Equitable Group Inc

TSX:EQB

Welcome to EQB's Earnings Call for the Second Quarter of 2025. This call is being recorded on Thursday, May 29, 2025. [Operator Instructions]

It is now my pleasure to turn the call over to Maggie Hall, Director of Public Relations and Communications. Please go ahead.

Thank you, Jenny, and good morning, everyone. Your hosts today are Andrew Moor, President and Chief Executive Officer; Marlene Lenarduzzi, Chief Risk Officer; and David Wilkes, Vice President and Head of Finance.

For those on the phone lines only, we encourage you to also log on to our webcast and view our presentation, which may be referenced during the prepared remarks. On Slide 2 of our presentation, you'll find EQB's caution regarding forward-looking statements as well as the use of non-IFRS measures. All figures referenced today are on an adjusted basis where applicable, unless otherwise noted.

With that, I will turn it over to Andrew.

Good morning, everyone, and thank you, Maggie. Before diving into quarterly numbers, some initial observations. While the fundamental capacity of our business to grow profitably is unchanged, I would be remiss not to acknowledge that this was a period of unusual volatility. The confidence altering threat of cross-border tariffs dominated the narrative and dictated many customer decisions in Q2. The situation will be remedied, but it may take time. We trust that the resolution brings with it some benefits accruing to Canada for more diversified trade and the creation of a very necessary pro-growth economic agenda in Ottawa.

In the meantime, while being ever mindful of near-term risks, we remain confident in EQB's prospects and for good reason. We have market-leading franchises in digital banking, single-family residential and CMHC insured multi-unit lending, with great businesses in decumulation lending and across our portfolio of commercial businesses supported by a really strong capital position with excellent liquidity.

In a more muted market, these positions will serve us well, and in Q2, helped us to deliver one of the stronger periods for loan originations with market share gains. At a high level, our approach and record renewal rates helped our single-family uninsured portfolio grow at 2% quarter-over-quarter or $379 million. Our long-time leadership in serving Canada's apartment sector was again demonstrated in Q2 with the insured construction portfolio increasing 10% quarter-over-quarter and term loans under management increasing 6% over the same time period and nearly 29% year-over-year.

We did see a decline in gains on securitization from CMHC insured multifamily, but we expect higher earnings in Q3 and Q4 from this business. More detail on EQ Bank later, but it continued to grow meaningfully such that over 560,000 customers now enjoy our differentiated Challenger Bank offerings and deposits grew to $9.4 billion. Objectively, there is much to celebrate.

In a business like ours, we do not expect too much quarter-to-quarter volatility in earnings, given predictability in most elements of net interest income and noninterest revenue, which tend to grow at a stable pace. Variances in earnings when they occur tend not to be terribly material and considered individually, but they can add up when they coalesce and point in the same direction in a single quarter.

That's what occurred in Q2 as our securitization business produced lower earnings than in Q1. Our common equity was above target, weighing down ROE, and we incurred higher levels of other variable spending such as marketing and other expenditures to drive EQ Bank account acquisition.

When combined with elevated credit losses, we are the first to acknowledge our financial results were out of character. We certainly expect Q3 and beyond to show better performance even as economic uncertainty may continue to drive credit provisions. The bottom line is that we are well positioned for the future and expect over the medium term, we will generate over 15% ROEs consistent with our historical record.

Now to the numbers. Against our financial priority of generating over 15% ROE, we fell short at 11.9% for the quarter and 13.6% for the first half of the fiscal year, with EPS of $2.31 and $5.29, respectively, during that part to anomalous demand of our sector and the broader economy phase and the naturally variable factors I mentioned.

No conversation about the banking sector through this demanding period of uncertainty can be made without acknowledging the credit environment, which Marlene will walk us through in a moment. PCLs for our lending businesses in the quarter were up at $29 million. This figure is split nearly evenly across each of our business lines and broadly reflect the demands of Q2's unique macroeconomic landscape, stress on a vintage of SFR borrowers and pressure on the commercial portfolio, all collectively shadowing otherwise strong core performance.

Consistent with our expectations, our single-family residential originations increased 28% compared to last year. We won market share and picked up business in line with our risk appetite. This was achieved even as we dialed in our credit policies to manage risk in a less certain economic environment. We do not stretch our standards to achieve growth because we never do. By maintaining a broad presence across Canada, while prudently managing risk associated with house prices, we continue to build a strong portfolio with good risk-managed earnings potential.

SFR portfolio growth was also supported by one of the stronger periods for loan retention for the bank, a function of good customer service as well as economic factors. We naturally observe the housing market very closely. In line with market forecasts, many of you will be familiar with, our outlook now reflects lower housing sales than when we last reported. While the stock future still holds some degree of uncertainty, and we have adjusted our tone to be slightly more cautious as a result, let me be clear that we remain confident that the demand for housing is there and that we will continue to gain share in the markets that are important to us.

As an encouraging point of example, uninsured single-family loan application volumes in the first few weeks of May were up 17% from last year at the same time. Decumulation lending continue to enjoy strength in demand as we advance our presence in a market that's serving the growing population of Canada's retirees.

Growth in CMHC insured multi-unit residential was a highlight for our commercial banking business. Cash flow in multiunit apartments are attractive to own, and we're pleased to support this asset class that has yielded strong returns through many economic cycles. I'll have more to say about our outlook and innovation agenda, including for EQ Bank.

But first, I'd like Marlene to review credit performance, and David to provide a quarterly summary.

Thank you, Andrew, and good morning, everyone. I'll start with an overview of the current macroeconomic environment as it pertains to EQB's portfolios before moving on to the credit performance in the quarter, and then I'll provide a few words on the path ahead as we navigate this uncertain environment.

Since our last call, tariff uncertainties contribute to significant financial market volatility and have dampened activity in the economy, specifically in the real estate market. Shown here on Slide 8 is the range of scenarios we used to model the impact of sustained increases in tariffs on our portfolios. This exercise, coupled with recent investments we've made in risk management disciplines give us the confidence that we are appropriately reserved and are prepared for different outcomes. Thus, we're able to reiterate the conviction we have in our growth ambitions. The work we've done over the past year to enhance our risk infrastructure gives us a very granular view of our businesses and ensures we're able to adapt quickly as required.

Now turning to credit performance in the quarter. Briefly on the subject of gross impaired loans, the rate of new formations of gross impaired loans or GILs slowed in Q2, but economic headwinds means resolution activities are taking longer, resulting in the GIL increase we saw this quarter, up 8% from January to $775 million.

Within our personal lending portfolios, GILs increased 1.4% with $91.6 million impaired residential mortgages discharged or resolved in the quarter. Looking at commercial, impaired loans increased 12% in Q2, driven by 2 new loans with no individual provisions as well as a slower pace of resolutions. Equipment financing impaired increased 23% to $10.3 million as a result of deteriorating macroeconomic conditions stemming from tariffs further impacting the transportation sector.

Now on to PCLs. PCLs for our lending businesses totaled $29 million compared to $13.7 million in Q1. Of the total, $5.8 million was related to Stage 1 and Stage 2 performing loans, reflecting growth in the uninsured lending portfolio and a more negative macroeconomic outlook impacting the forward-looking indicators that are used to model expected credit losses.

Stage 3 PCLs associated with impaired loans were $23.2 million and 45% of which was associated with equipment financing. On the personal lending side, PCLs were $9.1 million, up from $6.3 million last quarter, primarily driven by the 2022 origination vintage Andrew mentioned. These loans continue to drive both GILs and PCL due to pressures from the previously rapid increases in interest rates and declines in real estate values from their peak in 2022.

Commercial PCLs were $9.4 million with $2.6 million related to provisions on performing loans. Provisions on nonperforming loans or impaired loans are mostly related to noncore assets. Reported PCLs and equipment financing were $10.1 million, down from $13 million over last quarter and $14 million last year. As we've expressed on prior calls, we have improved the credit quality of this portfolio over the past year, reducing exposure to long-haul transportation and shifting originations towards prime. Now over 50% of the originations are in the prime segment, up from 31% at the end of 2023.

On to the outlook. Given the degree of economic uncertainty facing the global economy and here in Canada, accurately forecasting the timing of resolutions or a decline in new impaired formations is difficult. With this weaker economic outlook, we have increased our provisions this quarter. If market uncertainty were to subside, we may see improvement in the second half of the fiscal, aided by today's lower interest rate environment and the investments we've made in risk management disciplines.

In response, we continue to deliver high credit quality originations using our disciplined and dynamic risk management approach, underpinned by prudent underwriting practices such as conservative average loan to values and strong borrower creditworthiness, tightening of our underwriting criteria in certain geographies and asset classes across all of our businesses, and active and ongoing management of the problem and impaired loans within our portfolios and finally, continued strengthening of the Bennington leasing business. We are confident in the overall quality of our lending portfolios in the level of reserves we've taken and expect our loan loss experience will return to more normal levels over time in keeping with our long-standing position as a credit performance leader among all Canadian banks. Now over to David.

Thanks, Marlene, and good morning, everyone. I'll start with return on equity and capital. As we share consistently, our priority performance measure is generating ROE above 15%. As Andrew noted, ROE for the quarter was 11.9% and impacted by several factors, including uncertainty in the macroeconomic environment and Stage 3 allowances primarily associated with loans that were already impaired. The elevated provision for credit losses led to over 250 basis points of the gap to our target ROE this quarter.

In addition, consistently strong organic capital generation each year has allowed the bank to grow capital faster than risk-weighted assets, resulting in the bank's increasing capital ratios as well as EQB's common shareholders' equity. As a rule of thumb, $200 million in additional shareholders' equity has a 100 basis point impact on our ROE. Given these 2 factors, we are confident in the fundamentals of our business and its ability to deliver target performance of 15% to 17% ROE over the medium term.

On capital, total capital increased 10 basis points to 15.6%, reflecting organic capital generation, net of dividends and our semiannual $4.4 million LRCN payment. In the quarter, Equitable Bank completed a $200 million dividend to its parent, EQB Inc., leading to a decline in its CET1 ratio to 13.2%. As part of optimizing its ongoing capital structure, the bank completed a $200 million subordinated debenture issuance to EQB, allowing it to maintain strong overall capital levels above 15%.

In terms of shareholder capital, last year EQB successfully executed on our guidance to grow the common share dividend 20% to 25% annually over 5 years. Since then, we are on track with our plan to grow dividends 15% annually and continued this with our latest dividend increase. This quarter, EQB also repurchased and canceled 271,000 shares for a total of $26 million through its NCIB. We will continue to use the NCIB as part of our overall framework that ensures capital is first allocated to shareholder value enhancing organic and strategic inorganic growth while returning excess capital to shareholders.

Net interest income grew 3% sequentially and was 1% above last year. There were a number of factors here, namely the growth of our uninsured lending portfolios across single-family decumulation and commercial and an increase in prepayment income quarter-over-quarter. Expansion of margin over the last year has been supported by our commercial lending portfolio and floor rates built into these agreements. Today, the bank holds several billion dollars of adjustable rate mortgages with contracted floors that protect from downward movements in rates. The majority of these loans are already at the floor rate, which means a further reduction in policy rates directly benefits NII.

The margin in the remaining lending portfolio is expected to be relatively consistent as rates fall given the matched funding approach and the book's 1-year duration of equity. For EQ Bank, deposits grew well, reaching a new record of $9.4 billion and up 4% quarter-over-quarter. Notably, demand deposits, including our innovative notice savings account grew 10% quarter-over-quarter and 32% year-over-year. These demand deposits contribute more to the bank's NII than its term deposits. EQ Bank deposit pricing is continually optimized to grow the long-term franchise while contributing to earnings today.

Overall, NIM was 2.2%, driven in the quarter by factors I've mentioned previously as well as derivative gains. Normalizing for these gains, NIM would have been 2.13% compared to 2.07% in Q1 and 2.01% last year. This is consistent with our guidance for NIM above 2% through the year. Noninterest revenue contributed 14% of revenue in the quarter. Once again, we experienced consistency from EQB's fee-based businesses with $23 million in revenue, including ACM Advisers and Concentra Trust. ACM continues to perform well with new institutional subscriptions as it prepares to launch its new social and climate fund.

Gains on securitization and income from retained interest decreased from a record Q1 as overall volume in the CMHC insured market declined, particularly customers looking for 10-year mortgages. Our outlook for NIR is constructive for the second half of the year with securitization income expected to increase in Q3 and Q4, and we anticipate NIR will contribute over 15% of revenue this year.

Moving to expenses. We continue to take a through-cycle approach to building capabilities, investing in innovation and growing the bank and have levers to pace our expense growth. With strong lending performance driving revenue for the future, we have the means to continue investing to deliver our trademark customer service, enhance our digital capabilities while delivering our target ROE over the medium term.

In May, Equitable Bank's Challengers moved into our new Toronto headquarters, which is a purpose-built facility equipped for our team. Following completion of the lease at our temporary facilities, this will reduce the adjustment to expenses in future periods. Again, our focus is investing through the cycle to generate 15% plus ROE while building long-term franchise value. We will remain firm in our commitment to cost effectiveness and expect operating leverage to improve as faster asset growth translates to higher revenue.

On asset growth, total loans under management reached $71.5 billion, up 3% in the quarter and 9% year-over-year. The drivers were growth in uninsured single-family decumulation lending, which is up 45% year-over-year, insured commercial construction up 31% and insured multi-unit residential up 29%.

On funding, EQ Bank deposits grew at their quickest pace since 2022, and we are particularly enthusiastic about the growth in activity here as more customers are choosing the platform for everyday banking, including payroll. And as I mentioned, this is leading to faster growth of lower-cost demand deposits. Overall, we remain confident in the fundamental and structure ability to generate consistent 15% to 17% ROE over the medium term as we invest in new capabilities and our core lending businesses continue to grow. Back to Andrew.

Thank you, Marlene, and thank you, David. Before final comments on our outlook, I want to express my thanks to our finance team and David, in particular, for their hard work this quarter. We also made 2 important changes to senior roles and responsibilities to align with our strategic priorities and sharpen our focus. Specifically, Dan Broten was named to the newly created position of Senior Vice President and Head of EQ Bank and Janet Lynn to the position of Chief Information Officer of Equitable Bank. Dan is a founding member of the EQ Bank team and Janet joined us in 2021 as VP Lending and Payment Technology, where she used her expertise to help build scalable technology solutions benefiting our Challenger Bank.

In his new role, Dan takes responsibility for EQ Bank marketing, product development, customer care and digital delivery, while Janet will ensure we remain at the forefront of innovation in all areas of Equitable alongside Dan at EQ Bank.

Now some time for EQ Bank. We are focused on adding more Challenger Bank service over time and building our recent momentum in customer growth and engagement. As I mentioned off the hop, EQ Bank customers grew 23% year-over-year such that over 560,000 customers have chosen our bank to suit their everyday banking needs and now benefit from the competitive tension we provide to our sector in Canada. Deposits grew at a rapid clip to $9.4 billion, driven notably by demand deposits, as David mentioned, which were up 10% quarter-over-quarter and 32% year-over-year, with our fastest expansions since 2022.

We enjoyed deeper engagement with our payroll customers, who, by the nature of this activity, choose us as a destination bank and represent a growing ratio of our total customers and deposit book. Q2 also saw our business owner customers provide meaningful feedback for our business accounts during its beta phase, which we look forward to rolling out fully this year. In short, we are deepening customer relationships in line with our strategy. As we build scale, we also see opportunity to drive down costs and improve efficiency.

Turning back to our lending businesses. Uninsured single-family loan application volumes in the first few weeks of May are encouraging, up 17% from this time last year, giving us a constructive outlook for Q3, coupled with a good picture for CMHC construction and term loans in our commercial business.

In closing, this was a demanding quarter that saw an array of variable factors converge with the impact of tariffs on the global economy. We responded by tightening credit in certain geographies and taking appropriate provisions. The rate of new formations has slowed and while, in some cases, delayed, we're working hard to resolve problem loans where we can affect a change using our proven approach. The quarter also had strong fundamental performance that supports my confidence in the future. All things considered, it is evident that disciplined execution of our strategy through this period of economic uncertainty will allow us to support our customers and translate recent asset growth into positive earnings and generate medium-term ROE above 15%.

Now I'll turn it back to Jenny to begin the Q&A portion of the call. Thank you.

[Operator Instructions]. Your first question is from Gabriel Dechaine from National Bank Financial.

Can you refresh my memory, what's your typical loan-to-value at origination for a single-family residential mortgage and commercial mortgage if such a thing as typical exists?

It does. So I'll let Marlene kind of deal with the quantitative there. But in general, as a sort of theme, if people with lower credit scores and therefore, a higher propensity to default. We have a lower loan-to-value than from those of higher credit quality. But Marlene, I wonder if you can deal with that.

Sure. A origination on average, our loan-to-value on the single-family book at -- uninsured book is 70%. And on commercial -- yes, around that. Commercial, it's a bit lower than that.

Okay. So point of my question is what -- and correct me if I'm wrong here, the provisions -- the impaired provisions on mortgages and on commercial mortgages, they're related to previously impaired loans? So -- and then I guess, if I just want to illustrate it a little bit, if your standards have been consistent over the years, you're originating uninsured mortgages in 2022 at 70% and then whatever the commercial mortgage was, I don't know when that was. But today, you're realizing the recovery rate is not as high as you anticipated and there's extra cost because you're holding on to the property longer. That part I'm less concerned about. But would that imply that your recovery is -- some of these assets have gone down more than 30% in value?

In pockets. And so these are isolated -- some of these are isolated loans. You look at them and say that the -- first off, it's the drop -- the softening in the prices. So a 10% drop that you might have seen through HPI, that's kind of -- that's an average, right? So you've got to look at in pockets, it's much higher than that. And you're right, it's the incurred fees and accrued interest and other costs that may be required to make sure the property -- when you recover a property, you may have to put some work into it to clean it up for sale.

Let me just give more color there. So the costs got a bit backed up coming out of COVID and with kind of this higher stress in system. So that meant we were unable to get on hold of property. I think we've talked about that internally before, but that doesn't help. And generally speaking, one of the challenges when you do actually go power sale on property. It hasn't been as well maintained as the broader portfolio. So you do see some decay beyond the kind of the values that you might have expected if it had otherwise had sort of proud homeownership through that period.

You got to pay somebody more the loan and paint the fence, all that stuff. But what's the bigger driver of this? Is it the value? Or is it the duration of -- the duration one?

It's really both, Gabe. It's both the value. And 70% origination, obviously, that's an average. We would lend up to 80% depending on the characteristics of the property and the borrower. Yes. But it really is both. It's the time as well as the softness in valuations.

Is this maybe another way of looking at it is, are we talking about a handful of properties or in 2022, the vintage, we saw massive growth, but -- and then I see impairments from, let's say, year-end 2023, impaired mortgage loans was about $120 million, and now it's $320 million. So somewhere within that delta, there would have been a handful of loans that you had these big drops in valuation?

I would say that it's definitely sort of more focused than we would have expected around a relatively few larger loans with the drops in value.

Okay. And then the same idea with the commercial mortgage, how many loans we're talking about there?

Well, in the commercial market, the gross impaired loan increase we saw was really related to 2 new loans that came into impaired this quarter. As I said, that they don't -- we don't have provisions against those ones because they seem to be adequately covered. The other reason for the increase in gross impaired loans is related to the fact that some of the resolutions are taking longer have been deferred. So that's really what's driving what you see there. We have -- and as I mentioned, these are a couple -- there are a few there that we are very mindful for and we're managing very actively.

Yes. I guess it's -- we've heard -- that we didn't take a provision. We don't expect a loss of -- a large loss, if any, and that we're certain things that are not big numbers. I'm not trying to blow it out of proportion, but it's an anomaly from my perspective anyway. So how do we know or how do we gain comfort that these sort of retroactive adjustments to previous provisions are one and done.

I mean I think certainly, the commercial side is easier for us to get comfortable. I mean, because we can look at it loan-by-loan basis. And while there's a couple -- we're keeping an eye on for this quarter. We think we're feeling very confident about that book. On the single-family side, we agree with you. We think probably at a high watermark overall on provisions. And that's clearly coming into this call in quarter end, we sort of did a lot of diligence to kind of get comfortable making that statement. But one could see elevated PCLs in Q3 and 4, but not at these levels.

Okay. I guess, I mean, newer originations in today's market, I can probably get a lot more comfortable with those LTVs because we know what the prices are like these days. So they're not...

They are changing markets to be super clear -- I mean, to be super clear that we're actually dealing with where the market is clearing, right? So when you change your market, we do things like shorten the time that appraisals have to be valid for and that kind of thing to make sure that we really are lending against current values.

Your next question is from Paul Holden from CIBC.

I guess we're going to have to continue on the same line of questioning. Just wondering, you say it's related to certain pockets, but maybe larger value homes that would tell me it's probably not condo market. I guess that's really my question is how much of this is related to, say, GTA condos, if any?

Almost nothing is related to GTA condos. I would say.

That's great.

Yes, I think that's it that's custom. And then we look to that book because there has been a bit -- just on that, Paul, I mean, there's been a bit of more narrative around that. So we've done a bit of a deeper dive there. And it's a modest-sized portfolio, we feel pretty comfortable. There's not -- nothing to emerge from that.

Okay. So you're not worried because I mean that is one pocket where you've seen greater price weakness in the overall market. I didn't think you had a ton of exposure there, and it seems like that's the case.

We don't. Yes, we've been attended to the risk in the condo portfolio in the condo market for some time and limit our exposure that way.

Okay. That's good. And then second question, and again, it goes back to this number of impairments are sort of caught up in the court system. I mean I would assume you have a pretty good visibility then on sort of that vintage here that has been impacted and what is still working its way through the court system. So 2 questions on that, I guess, is there any way you can quantify what's yet to be resolved through courts versus what's already been resolved through courts sort of for that same sort of at-risk vintage year? And then two, is your messaging that you believe you've now adequately provisioned for those impairments that have yet to be resolved through court?

I'll leave Marlene on the sort of first part of that question. I think on the second part, I think as I sort of said earlier to Gabe, just the -- I do think that we'll still have a little bit of elevation in Q3 and hopefully decaying in Q4. But I do think this is the high watermark overall for losses for PCLs in the quarter, but they're still expecting some more to come through there.

As I look at that vintage, I see that a lot of it is coming up for renewal now into lower interest rates, right? So that was the dynamic. They originated in 2022 when asset values were high and interest rates were low, renewed. Our duration tends to be 1 to 2 years. So they renewed at a higher rate and then started to get into a bit of trouble. There's a large part of that vintage, which is now ready to renew at a lower rate. So that gives us some optimism going forward. However, there's still -- that was still a peak year from a valuations perspective. And we've gone through those in a fair bit of detail to make sure that we have the granularity that's needed to understand those valuations. So we may see another quarter around the levels that we saw this year -- this quarter rather. But looking forward and projecting outwards, you can see improvements down the road.

Okay. One more question for me on a different topic. Andrew, you did refer to strong application volumes in May, 17% up year-over-year, obviously, a positive as you indicated. I'm kind of -- like I have to ask on that. I'm curious because that's not the general indicators we're seeing in the housing market, right? We're hearing a lot about sort of soft volumes and consumers pausing because of tariff uncertainty. So kind of curious if you can drill down on that and where you're seeing the strength come from?

I mean the data isn't great. But I mean, we do get some proprietary data that seems to suggest we're winning share in our part of the space and particularly against one of our more significant participant -- one of the more significant participants in the market. So I think it's mostly about something sort of idiosyncratic with one of our competitors, while our team is doing a great job in bringing in front of our mortgage broker customers and helping them build their business in what's otherwise a tougher environment for them.

Your next question is from Lemar Persaud from Cormark Securities.

I'm going to go back to credit. I apologize. But just trying to tie together a lot of the commentary about credit losses remaining elevated in Q3, Q4. In the past, the bank has mentioned PCLs for 2025 of 12 basis points. This was well before any of this trade uncertainty. So obviously, I'm not holding you guys to that. But if you could tie it together between the elevated credit losses we saw this quarter and your expectations for Q3, Q4, how do you think PCLs are going to end up in 2025?

I'll give it a go. As I mentioned in my remarks, it's really difficult to predict in this market. But I would suggest that we have some -- we have a few places where we see pockets of green shoots, right? So we do see lower formations and problem loans in our commercial book. We see improvements even in our leasing book. And SFR, we're working through. We have real clarity on where we have areas that were -- that need more attention and we work through that. So that gives me some confidence along with the fact that I think the uncertainty that we experienced in this quarter with announcements seemingly to come out every day related to the tariff strike.

It feels like that's calming down. And so that gives us the outlook for the rest of the year reasonably more positive. I'm using a lot of couched words because there is so much uncertainty here. I'm not about to put -- to give you a number, but I think that we have reason to believe that the second half like really strong evidence to support that the second half should show that slowing down in those increased losses and PCLs.

But I think that's a great sort of response. And Marlene and the team, we've really upped the analytics since Marlene has arrived in terms of looking at this, if I can put it in a more sort of anecdotal way, more than $5 million of the losses in -- that we're putting through PCLs in this quarter were a result of the deterioration in our expectations about the macroeconomic environment, so the forward-looking indicators.

So assuming that our outlook 3 months from now is the same as it is today, that $5 million shouldn't repeat. And then I think, again, we sort of feel comfortable that both our leasing book and our commercial book, in particular, that we're going to start to see some downward trends that are positive. So certainly expect both Q3 to be lower than Q2, and hopefully, Q4 becomes lower than Q3.

And then maybe, Marlene, just sticking with you on the credit here. Can you help me understand how much of this performing build was driven by model-related changes, so forward-looking indicators, how much scenario weighting? And then how much you topped up, if any, by your expert credit judgment?

Yes. That's a good question. I think when we look at the -- so first off, we use Moody's to support our macroeconomic outlook and to provide us with those varying scenarios that I talked about. Moody's uses a scenario weighted or probably weighted approach to their scenarios. And each month when they issue new scenarios, they are adjusted to current state. And so our last ones were based on March month end as at, if you will, or macroeconomic conditions, which already included the current state of the tariff situation. So I would -- so compared to Q1, most of that build that you saw in the performing PCL was related to the deterioration in the outlook, both in the base case and in the more severe cases.

And then maybe for Andrew, just a different type of question here. I think you mentioned these securitization gains picking up in the back half of the year. And I know you have pretty good visibility into the pipeline. Like how should we be modeling that for Q3, Q4? Should we look at Q3, Q4 last year as a good starting point? Any thoughts on that would be helpful.

Yes, we do have pretty good visibility. I mean those mortgages now sitting on book basically and being securitized as we speak. So had a few million for sure in terms of gains. I mean, David, do you want to give some more context on that?

Yes. Lemar. Q1 was a record, and there's some seasonality to Q2, but I would put the number between the 2 with improvements going forward.

Closer to Q1 than Q2 and -- closer to Q1 in that line item than Q2. But Q2 was unfortunately, we have to hit some very tight windows in terms of closing some loans before a month end so that we can then securitize the following month. And we just end up with a slightly idiosyncratic problem where some larger loans got pushed and that changed our securitization volumes.

We're seeing the opposite impact in Q3 where some of those larger loans that get pushed in Q2 are now going to be securitized in Q3. So we'll have a little bit of an improvement. I would say that as the yield curve steepened, then we've seen a preference amongst our customers from going 10-year to 5-year loans, and that's slightly less profitable from a securitization perspective. So that's a little bit of a headwind despite these very strong volumes. I think it's likely that Q3 will have our highest volumes ever in terms of securitization or close to it.

Your next question is from Darko Mihelic from RBC Capital Markets.

A couple of questions for Marlene and then one for Andrew. My first question is that what is -- the conditions in the marketplace don't seem like they've changed with respect to speeding up the process. I think values are likely still going down. So the question, again, goes back to the one and done thing, but maybe even a little bit beyond that, what is it that's giving you comfort, for example, to have a couple of loans default this quarter and not take any provision given -- knowing that we just had interruption, and it could be 6, 12 months from now, they don't get resolved at all. I mean what is it that's giving you that comfort, Marlene?

No. We look at our problem. So we've been monitoring these 2 loans for a while now, and we actually meet every 2 weeks with our credit teams and the commercial teams. So these -- and through that process, we assess values and get refreshed values and that's what's driving the provision that we put out or lack of provision that we put on those two.

Okay. And then with respect to the performing build, when I look at the Moody's information, again, it's difficult to understand how much overlay in your previous answer, expert credit judgment kind of -- because even if you weighted the scenarios, I mean, one of the things that I look at is the home price index. It's actually expecting it to be up in the next 12 months.

And the downside scenarios just don't look that. But we just went through a period where in your answer to Gabe's question, yes, we've seen deterioration in some house prices or asset values, let's say, of 30%. And here we are looking at downside scenarios where the downside scenario, the worst one is only 3.8%. So could you maybe help us with a little bit stronger answer on how much overlay you've built into these reserves?

Sure. Well, first, let me just talk about how the macro forward-looking indicators have changed from the Moody's perspective, looking at this. So first off, unemployment rate has increased higher in the newer forecast than in the previous one. And it's peaking sooner and it's peaking a little bit higher than last time. The other one is the change in GDP is much more stark this quarter versus what we showed last quarter. So that's a big driver as well. And then you're right, HPI does drop out a little bit deeper in a lot, I would say, than what the previous forecast had.

In terms of expert credit judgment on that front, we look at the segments we've always looked at, right? So we have overlays related to areas that have, I would say, a bit higher vulnerability, and we've had those types of overlays for the last few quarters, things like long-haul transportation, certain segments within our commercial pocket like land and office as well.

Okay. It's just that the one of the primary things that always made us feel better about your credit quality was the loan-to-value and the collateral behind the loans in many cases. And that seems to have shifted this quarter, and that's why I'm still struggling to understand if that's been accounted for in your performing reserves.

Yes, I would say it has. I think the softness we saw this quarter was a little softer than perhaps we thought it would be previously.

Okay. And then last question for Andrew. As I go to the back of the deck, and I see the slide. Let me just get back to it because I apologize for what's going on. So Slide 20. There's some good data on here. There's 23% year-over-year growth in customers. You talked about the steady growth that you're seeing in payroll. You talked about the small business engagement and great feedback and have something roll out. Why did you need to make a leadership change? And what is it aimed at? Like what is it that you didn't like and you decided that you needed a leadership change here?

Yes. So what I -- we used to have a single leader, single executive overseeing both the -- we had personal banking as a division. So we had both lending and both sort of single-family lending, some of the things we're just talking about, reverse mortgages and so on as well as EQ Bank. And really, what I'm trying to do here is divide the business into 2. So one being the digital delivery EQ Bank, somebody that comes in every day, not confused about building a fantastic franchise in that area, driving change in Canadian banking, bringing innovation, somebody that's monitoring what Monzon and starling and chase are up to in the U.K. every day and trying to bring those innovations, some of the good ideas from those banks to this market. And that sort of requires complete focus working with our pods.

And then similarly, on the lending side, somebody completely focused on serving the brokers, managing the risk in what's really a B2B environment. I mean, the brokers are our primary customers for driving the channel. And we've been very successful over the years in gaining market share. We were an insignificant player back in 2010 in this business, and now we are absolutely the premier franchise in all lending in Canada. But I do think we need to bring some more sophistication to some of the kind of ways we're thinking about some of the -- even the risks we were talking about through this call.

So I'm very comfortable that kind of having that focus and having executives are completely focused on the 2 sides of the business is better than thinking about just because we're dealing with individuals, they should necessarily be bundled together in our Personal Bank.

Okay. So it was a division -- it was sort of like breaking it up into pieces to get more focus, I suppose, but it's still required a management change?

That's right. Yes. So some of the conversations around making that split that didn't sit particularly well with prior executive have both responsibilities. And so that's why we've kind of made this change.

Your next question is from Graham Ryding from TD.

Can you just maybe simplify what you're actually trying to achieve on the capital front. You've got a lower CET1 ratio now going forward, a bit more capital on the Tier 2 side. Are you ultimately just trying to optimize ROE here? Or how should we interpret the puts and takes?

Yes. I mean I think we're going to make sure we've got an efficient capital model. So I think as we indicated in our previous call, we're going to maintain a strong total capital ratio at sort of above 15%, above 15.5% as we speak right now. And then keeping CET1 above 13% for the rest of this year. And we do believe our ICAP, which is how we think about assessing capital would continue to keep that strong level of total capital with having more sophisticated kind of mixture of the capital stack beneath that.

So you might as well see more Tier 2, AT1 and as part of that mix to get to the total capital position. So just to be clear, what happened here is we dividend up $200 million. We invested $200 million from EQB, the holdco into sub debt of Tier 2 instruments in the bank, and then we dividend up $200 million back up to the bank. So the bank holds the Tier 2 capital. And of course, there could be the potential at some point to finance that in an external market, and that would mean we've got a couple of hundred million dollars of excess equity sitting at the holdco.

Okay. Understood. And then your appetite for buybacks like sort of maintain at the current level. Is that a reasonable assumption? Or how should we think about your appetite on that front?

I think -- so we think about very much in the sort of -- at least I think it's the interpretation of how Warren Buffett thinks about buybacks. We buy back when it's a good way for our shareholders' capital to be applied. So that depends on current stock price or expectations about the future performance of the bank, which I think is different than some sort of think about it. I would say in the quarter, we started -- we did execute a modest buyback.

We paused a little bit in sort of maximum fix tariff concerns just in a bit of a flight to safety approach was just back out of the buybacks. And I think as we see the economic environment that looks a little bit more stable now and the uncertainty doesn't seem quite so wild as it seemed a couple of months ago, we might well engage constructively in that process.

[Operator Instructions] Your next question is from Stephen Boland from Raymond James.

I just want to talk about the Pride exposure. In Q1, the facility was $70 million. You had already taken a $5 million provision there. The facility now is down at $63 million I'm not sure that transportation PCL was related to the Pride. If it isn't, why would that -- I guess, that facility change? Just trying to get a better -- a bit of a time line on that.

Sure. I can take that. So on the TPine, the provision for TPine was flat quarter-over-quarter, I would say that, first off, that is a runoff portfolio, right? So it's shrinking. And that reduction in the exposure you saw in the MD&A reflects the runoff and the resolution of that outstanding balance, as well as asset sales, yes.

Okay. Maybe I'll follow up with that. And second, Andrew, this is probably more for you and answering a lot of questions, but about credit and things like that. And maybe a bit more on the guidance. I know it's medium-term guidance, but we're halfway through the year. It could be a struggle to hit some of your EPS guidance, ROE guidance. I'm just wondering how should we think about the guidance being applied to 2025?

Yes. I think certainly, when I talk of 15% plus ROEs, that's sort of medium-term guidance, and it's going to be certainly tougher to hit those kinds of numbers this year, given what we -- given where we are already. But we do expect earnings -- EPS at least to be stronger in the next couple of quarters than it was in the last reported quarter.

[Operator Instructions] And your next question is from Etienne Ricard from BMO Capital Markets.

My question is a longer-term one on capital allocation. EQB has built a track record over time for retaining a significant percentage of its earnings for reinvestment in growing the loan portfolio. Now in recent years, the payout ratio has increased from low levels and you've started also repurchasing shares. So does this indicate the opportunity set to grow the mortgage book today is maybe not as strong as what it used to be? In other words, how do you plan to balance organic growth and capital returns going forward?

Certainly, I mean, we continue to focus first on finding organic growth within our risk appetite, and we do believe we've got some very strong franchises in that area, whether it's single-family mortgages, reverse mortgages. The places we play in commercial lending, clearly our specialized finance group. So we do think that in a more normal macroeconomic environment, we can grow our assets relatively fast. Having said that, clearly, we're in a more subdued macroeconomic environment. So this year, I wouldn't expect to hit our sort of basically, when you think about it, if we're paying out 10% of our earnings as dividends, then we -- and we're generating our 15% to 17% aspiration.

We need to be growing assets at 13% to 15% a year to fully utilize our retained capital. It's going to be a little bit tougher in this kind of economic environment, the uncertainty and even our own risk appetite in this kind of environment to grow at those levels. So we will see a fairly rapid growth in capital -- CET1 total capital ratios. And we will think about how to return some of those to shareholders because it doesn't feel like we'll be able to deploy them sufficiently over the next year or so in growth. But over the longer term, I don't know that to be true. Clearly, this is a pretty unusual period. We're now entering a period where the government is focused on building more houses, which generally turns out to be a good -- any housing activity for us. So I think the world may look quite different this time next year or even before then in the way that we can deploy capital into the market.

So I kind of like the position we're in. We pay a relatively modest dividend that allow -- gives us the opportunity to grow organically at a good clip within our kind of risk parameters if the market is there for us. And if not, we build capital and we need to kind of think be more thoughtful about how we return that capital to shareholders, whether it's special dividends, increasing dividends or indeed buying back stock.

Of course, one of the other things that we do see over the horizon is moving to AIRB. So that becomes even a bigger capital efficiency issue when we get there. But just as a reminder, we think that if we are an AIB bank, we're releasing a lot of capital.

So Andrew, if we look longer term to your point, maybe over a 5- to 10-year period, given housing affordability challenges and maybe slowing population growth and certainly, over the next couple of years, are these significant headwinds to -- in order to return to double-digit loan growth over time?

Certainly it's helpful when those things have got good growth to them. But the reality is that we've got 1% of the Canadian banking market or some very small number. So it's really about us being thoughtful enough to find areas to lend into the market where risk is appropriate and we can win share. So I think some of those -- if you look at our track record over 10 years, and we've clearly managed to grow at those kinds of paces. So I don't think anything structurally has changed in the market that would stop us from doing that.

One of the things that's really important to us is we're super aligned with the mortgage broker channel, which is -- I can remind everybody is sort of growing from just over 10% market share back in 2000 to over 50%, we believe, today. So being aligned with that innovative channel is really helpful to us. So I think it's -- I'm optimistic about being able to grow at a good sort of double-digit basis, but I do think that's going to be a challenge over the next 6 to 12 months.

There are no further questions at this time. I will now turn the call back over to Mr. Andrew Moor for the closing remarks.

Thanks, Jenny. We look forward to reporting our third quarter results in late August. And if you get the chance, please consider attending Canada's Open Banking Expo in Toronto on June 17. I will join a roster of 80 speakers who will draw attention to the urgent need for Canada to adopt open banking as a means of improving competitive intensity, fostering fintech innovation and realizing the benefits that millions of people worldwide already enjoy from consumer-directed finance. And obviously, it would be great to engage with many of you one-on-one.

Thanks for listening, and goodbye for now.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.