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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Home Capital Group Fourth Quarter and 2019 Results Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded. [Operator Instructions]I'd now like to hand the conference over to your speaker today, Jill MacRae, Head of Investor Relations. Please go ahead.
Thank you, Jack. Good morning, everybody, and thank you for joining us today. We'll begin the call with remarks from Yousry Bissada, President and Chief Executive Officer; followed by a review of our financials by Brad Kotush, Chief Financial Officer. After the presentation, we'll have a Q&A session for analysts and investors. With us on the call to answer your questions are Ed Karthaus, EVP of Sales and Marketing; Mike Forshee, EVP of Underwriting; Benjy Katchen, Chief Digital and Strategy Officer; James Pelletier, SVP of Commercial; and Victor DiRisio, Chief Information Officer. Before we begin, I'd like to caution listeners that this conference call may provide management with the opportunity to discuss financial performance and conditions of Home Capital. As such, such comments may contain forward-looking statements about strategies and expected financial results. Various factors could cause actual results to differ materially from results projected in forward-looking statements. Accordingly, the audience is cautioned against undue reliance on these remarks. Finally, a link to the slides accompanying this live webcast is available on our website at homecapital.com. Now I'll turn the call over to Yousry Bissada.
Good morning. Thank you for joining us for our Q4 2019 conference call. This morning, we announced our financial results for the fourth quarter and full year 2019. Earnings per share of $0.65, or $0.72 on an adjusted basis, continued the trend of positive year-over-year earnings growth that we delivered in the first 3 quarters of the year. Our full year earnings of $2.29 reported and $2.49 adjusted fully diluted grew by 38% or by 50% on an adjusted basis over 2018. Our share price more than doubled during the year, making us the top-performing financial company in the TSX Composite Index for 2019. Our success in 2019 was made possible because Canadians saw Home as a company that could help them build their financial future, whether that meant owning a home or creating a saving plan. Our broker partners brought mortgage clients to Home, confident that we would listen to their stories and find a solution to help them become homeowners. Our Oaken customers brought us their savings, confident that we would take the time to find the right financial solution for them. And our employees brought us the best of their enthusiasm, creativity and determination to build our company for the future. They are the strength of this company, and I'd like to recognize the work of the whole team at Home this year. The results we're reporting today are made possible by their efforts and commitment to our core values. Throughout the company, our people were excited to build on the work we began in 2018. 2019 was a year of innovation at Home Capital and of progress towards our objectives. Let me take a minute to review some of our many achievements for the year. We reported strong growth in our originations and our loan portfolio. Those aren't just numbers, we helped a lot of individuals, partners and families become homeowners. We grew deposits through our Oaken channel. This is another way we're helping Canadians find flexible solutions to meet their goals. We announced the launch of our Home Trust IGNITE program, which is the name we gave to our technology transformation project, and we celebrated the first deliverables of this digital journey. We launched a new mobile-responsive Loft broker portal to improve our mortgage broker's ability to communicate with us. Our new CRM is also fully mobile for our sales teams to ensure they have the power of information wherever they are. We moved to completely paperless underwriting and funding. We migrated our data centers to the cloud. We delivered our first 3 implementations of robotic process automation and we introduced our new deposit origination system at our Toronto Oaken store. This provides straight-through processing of new GIC purchases, eliminating a number of manual processes and gives our employees better tools to do their jobs. Our customers receive better service, and we benefit from improved operating efficiency. We will be expanding this system to our other Oaken stores and adding RRSP and TFSA throughout 2020. On the finance side, early in 2019, Home Capital received upgrades to our credit ratings from both S&P and DBRS. We launched the first cross-border placement of residential mortgage-backed securities. We bought back over 4.7 million shares during the year at a price well below book value, and we announced a further $150 million substantial issuer bid, which was completed in early January of this year. In November, we heard our -- we held our first Investor Day since 2012. For anyone who joined us at that event, you learned that the passion for growing the business and the commitment to our sustainable risk culture extends through the all areas of the company. We will maintain our focus on delivering excellence to our customers and partners in the markets we serve. We will continue to make Home a trusted partner to Canadians in the mortgage industry. Looking ahead, we expect 2020 will be a year of continued progress and innovation due to some of the following: interest rates are expected to remain stable; employment data is still supportive of a healthy housing market, particularly in our target geographical areas; our IGNITE program will help us continue to deliver improved product and service options to all our customers. We are preparing for further cross-border placements of RMBS as we continue to support the development of the private RMBS market and diversify our funding sources. We are looking at our engagement in environmental, social and governance or ESG activities. We're proud of the initiatives happening at Home, and we want to share them with all our stakeholders. ESG is another way we put our values into action, and we plan to enhance our communication in this area. On January 17, the TSX approved the renewal of our normal course issuer bid. We will continue to create value for shareholders through the strategic deployment of capital. And finally, to address this week's announcement regarding the change of the mortgage stress test. The Department of Finance has announced a change to benchmark rate used in the B-20 stress test for insured mortgages. And OSFI has begun a consultation period as they consider potential changes to the stress test for uninsured mortgages. We view this positively as any policy changes that support the goal of helping Canadians attain homeownership while continuing to ensure prudent underwriting standards to protect financial institutions balance sheets benefits the entire mortgage system. It is too early to gauge the impact that will be on our particular segment of the borrowers. I'll now turn the call over to Brad to discuss the quarter and the year in more detail.
Thanks, Yousry, and good morning, everyone. My comments will focus on our Q4 results, beginning on Slide 7. Net income in Q4 was $37.2 million or $41.2 million on an adjusted basis compared with $35.8 million in Q4 of 2018. This represents a year-over-year increase in net income of 4% or 14.9% after adjustments. On a per share basis, our earnings increased from $0.46 per share to $0.65 or $0.72 adjusted, growing by 41.3% and 56.5%, respectively. We also grew our book value per share by 11% to $29.33 per share or $26.43 per share at the end of 2018 and, and we reduced our shares outstanding during 2019 by 7.6% through repurchases under our normal course issuer bid. Slide 8 shows the factors that contributed to the increase in earnings per share this quarter compared with Q4 2018. Growth in net interest income was the largest contributing factor to our EPS growth. The reduced share count accounted for $0.17 of the increase. Higher noninterest expenses reduced earnings by $0.17, while adjustments associated with Home Trust IGNITE program increased adjusted earnings by $0.07 per share in the quarter. Summary of the adjustments related to the IGNITE program this period is available on Slide 9. Total adjustments this quarter were $3.9 million in net income, $0.07 in earnings per share, 4.3% to the efficiency ratio and 0.9% in annualized return on equity. I remind you that our financial results will be adjusted for the IGNITE program for the duration of the project which we expect to complete by the end of 2021. Slide 10 shows our classic single-family originations for the quarter and the full year. Originations in the quarter were impacted by some competitive pricing in the market. As we have said in the past, we intend to compete by offering superior service and disciplined risk-based pricing rather than chasing market share. We believe these competitive conditions were temporary. For the year, our classic single-family originations grew by 11.2% over 2018 levels. Looking at our Accelerator business, we refocused our efforts on this area in the third quarter of 2019. That resulted in a return to positive year-over-year growth in Accelerator originations in Q4. Our total loan portfolio, as shown on Slide 11, grew by 5.5% during the year. Slide 12 shows the change in our net interest margin during the last 2 years. Our NIM reached 2.31% in Q4. Our NIM expansion during the year was a result of higher yields across all asset classes and the benefit of a lower proportion of lower-yielding assets in our mix. Turning to funding on Slide 13. Deposits through our Oaken channel reached $3.4 billion at the end of 2019, an increase of 25.7% from the year-end 2018 total. As of year-end, Oaken represents 24.6% of our total deposits. Importantly, over 80% of our Oaken deposits and nearly 95% of total deposits are in the form of term funding. We continue to place a high-value on limiting the liquidity risk associated with demand deposit balances. We've been pleased with the reception of our RMBS in the marketplace. The characteristics of the series of notes have performed in line with our expectations. We plan on being serial issuers of RMBS and helping to further develop the private RMBS market in Canada. The influence of our sustainable risk culture continues to show in the quality of our loan book on Slide 15. The Beacon score of our classic single-family residential mortgage portfolio was 696 on originations during the quarter and 704 across the total portfolio at year-end. Single-family uninsured mortgages originated during the quarter had a weighted average loan-to-value of 70.9%. The average loan-to-value across all uninsured single-family mortgages was 61.5%, up slightly from 59% last year. Looking at credit performance during the quarter. Slide 16 shows that nonperforming loans as a percentage of gross loans are stable at 44 basis points across the total loan portfolio. Within the portfolio of single-family residential mortgages, net nonperforming loans make up 31 basis points of the total. As of the end of the year, loan loss allowance covered 25.2% of gross nonperforming loans. Provisions for credit losses during the quarter as shown on Slide 17, were down slightly to 9 basis points of gross loans, while net write-offs were 4 basis points. Within single-family residential mortgages, net write-offs were 1 basis point for the quarter and 2 basis points for the full year. Slide 18 shows how we're effectively managing our liquidity. In addition to maintaining a sizable portion of our portfolio of liquid assets, we manage our exposures such that near-term deposit maturities are well covered by loan maturities. Our capital and leverage metrics are on Slide 19. At the end of 2019, our Basel III Common Equity Tier 1 capital level stands at 17.64%, well above the regulatory minimum level of 7% and down from 18.94% on a year-over-year basis. Our leverage ratio is 7.07%. Slide 20 describes returning capital to shareholders. This has been an effective cornerstone of our value creation strategy. At the end of 2018, we completed a substantial issuer bid, where we repurchased 18.2 million shares for $300 million or $16.50 per share. Since that time, we've repurchased a further 4.8 million shares in 2019 under our NCIB for just over $94 million or $19.85 per share. And last month, we closed $150 million SIB, repurchasing an additional 4.4 million shares. Since December 2018, we have utilized over $540 million to repurchase shares. Repurchases have been a powerful value creation tool for Home Capital shareholders, and we intend to continue on that path. Our Board regularly reviews all options for deploying capital and investing in our business is the first priority for our capital. But as long as we're well capitalized, and our shares are trading below our view of intrinsic value, we believe share repurchases to be our best method for sustainable value creation. I will now turn the call back to Yousry for concluding remarks.
Thank you, Brad. The results we reported is the product of strong execution across all our business units. Everyone at Home contributed to our progress by committing to our values of knowing your business and executing with excellence. I'll now ask the operator to poll for questions.
[Operator Instructions] Nik Priebe with BMO Capital Markets.
Okay. I want to start with a question on the net interest margin, just the yield on the classic single-family residential mortgage portfolio. I think it's increased about 50 basis points comparing Q4 '19 to Q4 '18. Just wondering if you could provide a bit of insight on whether that's reflective of a deliberate repricing of that product? Or is that more of a function of mix owing to some of the higher Beacon business that you've been picking up?
Nik, it's a mix of both. I think in my earlier comments -- we're looking at all of our pricing. We do a mortgage-by-mortgage on a risk basis, and we had had a goal of increasing what that effective margin would be. And certainly, with the maturity profile of our mortgages, we are renewing at higher rates and lower rate mortgages are falling off.
Okay. And just one follow-up then. So I guess, based on pricing today and the mix that you're seeing, could you give us a bit of a rough outlook for where that could get to? Like, would we expect to see another 50 basis points this year? Or is the upside a little more modest now?
Well, I think that would be a very aspirational goal for us, but I think more likely, if you look historically, the highest NIM the company has achieved in the past few years has been 2.37%. So I would sort of overall, keep that in mind. And as we spoke earlier in our remarks, it is a competitive market. We've been able to maintain our pricing discipline. But we do have to react to market conditions, but we're comfortable with our current levels of NIM.
Geoff Kwan with RBC Capital Markets.
Just wondering, you talked about the OSFI and the Department of Finance changes and what you think the impact will be. But any early indications on what you're seeing for a spring housing season?
Geoff, it's Yousry. Can you just repeat the last part of your question [indiscernible].
Yes, just -- in light of what came out from the government. Like it might push back maybe some buying activity. But just generally speaking, what are you seeing in terms of the spring housing season so far?
It's been very healthy. Supply is still quite low year-over-year. Supply this year in GTA is lower than it was last year. So that's creating some price increases. So the refinance market is also quite healthy because when people can't -- have difficulty buying a home, they just make the decision to stay in their home and renovate it and upgrade it. So that's healthy for the mortgage market and not linked to how many homes are for sale other than it fuels them to just do that. So you mentioned the Department of Finance changes. As I mentioned, they are -- they have set how they're going to do it for insured. There's a consultation on how they're going to do it for uninsured. When you look at the insured and what they've said, it is slightly better than what it used to be. So it should create some opening of the market as well.
Okay. And just one -- a follow-up question is, you had some good growth in the Oaken savings accounts. I know you've talked about how that is relative to GICs within Oaken, but thinking about total demand deposits as opposed to -- sorry, as a percentage of total deposits, like where do you have kind of that comfort level, if you're still able to get a lot of this growth coming through the various deposit channels?
I think, Geoff, our current view is that we'll maintain our level of demand deposits as a -- in a consistent proportion to our total deposits.
Okay. So expect the deposits to be about the same rate?
As we grow -- yes, if I can elaborate. So as we grow deposits, we may grow our demand deposit proportionally, but we're not looking to expand our demand deposit portfolio. We've been able to add another source of liquidity with our RMBS, and we plan on doing that. And that's taken some pressure off of both -- all of our other funding channels as we continue to diversify our sources of liquidity.
Graham Ryding with TD securities.
Maybe I could just follow-on that net interest margin theme. You mentioned in the past that there was higher deposit costs in Q4 '18, given you had to raise some money to fund the substantial issuer bid back then. Is that still in your deposit cost overall? And is that potentially something that will come out in Q1 or Q2 and then potentially be another sort of lift to your overall NIM? Or has that already played out?
It's a mix of both, Graham. Some of that -- about 2/3 and so -- and just to remind, back in December, not only did we have the SIB, we also had a deposit nonmature. And about -- at the time, about 2/3 of that funding was greater than a year in terms of maturity. But we do see over the course of the year, some of those higher cost deposits have fallen off. We talked earlier about competition. So there may be some -- as that deposit costs drops, there may be other competitive pressures that would cause us to lower our mortgage rates. We've been successful in maintaining those, and we hope to continue. But I think there is a balance there, but your thesis that some of those higher cost deposits will continue to fall off over time is generally correct. It's just a matter of what happens on the asset pricing side in relation to maintaining them.
Got it. Fair enough. And you made a mention of intrinsic value, and you'll continue to be active on share buybacks relative to that. What is your view of intrinsic value on the shares? And has it increased today versus where it was a year ago?
I think that we're looking at it over a longer term. And based on our comments, it's higher than today's market price.
Cihan Tuncay with Stifel GMP.
Just wanted to follow up on the commentary about the increased competitive pressures that you're seeing in the mortgage market. Could you talk to a little bit about what the dynamics are that you're seeing there? Is it a case of your larger competitors that are perhaps moving more downstream on the Beacon scale? Or is it from -- more from your traditional competitors? Just wondering if you could go through the dynamics there.
Cihan, it's Yousry. It's a little of both. There are some people who have played a long time in the Alt-A and fighting for volume. There are newer players who are entering and as they experiment with entering, they will play with rate to try to generate some volume. So it's a little of both, but we feel well positioned. We would argue, it's not only about rates. It's about service, it's understanding the particular marketplace and that we have a very good reputation in that area, and it helps us with volumes.
And just a quick follow-up question. Same question on the deposit side. Are you seeing also similar levels of competitive pricing? And how does that make you feel about -- I know you just spoke before about potentially doing 1 or 2 RMBS issues per year now as you've established that as a funding source. With the competition level on the deposit side, how do you feel about continued use on the RMBS? Or has that changed at all?
Well, I'll start by answering in reverse order. We do plan to be a serial issuers of RMBS, and I think we've consistently said that. We think we'll go-to-market probably twice per year, subject to market conditions. So -- and recently, there was just a -- although it had a different structure, there was another private RMBS that just was announced yesterday for around $450 million. Different structure than ours and a little different mortgage collateral in the pool, but nevertheless, now there is another participant in the market. So we think the more participants, the deeper and more liquid that market will become. In terms of deposits, we have been successful in attracting what we want and need from -- in our Oaken channel. And that seems to be much more of a normal competition, and you would have heard us say previously in relation to the deposit boards, that is just a daily auction. I'll use the word auction to describe it where you and anyone who is offering the highest rates will generally pick up the most money. And depending on our demands for liquidity, we will participate accordingly. And it's just really one -- of setting that daily rate. And our treasury department does a great job in making sure that we're getting the liquidity we need from that source.
[Operator Instructions] Jaeme Gloyn with National Bank Financial.
Yes. First question is just related to the provisions in the quarter. Could you just elaborate on what was driving the provision in other retail loans?
Well, I think -- we look at that portfolio, and we take our model, and we think that there are some additional risks there. And we've moved to a higher Stage 3 balance is what drive those provisions.
Anything in particular that was driving that higher view of higher risk?
Yes. I think you may -- you recall back in Q2, we had changed some of our methodology in relation to looking through our counterparties to the actual underlying customer of that counterparty, and that resulted in a pretty big adjustment in that quarter. And since then, the relative quarterly increases have been more modest.
Okay. Second question is just around the -- again, I just want to dive into the yields earned on the Classic's mortgage portfolio continuing to increase this quarter. You talked about more competitive pressures coming in. Yes, I'm just trying to square that commentary with an increase in the average yields in that portfolio. Is it -- like, what's driving that, let's say, 10 basis points quarter-over-quarter increase? Is that primarily driven by repricing of renewal mortgages? Or new originations coming in significantly higher than the previous portfolio?
Jaeme, it's -- I'll try -- I'll start and maybe Brad will add some comments. What drives NIM, of course, is what we can price on the business. And part of pricing on the business is looking at the risk and the different Beacon levels and location. We have a matrix that changes depending on your LTV, depending on where you live, depending on your Beacon, et cetera. So sometimes, we'll get the kind of business that gives us a higher NIM just because it fits in that bucket of our risk pricing mechanism. And at the same time, we have chosen, over a year ago, to focus on a set number of brokers and give them exceptional service. We want to be there their go-to financial institutions. So we have a regular relationship, constant communication on what we're doing and understand their clients and that's been a big part of driving the volume. So those 2 things, as you say, on renewals, we -- obviously, when we renew, we have -- like every other financial institution, we have to balance between renewing and getting as many renewals as possible. Pricing it to renew as many renewals as possible. There are costs that we don't incur upon renewal and there are other costs that we do incur on renewal. So it's all factored in. And for the last few months that's been helping with the NIM as we're renewing the pipeline, as you suggested. I don't know if you want to add anything, Brad?
No, I think you've covered it, Yousry.
Graham Ryding with TD securities.
Just looking at loan growth into 2020. Any sort of expectation or target? You did 5% this year for your on balance sheet and you're flat for loans under admin overall, maybe just some color on your outlook.
Yes. We think -- we're not really economists, but we think it's [ 2019 point 2 ]. It's going to be a good steady year of demand in the geographic areas that we have. The markets that we lend to, which are new Canadians, business for self, whose credit seem to be all growing and seem to all want to move into our geographic area. So we see it as continuing to steadily climb.
Jaeme Gloyn with National Bank Financial.
Just one follow-up on the credit card and Equityline Visa growth in the quarter. I just wanted to get your commentary around how you see that product driving growth of the overall mortgage portfolio? And any commentary around potential impacts on HELOC as OSFI identifies HELOC as being one source of vulnerability in the Canadian market?
Jaeme, sorry, you faded off. I -- make our phone a little bit louder. You faded off a little bit. But I'll start and if I don't fully answer your question, let me know. We have a very good product in our Home Equityline Visa. It is a product that is in demand, and we are going to market it a little more aggressively this year because we think it's a good product, good profit, very good for the client because they can move in and out a lot easier. They have a lot of flexibility. So what was the last part of your question, something about the regulation? I didn't hear you. That tailed off, Jaeme.
Yes. Sorry, I just wanted to get some of your views and commentary around HELOCs and, let's say, auto readvanceable mortgages and the potential impacts that any changes there to restrict volume growth in those types of products could have on your business? So how important do you view Equityline Visas and HELOCs as a driver of overall mortgage growth?
It's Mike Forshee. I think when you look at the Equityline Visa product, our max limits that we offer the equity positions on each deal, I don't see any regulatory changes really impacting the demand for that.
Jaeme, are you there?
Nik Priebe with BMO Capital Markets.
Just one follow-up question for Brad. Just on the increase in noninterest expenses. I think one of the factors you attributed that to in the MD&A was an increase in the stock price and the impact it had on stock-based comp. Just wondering if you could quantify what that piece amounted to?
Roughly $5 million.
Geoff Kwan with RBC Capital Markets.
Just was wondering if there's any updated thoughts in terms of if and when you might reinstate the quarterly dividend?
Geoff, the Board reviews that every quarter. And I think our comments are that we're in [ our ] that we're focused on the best way we think we can create value for the long-term for our shareholders. And that view right now is that we should be focused on repurchasing shares, and that gets evaluated every quarter.
There are no further questions at this time. I would now like to turn it back over to our presenters for final remarks.
Thank you all for your questions and for your interest in Home Capital Group. We look forward to speaking with you again soon.
This concludes today's conference call. We thank you for your participation. You may now disconnect.