EQB Inc. (EQB) Earnings Call Transcript & Summary

The Annual Meeting of Equitable Group will now begin.

Good morning, and thank you for taking the time today to join Equitable's 2020 Annual Meeting of Shareholders. My name is David LeGresley. I'm Chair of the Board and Director of Equitable Group, the parent company of Equitable Bank, Canada's Challenger Bank. Andrew Moor, our President and CEO; Tim Wilson, Senior Vice President and Chief Financial Officer; Michael Mignardi, the bank's Vice President and General Counsel; and Linda Dwyer, our Corporate Secretary, are also participating. I'd like to welcome all shareholders and proxy holders as well as guests and friends of Equitable, and remind you that we have posted a slide deck to the Computershare virtual interface. Should you wish to follow along with our presentations, we will let you know when to advance the slides. We are on Slide 1. Now turning to Slide 2. It's hard to believe that just a couple of months ago, the bank was well along the way to another strong first quarter performance, having finished 2019 and the previous decade with record earnings and an enviable history of superior long-term shareholder value creation. The economic and social lockdown brought on by the COVID-19 pandemic has changed Canada and altered the course of the entire economy. For those struggling with health issues, loss of employment and business shutdowns, we extend our heartfelt sympathies. While no one saw this coming, it is precisely for this reason that banks, including Equitable Bank, devote so much time to risk management, stress testing and the application of disciplined, prudent lending practices. Our risk management pyramid is on Slide 3. For our part, we remain confident that the strong capital foundation we've built will allow Equitable to prevail even under these difficult circumstances. That said, we recognize that these are extraordinary times. Accordingly, our outstanding executive team and your Board of Directors have made adjustments to ensure Equitable continues to perform responsibly and responsibly for consumers, partners, shareholders, while protecting our employees and enhancing the bank's ability to withstand a prolonged economic recession. The adoption of this virtual meeting format is just one small example of adjusting to new realities. Later in this meeting, Andrew will speak to our response to the challenges brought by COVID-19, after we conduct the formal business and before we take your questions. On a related note, we would like you to participate in this meeting as if you were attending in person. [Operator Instructions] In these ways, today's format will as closely emulate a physical meeting as possible. Moving now to Slide 4. This is one of those moments without precedent that test our business IQ and brings in a sharp relief the value of our established governance practices. As we sail into uncharted territory, it is comforting to know that your company is served by a strong independent Board, comprised of invested individuals who have many years of relevant business and management experience. I'm speaking of Eric Beutel, Michael Emory, Susan Ericksen, Kish Kapoor, Lynn McDonald, Rowan Saunders, Vincenza Sera and Michael Stramaglia. I thank the members of our Board, each of whom is also participating remotely, for your deep engagement and commitment to all things Equitable. Moving to Slide 5. As I know a great number of Equitable employees are also shareholders who are listening today, I must say I'm impressed by the professionalism and compassion you've shown in serving our customers throughout this difficult time. While tone from the top is very important, it is the people on the ground who make this bank the great business that it is today. Now turning to the business of the meeting, and Slide 6. I appoint Linda Dwyer, Equitable Bank's Corporate Secretary, to act as secretary of the meeting. I also appoint Matt Gemmell of Computershare Investor Services Inc., our transfer agent, to act as scrutineer. We have received confirmation from Computershare that notice of the meeting was given in the proper manner and that the meeting materials were mailed to shareholders in compliance with applicable securities rules. Copies of such documents were also made available to shareholders through notice and access. I would ask the secretary to ensure that the affidavit is kept with the minutes of this meeting. I've also been providing with a report from the scrutineer, which states that 11,759,337 common shares, representing 69.97% of all common shares of EGI, are represented by proxy at this meeting and that a quorum is present. I therefore declare this meeting to be properly called and duly constituted for the transaction of business. The scrutineer's report also confirms that the votes represented by proxy at this meeting are sufficient to pass all matters to be voted on today. As a result, and for efficiency, there will be no voting at this meeting, unless a shareholder or proxy holder requests otherwise. For the first item of business is to receive the financial statements of Equitable Group Inc. for the year ending December 31, 2019. The financial statements and the auditor's report on those statements were filed on SEDAR on February 24, 2020, and were also mailed to those shareholders who had requested them. I therefore declare the financial statements of EGI for the year ending December 31, 2019, together with the auditor's report, have been received. The next item of business is the election of directors. I call upon Linda Dwyer for the nomination of the 10 individuals proposed for election in the management information circular provided to shareholders.

I, Linda Dwyer, nominate Eric Beutel, Michael Emory, Susan Ericksen, Kishore Kapoor, David LeGresley, Lynn McDonald, Andrew Moor, Rowan Saunders, Vincenza Sera and Michael Stramaglia, each to serve as a Director of Equitable Group Inc. until the close of the next Annual Meeting of Shareholders or until the appointment of his or her successor.

My name is Michael Mignardi, and I second the nomination.

Thank you, both. I'm advised by our scrutineer that the number of shares represented by proxy to be cast in favor of the election of each individual named in the management information circular is more than sufficient for me to declare, and I do, that the 10 director nominees have each been elected to serve as directors of Equitable Group Inc. until the next Annual Meeting of Shareholders. The next item of business is the appointment of auditors. I ask Linda Dwyer for the motion to appoint the auditors for the upcoming year.

I, Linda Dwyer, move that KPMG LLP be appointed as auditors of Equitable Group Inc. until the close of the next Annual Meeting of Shareholders at a remuneration to be fixed by the directors.

My name is Michael Mignardi, and I second the motion.

Again, thank you, both. I'm again advised by our scrutineer that the number of shares represented by proxy to be cast in favor of the appointment of the auditors of EGI, as listed in the management information circular, is more than sufficient for me to declare, and I do, that KPMG LLP has been appointed the auditors of Equable Group Inc. until the next Annual Meeting of Shareholders. That concludes the formal business of the meeting. A detailed report showing the final voting results will be available on SEDAR and on Equitable Bank's website later today. I declare the formal part of the meeting terminated. As noted, we will have a question-and-answer period shortly, and you may submit your questions using the messaging icon on your screen. Now it's my pleasure to yield the virtual floor to Andrew Moor, and Slide 7 in your deck. This slide contains the company's caution regarding forward-looking statements. To paraphrase, our presentations, comments and answers to your questions may contain forward-looking information, including statements regarding possible future business and growth prospects for the company. You're cautioned that forward-looking statements involve risks and uncertainties, including those introduced by the current global COVID-19 pandemic. Certain material factors or assumptions were applied in making these statements and could cause results or performance to differ from forecasts or projections expressed in these statements. Equitable does not undertake to update any forward-looking statements except in accordance with applicable securities laws. Now here's Andrew.

Thank you, David, and thank you to all shareholders, proxy holders and guests for participating in this virtual meeting. This is a very difficult time for Canadians of all walks of life. While we are a bank and a business that plays a role in the economy and households -- of households and small businesses across the country, we're also people who care deeply about others. Our hearts go out to all of those for suffering, and we offer special thanks, especially during National Nursing Week, to our frontline health care workers for their selfless acts of courage. In developing my remarks today, I decided to stay very focused on the things we are doing as a bank to respond to this crisis and to offer a few thoughts on the future. In this environment with so many competing items we all need to tend to, I thought shorter would be better. However, if you're interested in more details, our first quarter MD&A, along with a recording of our analyst conference call held yesterday, are available at equitablebank.ca. I also completed an interview on BNN yesterday that explored broader economic commentary themes, and you might be interested in that. Moving to part 1 of my remarks on Slide 8. I'll talk about actions taken within the bank to protect our employees and help our customers and communities. As soon as we saw the lockdown coming, we moved quickly to do all the things you expect a prudent bank to do. First, we enacted our business continuity plan, and that meant moving our team to safer ground, which in this crisis is home. As a digital branchless bank with a very strong cloud-based architecture backing our EQ Bank platform, it was comparatively easier for Equitable to adjust to a world of physical distancing than other banks. But there were still some big adjustments for the team. Not everyone has the benefit of a home office. I know some employees are working in their kitchens, bedrooms, or like me, their basements. I'm truly appreciative of their extraordinary efforts. We sought to support our team through this period by ensuring our employees have the tools and knowledge to maintain their mental and physical health and achieve some sense of normal work-life balance. We've also been crystal clear about the confidence they should have in their continuing employment with the bank. Despite all the distractions that a move of this nature caused, the Equitable team continued to perform at a really high level, responding to all customer requests with their usual vim and vigor. As you can imagine, early in the lockdown, we addressed many more calls, e-mails and social media messages from our customers than ever before. I took a few of these calls myself, and understandably, there was a high degree of anxiety amongst our customers. While this anxiety has abated somewhat, it is still in an anxious time for Canadians. The federal government has certainly stepped up to offer support for those temporarily out of work or whose businesses have been impacted. For our customers, Equitable has granted loan payment deferrals to 14,500 of our retail and commercial borrowers. Deferrals can make a world of difference to those who have lost income, with the objective being to keep everyone sheltered in place. To the bank, a deferral itself represents a relatively modest increase in risk, an average loan-to-value of 64%, an interest rate of 4.9%. The LTV on uninsured mortgage will only increase by 0.8% over 3 months or 1.6% over 6 months, assuming house prices don't change. While not a specific gesture related to the lockdown, as Canada's Challenger Bank, we offer free Interac transfers for bill payments with EQ Bank, the most cost-effective international money transfer service of all Canadian banks, what I believe to be a fantastic customer experience and great savings rates on all products. A safe, secure haven for one's money is something I know our customers appreciate. Equitable also remained active with our long-term partner organizations, Madison Community Services, CRC 40 Oaks and the Mount Sinai Hospital Foundation, through our charitable donations and support programs to ensure they are able to step up to the challenge posed by the pandemic. I encourage you to review our public accountability statement for information on the year-round efforts our employees and our bank make to help. Moving to part 2 of my remarks on Slide 9. I'll describe actions taken to protect the bank with a management mindset that this is clearly attuned to this environment, focusing on managing risk closely and not stretching risk boundaries to seek higher returns. As David indicated, the bank has always operated with a strong risk management culture. While in no way the same, the Great Recession in 2009 provided a testing ground for all banks. And through that period, Equitable found a good way forward through various actions. What we learned then we applied as soon as we saw the lockdown coming. During the first quarter itself, we increased liquidity by $600 million. We know this weighs on profitability as it represents negative carry. And although we have not experienced any institutional-specific stress, we felt it was most prudent under the circumstances. Like other Canadian banks, we have access to funding facilities put in place through the Bank of Canada and CMHC. In addition, we have extensive liquidity facilities available from other banks. I am very comfortable with our liquidity position. Government restrictions to control the pandemic also depress economic activity and may depress asset values in our key markets. In order to be prudent while there is uncertainty in underlying collateral values, we have dialed back our loan to values in many of our lending businesses. While this will slow loan growth, it will ensure that the bank continues to stand on strong foundations. We have run a broad series of financial and capital stress tests to ensure the bank to manage through both possible and extreme downside economic scenarios, involving significant employment loss and real estate price declines. Some of those scenarios are shown on Slide 9. As prudent bankers, our role is to ensure we never downplay risk, and that means staying abreast of changing economic forecasts in our modeling. On Slide 10, you can see our capital ratios at March 31. Based on the results of tests to date, even in the most extreme scenario analyzed, Equitable has sufficient capital to absorb potential losses without being forced to raise capital at dilutive share values, and we remain profitable in each area of the testing horizon. Our liquidity and risk management actions have continued in Q2 as we have already insured $622 million of residential mortgages under CMHC's portfolio insurance program. This move, alone, has an equivalent 30 basis points positive impact on our CET1 ratio, which is a measure of the amount of risk absorbing capital the bank is maintaining. In fact, it's the highest form of such capital. Along with slowing the pace of growth in risk-weighted assets and sustaining our profitability, we expect CET1 to remain, as it has in the past, at a level higher than the other 8 Schedule I banks included in the TSX Composite Index. These and other actions ensure that our bank will maintain its rock-solid foundation. There's an added element of support for the banking system in this country. I'm referring to actions taken by OSFI, the banking regulator, the Bank of Canada and the Canadian government. All have provided very constructive guidance and assistance, and we thank them for that. As a Schedule I Canadian bank, Equitable is making use of relevant programs, including the Bank of Canada's Standing Term Liquidity Facility and the expanded Canada Mortgage Bond program to further strengthen our liquidity. Moving on to Slide 11. You will recall that last summer, Equitable announced its intention to grow its common share dividend at a rate between 20% and 25% for each of the next 5 years. The Board has put these planned increases on hold because of regulatory guidance from OSFI to the banking industry. The guidance to all federally regulated banks was to cease increasing dividends as a means of supporting financial and operational resilience. That said, I'd like you to know, we do plan on -- we do not plan on decreasing the dividend. Our low payout ratio, which was 11% last year, means that we have room to maintain our dividend and still build capital organically. We continue to believe that delivering increased dividends will be important to returns to our shareholders over the longer term, and we will revisit our approach to dividend growth as soon as the circumstances allow. Moving to part 3 on Slide 12. A few thoughts on the future. As much as the world has changed, and will continue to change, we still believe our medium-term financial objectives, found in our annual report, are within reach in the years after we emerge from COVID-19 as we realize our vision as Canada's Challenger Bank. As a digital branchless bank with an award-winning EQ Bank all-digital platform, Equitable is in a unique position to serve customers in this era of physical distancing. We knew it was only a matter of time before Canadians grew more comfortable in our purer approach to digital banking. And it seems that the pandemic is a helpful catalyst in that regard. We're seeing clear signs of that. As we speak, EQ Bank is opening accounts at a much higher pace than normal, and I am enormously encouraged by the progress we are making in this area. Knowing this, we will continue to move forward through this period by investing in the advancement of our digital capabilities and the creation of new EQ Bank offerings. Summary on Slide 13. I can assure you that we will maintain the bank's proven strategy for long-term value creation. We've used it to great effect for over a decade, and it remains just as valuable as ever because it protects our depositors and shareholders and it causes us to think deeply and in a disciplined manner about capital allocation and capital deployment so we can optimize returns. As I hope you can tell, we have made prudent moves to protect our institution. If I can leave you with 3 messages, they are these: first, the bank's liquidity is in great shape; second, our capital position is strong; and finally, while like all banks, we expect loan losses to increase in a stressed economy, our approach to lending is sound and prudent, and any losses will be manageable. We don't know how and when this health crisis will end, what we do know is that Equitable is the bank Canadians could count on before the pandemic, and it's the bank you can count on now and into the future. Thank you for listening. And now back to David for questions.

That's great. Thanks, Andrew. Now that the formal business is concluded, it is time for question period. [Operator Instructions]

We have 2 questions that have come in on the line, which I will repeat for everybody's benefit. The first relates to the deferral program that we've offered to our mortgage borrowers. And the shareholder is interested in any insights we can provide on the nature of the deferrals, specifically, what percentage of the deferrals were provided to people who have actually lost their employment?

Yes. Thank you for the question. I don't know that we have that precisely. The -- or even -- actually, I couldn't even really answer it anecdotally. What we have been asking our customers when they call in, trying to be empathetic around understanding -- asking the basic questions, how they got loss of income. And being generally, fairly relaxed about offering these deferrals just because, as I mentioned, the stress is so high that the pushback was seen as not being particularly constructive. But we are asking people whether they've lost income. Does it make sense that they've lost income based on the job that we understand they have, and if that's the case, then been offering those deferrals. But I would say as a lot of them are on 1, 2, and the most we've gone so far as 3-month deferrals, which is not to say that we won't extend these deferrals when it turns out that people have still got extended job loss. But we thought it would be useful to kind of touch base with our customers to the extent that they're actually back in employment in a shorter time frame, it may well make sense for them to kind of reverse the deferral decision. So I think it's true that -- my sense is that many of them are doing this as a bit of an abundance of caution, not knowing what's ahead rather than actually suffering from job loss, but I'm afraid I don't have a precise statistic on that. I mean that's my impression from talking to our customer service team who, by the way, have done a fantastic job.

Thank you, Mr. Moor. The second question relates to the product road map for EQ Bank. It begins by acknowledging the successful launch of our brokered U.S. dollar high-interest savings account recently and asks whether there's any plans to introduce the U.S. dollar product over the EQ Bank platform. It then further asks about the status of joint accounts and small business accounts that were discussed at last year's meeting. It asks about a virtual debit card that may be used with Apple Pay or similar tools and provides the example of Revolut, which is -- appears to be positioned to launch a virtual debit card in Canada and has done so in other markets.

Great. Well, there's quite a large range of products, all of which are things that we're thinking about very actively. So thank you for the question -- the pointing out that we are one of the first banks to take advantage of the fact that CDIC is now offering coverage on U.S. dollar HISAs. So we -- as you point out, we launched a U.S. dollar HISA towards the end of last month and are seeing good traction through the broker channel in that area. That will be launched in the EQ Bank channel either towards the end of this year or early next year. So something we're very actively working on. I think it's of extreme value to people that have property in the United States, for example, to be able to hold U.S. dollars HISAs to snowbirds. And what we're actually going to have is a great piece of that product is the ability to move money into accounts in the United States very easily and cheaply. So we're looking forward to bringing some innovation to that side of the market. Joint accounts we would be expecting to launch in June. So they're just around the corner. We're testing them now. I'm pretty excited about that. One of the things about joint accounts is that with most conventional banks, they're extremely challenging to set up, you're being forced to move into the branch world and get all the people involved in the joint account in the branch at the same time. Where we're bringing some fantastic innovation is the ability to link 2 borrowers in a digital environment. So again, bringing some unique innovation, we believe, in the Canadian market to that side of things. We also are looking at registered accounts later this year, so more going on there. And Tim, was -- yes, payments and cards, generally, is an area of a lot of interest. I have a Revolut card -- well, I have hundreds of different cards from financial services providers just to test them all out. So I would say that, yes, you should expect to see some innovation on the payment card front over the next year or so. That's a little further down the down the road map than things like joint, which are really just around the corner.

Thank you. We have some additional questions that have come in, in the meantime, one of which builds on your earlier answer about deferrals and asks, how long we could conceivably offer more deferrals once the current deferral periods end.

So this is actually something that's really been established for the Department of Finance. I mean it really came from a request from the Ministry of Finance to the major banks. And the way this works within the kind of regulatory framework is really offering deferrals in total up to 6 months in this COVID environment. So we wouldn't expect to be offering deferrals beyond 6 months.

Okay. And then the final question appears to be related to our expenses and efficiency ratio and asks, what type of -- what level of efficiency ratio we are aiming for this year.

Tim, you're the CFO. So why don't you address that question?

I'd be happy to answer my own question. So I -- what we communicated yesterday clearly on our call with analysts after our results were released is that we believe expenses will remain roughly at Q1 levels through the duration of the year. Answering your question about our efficiency ratio is difficult because we have not provided any outlook on our revenue, which is the denominator in the efficiency ratio question. So we will, again, reiterate the guidance that expenses are expected to remain level with Q1 through the year. And I think it's -- then falls upon investors to consider what revenue they believe we will earn over the course of the year and derive the efficiency ratio. But unfortunately, we're not providing any guidance on that front at the moment.

And just to add on that, we have been controlling expenses in this post-pandemic world, partly because I don't want to be in the place where we would ever have to lay anybody off, so we're not trying to over hire and then find that we've got people that are surplus to the needs of business if business indeed becomes quite a bit slower. But more because it's very hard to onboard people and make them productive in a socially distant world. And just thinking about kind of prudence to carry our way through here. So expenses are being controlled. You can't even, for example, shoot new TV advertising footage and our feeling about the return we get on that kind of advertising at this point is relatively low, and we're seeing good traction through social media. So there has been an expense-containment process going on in the bank since we saw the reality of COVID about to hit us.

All right. Thank you. And we do have one last question that has come in. Thank you to investors for your engagement today. The question is related to capital and whether we expect a build in the near future. And then how we would think about share repurchases in that type of environment?

So we would expect capital to build [ over the next little while ], partly because dividend growth has been constrained. Although we will want to hold a bit more dry powder or capital in reserve in a more stressed economic scenario. We certainly raised the issue of share buybacks with the Board, but we've never landed on the spot related to that. But if we see capital growing above our target levels, which, as a reminder, is 13% to 14% CET1, we would consider what to do with that. You -- essentially you have choices. Are there opportunities to expand the business? Can we grow dividends faster? Or can we indeed engage in share buybacks? And I think our share buyback approach, for sure, would be determined, to some extent, by where the stock is trading at the time.

Okay. Thank you. Questions continue to roll in. And the next one relates to cloud-based banking. Specifically, question about how we're thinking about cybersecurity and protecting customer data as we move to a cloud-based environment.

Yes. Well, we -- of course, before we made this transition, we did a deep dive on this approach. Our fundamental belief is that using cloud-based technology actually provides a stronger cybersecurity infrastructure. In essence, we're levering off the cybersecurity strength of the cloud provider, which, in our case, is Azure from Microsoft. Azure is the cloud-based provider of Microsoft. And of course, we do a lot diligence on their cybersecurity, but they would have perhaps 3,000 people across the organization working entirely on cyber, whereas, obviously, a smaller bank, like ourselves -- I mean it's more than 3x our own in total employment base. So we're pretty comfortable that we've got the right infrastructure in place with that cloud-based technology. And I think to the extent that you -- when I first started thinking about cloud 5 or 6 years ago, that was certainly a concern that you really -- stood sort of front and center. And as I attended many conferences [ focusing ] on these issues and read about it, I get more and more comfortable that our cybersecurity posture is more comfortable in the cloud than with conventional on-premises technology.

That appears to be all the questions today.

Okay. Thank you, Tim, and thank you, Andrew. As there are no further questions, I will sign off by saying thank you for participating. And reminding you that our door is always open for shareholder engagement during the year. Thank you. Goodbye. Have a good weekend.

This concludes the meeting. You may now disconnect.