s entirely the right way to think about it. Let’s not forget in those GDS TDS numbers. It doesn’t include any assets outside of the house. For example, you could have money in the savings account in your RSP, that’s not even — that doesn’t help alleviate GDS TDS, so presumably, it’s probably likely that relatively high Beacon score if you have got those kind of funds put away.

But I think many of the way we think about these metrics doesn’t reflect the complexity what really happens when people take a mortgage. Their family supports here, the teenagers can go and contact us to job on Saturday morning and these are family enterprises to maintain the family and home, right? So that’s certainly how we think about it and that’s what we observed in our loan book.

And not to say, it doesn’t put stress on our borrowers and we have lots of empathy for our customers, obviously, with this almost unexpected increase in rates, but many of them have the intellectual resources to sort of figure out how to work their way through this.

Jaeme Gloyn

Great. Got it. Thank you very much.

Operator

[Operator Instructions] Your next question will come from Stephen Boland of Raymond James. Please go ahead.

Stephen Boland

Good morning. Andrew, I just wondering if your thoughts on the competitive environment if Mr. Smith is successful in acquiring the Home Capital. Do you believe this is positive for Equitable or negative?

Andrew Moor

I think it’s neutral, Steve, right? I mean Home Capital has a sort of rationale management team doing sensible things, and we compete with them fairly and we able to run I think, and Stephen obviously, is a very much a rational competitive businessman. I mean just build businesses he has without that.

So I think it will be the things will be pretty much as they were before. I guess one thing we were benefit of seeing their results in public. So that’s a little bit of a disappointment for me. But other than that I don’t think much changes.

Stephen Boland

Okay. And you have had a very good partnership with First National for many years. Mr. Smith, one of your largest shareholders, has there been any discussion in terms of a change in that relationship with First National going forward.

Andrew Moor

I think we wouldn’t expect any, Steve, I mean, Stephen also sort of one of our best pals. We do a lot of stuff together, cycled bike ski and stuff together. And certainly the conversations I have with him doesn’t suggest that there’s going to be any change in that relationship. And probably as I am making this call now, we have probably got five phone lines, but our people with First National people talking about various elements of the business we do together. So I am expecting that will continue.

Stephen Boland

Okay. Thanks very much.

Chadwick Westlake

Thanks, Stephen.

Operator

Mr. Moor, there are no further questions. So back to you for closing comments, sir.

Andrew Moor

Thank you, Michelle, and thank you everyone for attending today. We look forward to reporting our Q1 progress on May 2nd and hosting our Virtual Annual General Meeting on May 17th. As a final thought and invite everyone listening today to sign up to receive EQ Bank Card, not only do I think you will like it, but also from a research perspective, it’s a great way to get to know Canada’s Challenger Bank. The value we are creating the consumer marketplace, why we are so positive about our digital future. Thank you for participating and have a great day and weekend.

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. Thank you all for joining and we ask you to please disconnect your lines.