Equitable Group, Inc. (EQGPF) CEO Andrew Moor on Q3 2018 Results - Earnings Call Transcript

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About: Equitable Group, Inc. (EQGPF)
by: SA Transcripts

Equitable Group, Inc. (OTC:EQGPF) Q3 2018 Results Earnings Conference Call November 9, 2018 8:30 AM ET

Executives

Andrew Moor - President and CEO

Tim Wilson - Vice President and CFO

Analysts

Marco Giurleo - CIBC

Jaeme Gloyn - National Bank Financial

Stephen Boland - GMP Securities

Geoff Kwan - RBC Capital Markets

Graham Ryding from - TD Securities

Nik Priebe - BMO

Operator

Good morning, ladies and gentlemen. I'd like to welcome shareholders and analysts to Equitable's Third Quarter 2018 Conference Call and Webcast. Later, we will conduct a Q&A with participating analysts on the call.

Before I begin, and on behalf of our speakers today, I will refer webcast viewers to Slide 2 of the presentation and our callers to the following information, which contains the company's caution regarding forward-looking statements. We remind you that certain forward-looking statements will be made today, including statements regarding possible future business and growth prospects of the company.

You are cautioned that forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Certain material factors or assumptions were applied in making these forward-looking statements and many factors could cause actual results or performance to differ materially from those conclusions, forecasts or projections expressed by such forward-looking statements.

Equitable does not undertake to update any forward-looking statements made by itself or on its behalf, except in accordance with applicable securities laws. Additional information on items of note, the company's reported results and factors and assumptions related to forward-looking statements are available in Equitable's Q3 2018 MD&A and Earnings News Release. This call is being recorded for replay purposes on November 09, 2018.

It's my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Bank. Please proceed, Mr. Moor.

Andrew Moor

Thank you, Joanna. Good morning everyone and welcome. I'm joined by Tim Wilson, Senior Vice President and Chief Financial Officer of the bank. Pro our business lines, Q3 was one of the most productive periods in our history, and for the bank's earnings, our best quarter ever.

On the strength of better than expected market conditions and great execution, mortgages under management at $1.4 billion dollars higher than we thought they would be when the year started.

This creates a substantial tailwind for future earnings.

Meantime, EQ Banks surpassed $2 billion in savings deposits, rather solidifying its position as the consumer’s choice for all-digital banking. Based on these results, and on our updated market and economic assessments, our outlook for growth has improved.

Today, we'll be talking about the underlying reasons. Update your own progress against our priorities, and provide insights into our position as Canada's challenger bank. Looking briefly to the quarter’s key financial metrics.

Diluted EPS was 27% higher than the year ago, and 9% above the previous all time record set in Q4, 2016, which notably did not include any costs associated with managing through last year's liquidity events.

Liquidity event related costs are now lower than a year ago, due to declining insurance premium amortization and the downsizing our backstop last quarter. These lower costs along with strong underlying earnings performance support an ROE of 15.9% in Q3.

Either way, our returns were high and demonstrate the advantage of Equitable's value creation approach. On the shoulder of this performance, we increased our dividend again yesterday to $0.28 per quarter, or $1.12 annualized.

Turning now to report on our five key strategic priorities. The first is to grow our existing businesses through superior service. In the third quarter, mortgages under management increased 14% year-over-year or $3.2 billion.

Alternative single family book was up by 13% based on strong originations and excellent mortgage projections. [Indiscernible] [updated the face of 20] guideline that became effective in January was widely viewed as a headwind to originations. Several countervailing factors worked in our favor including a concerted effort by a single family team to give great service to brokers and borrowers, market share gains and higher retention rates on our existing book of business.

As you know for more than a decade, Equitable centered its origination strategies on superior customer service to our mortgage broker customers. It is heartening to learn that our recent national survey conducted by Canadian mortgage professional magazine, Equitable finished first amongst alternative lenders in five categories, underwriting support, broker support, turnaround times, satisfaction the credit policy, and transparency of commission structure.

These are coveted wins, and I think our single family team for the hard work and single minded focus on customer service. Our outlook for growth has improved again. We now expect our alternative single family portfolio growth to be in a range of 11% to 13% for 2018, compared to our original forecast for the year of 2% to 4% expansion.

That difference means that we'll end the year with approximately $840 million more in assets, than we had expected, setting the stage for profitable 2019. As we reported last quarter, growth in single family also continues to be accompanied by higher average beacon scores, but there are uninsured residential portfolio.

This uptake is a function of benign credit conditions in the economy and may also be a byproduct of B-20 changes. Considering current market conditions, the outlook for the broader economy and real dynamics, we expect continued growth next year. We’ll provide more color on the 2019 outlook next quarter after we’ve worked through our normal budget cycle.

Needless to say, we're optimistic about the growth runway for our lending businesses. In Commercial, the banks set new high watermarks for mortgage principal and quarterly originations up 27% and 48% respectively.

This best ever performance reflects our strategy of allocating more capital to commercial, and the team's outstanding success in building the breadth and depth in our partner relationships through high quality service.

Improvement in renewal rates so far in 2018 have supported overall portfolio growth. Growth in our commercial assets have been spread across a wide variety of asset classes, including industrial, office, multis and construction facilities.

We funded our first CMHC insured commercial construction loan in the quarter. This represents a new lending niche for the bank, and another solution for our commercial customers. More generally, it reflects our ongoing desire to diversify and be recognized as a challenger bank in all business lines.

We’ve also elevated our outlook for commercial. We now expect asset growth to range between 20% and 25% this year compared to our previous range between 18% and 20%. We continue to allocate a healthy amount of capital to commercial and outlook for ongoing growth in 2019.

Securitization and financing mortgages under management grew 11% versus last year reflecting originations, renewals and multi-unit residential mortgages and growth in our prime single family book.

Prime mortgages that we originated through our internal team grew 24% year-over-year as a result of a steady increase in broker relationships, built on service. Those originations were supplemented by 400 million originations sourced through third party partners.

This prime mortgage is not particularly profitable at the moment, given price competition in the market. We expect them to be much more profitable on renewal. Our second priority is to cement EQ bank’s position as Canada's leading digital banking platform.

We gauge progress against that priority by cracking a number of indicators including, customer feedback, savings deposit growth, and new digital account openings. On each count EQ Bank continues to make great progress. Last quarter, I said EQ had reached 60,000 customers, that total now exceeds 66,000. I also said that EQ was closing in on $2 billion in savings deposits. That number is now approaching $2.1 billion, 31% higher than a year ago.

Pervasive EQ Bank marketing early this year, by advertising, social media and partnerships has clearly lifted brand awareness and led to more account earnings. While market leading digital capabilities and the recent launch of EQGIC products are encouraging to existing customers to save more with us for longer periods. To pave the way for even more cost per customer savings, we recently increased the deposit ceiling for the savings plus high interest account to $200,000 and allowed each customer to open up to 20 GICs each, which enables more effectively [laundering].

We’re very excited about the road map we're on. Just this week, SOURCE launched a new EQ mobile bank app that includes the latest in biometric authentication capabilities, i.e. face recognition to open the app.

We are also deep into planning for 2019 developments, including enhanced customer contact center, a move to cloud infrastructure and several new product launches. We're also delighted to receive approval from Bill Morneau, the Minister of Finance to set up a new trust company, Accrual Trust, a subsidiary of the bank.

Amongst other uses of the unique powers of the trust company, we expect to be able to offer more deposits insured by CDICs into the EQ Bank Platform. Priority three is to leverage our capabilities and balance sheet to diversify into attractive adjacent markets that can support asset growth over the long run.

This year, the headline story is the launch of a reverse mortgage business, which from birth earlier this year is now finding its feet, getting great feedback from mortgage broker partners. We recently made changes that will enhance competitiveness; I'm more convinced than ever that reverse mortgages will become an important bank -- business to the bank all the time.

More broadly, we're thinking about how Equitable can bring value to people at the accumulation of assets stage of their lives, also known as retirement and how the bank can bring valuable solutions to these people.

Within commercial, they also grew up specialized financing pipeline in the quarter, lending to other lenders who operate an attractive market segments such as equipment financing. This business allows us to combine our balance sheet and the strength of the secured lender, with the distribution and credit management experience of other companies, and thereby diversify into new asset categories. We expect to continue to see this business grow in upcoming years.

Priority four is to maintain a disciplined approach to capital management and a low risk profile. Compared to last year, higher asset growth meant that our CET1 ratio edged lower in Q3, which means we have successfully and profitably deployed a significant portion of our access capital that will benefit shareholders through stronger earnings in the future quarters.

Although we're still carrying some excess common equity, it is not as pronounced as last quarter. We are also maintaining a low risk profile, the evidence can be found in our credit metrics. Net impaired mortgage assets were just 16 basis points of total mortgage assets, while up from last year due partly to the adoption of IFRS 9 16 basis points is still an extraordinary low rate even by our standards.

Considering economic forecasts, our view is that risk in the case of residential real estate has decreased over the last couple of years, just a more balanced supply and demand dynamics; the credit quality of the mortgage is threatened.

And as a result, we expect our raised rates and credit loss provisions to be low for the remainder of 2018. That said, we're all prepared to act quickly to address any areas of elevated risk. And as a matter of policy the bank remains well reserved with allowances for credit losses equal to 11 basis points or assets, well above our long term loss rates of four basis points.

Our fifth priority is to strengthen our key capabilities. We continue to do this by hiring great people, investing our technology, infrastructure and advancing our AIRB initiative. As you probably saw in a press release put out last week, we have committed to invest in the Portag 2 equity fund. This brings Equitable to more -- centrally to a more globally leading intact ecosystem.

We already have a deep relationship with a team of Portag. We've been co-investors with Portag and Borrowell for a number of years, which is really paying off for us, and we're providing deposits into the well simple platform, a Portag and investing company and the leading robo-advisor in Canada.

I'm optimistic that we'll find additional opportunities for the bank to do business with other part of the Portag ecosystem. And other important news, our board also strengthens its capabilities with the appointment of Stu Erickson. Stu has worked as a Chief Information Technology officer several Fortune 500 companies such as Coca-Cola, New York Life, Fiserv, Merrill Lynch and Citi. Her experience in technology leadership positions will be invaluable to us as we advance the I.T. infrastructure that has made us Canada's digital bank innovator.

Now, I'll turn the call over to Tim for his report.

Tim Wilson

Thanks Andrew and good morning everyone. In Q3, our key profitability measures, namely net interest income, efficiency and EPS were well above last year and the expectations that we communicated last quarter. We attribute our record performance to strong asset growth, the diminished costs of the now smaller backstop facility, low losses and improved margins.

We were truly firing on all cylinders in Q3. Our results were also buoyed by $2.8 million of derivative gains, related to our participation in the CMB program. Even normalizing for these gains, our performance would have been above expectations. EPS would have still been an all time record of $2.68 and ROE would have been 15.2%.

Net interest income was up by 29% over last year due to 13% growth in average assets, and improved margins. Total NIM expanded by 22 basis points compared to last year, to stand at 1.69% in Q3, the best showing in seven quarters.

NIM and core lending was 22 basis points above last year, due to lower liquidity event costs, higher margins in our commercial book and various shifts in asset, mix all of which are itemized in our MD&A.

NIM was higher despite reduced levels of prepayment income and single family. As expected, quarterly interest expenses associated with what is now an $850 million backstop facility declined to $2.3 million in Q3 compared to $5.4 million a year ago and last quarter.

In addition, last year we recorded $4 million of amortization expense associated with mortgage insurance that we obtained during the liquidity event. This year, that number was essentially zero. In other words, quarterly liquidity event costs are down to $2.4 million after hitting a high of $9.4 million last year in Q3, and they should stabilize at that level at least until next June when our facility matures.

Our NIM performance far exceeded what we had expected, particularly in core lending. We had expected core NIM to be between 2.3% and 2.35 % but we exceeded the top end of that range by 12 basis points, for four main reasons.

First, the level of price competition in the single family market abated slightly compared to our last outlook. Between May and October, we were able to put through a few rounds of price increases to some of the products in which we were seeing the tightest spreads, and those increases seem to have stuck.

Second, GIC rates dipped by approximately 20 basis points for a period in both July and late August, which also helped third quarter margins. Thirdly, spreads and new commercial deals continued to move up in the quarter, partly due to ongoing increases in the prime range.

And finally, our low margin liquidity portfolio decreased in relative size, which caused the positive mix shift in our assets. This decreased with a function of normal seasonality in our business. We need less cash on hand as we head towards Q4 and Q1, which are typically periods of lower mortgage fundings.

The spreads in our liquid assets were also helped by the prime rate changes. Looking ahead, we believe that Q4 NII will increase the year-over-year rates in the high teens. This is higher than we expected last quarter, due to both asset growth and margin stability.

While GIC rates have moved up over the past month, recent prime rate and mortgage rate increases should offset the majority of that rise in our cost of funds. I also want to highlight that while we expect NIM to be relatively consistent from Q3 to Q4 within each business unit, you will likely see a decline in our overall weighted average NIM. And this is partly due to asset mix.

We expect our lower yielding securitization financing portfolio to grow more quickly than core lending, which will cause the weighted average NIM to decline.

Despite investing more in strategic initiatives, our efficiency ratio improved at 36.3% in the quarter, 1.1 percentage points lower than last year, and 6.6 percentage points lower than last quarter.

Expenses themselves grew at 19% year-over-year just above the growth rates of our assets as we had expected. Drivers of the year-over-year expense growth, some of it in advance of the benefits realized, included 12% higher FTE and a 23% increase in spending on technology and systems, consistent with our objective of building our I.T. capabilities to support our growth.

Marketing and corporate expenses were up 39% but down sequentially as we completed a very successful marketing campaign for EQ Bank in Q2. For the remainder of 2018, we will continue investing in our strategic priorities. Consequently, we anticipate that Q4 non-interest expenses will increase year-over-year rate slightly higher than the growth rate of the bank's assets, and that our efficiency ratio will be in a high 30% range.

In dollar terms, we expect expenses to increase by up to $2 million from Q3, as a result of continued hiring and investments in some important technology initiatives, such as the move to cloud infrastructure that Andrew mentioned earlier.

With that, back to Andrew.

Andrew Moor

Thanks, Tim. Equitable is really hitting its stride as kind of this challenge bank. A challenger is partly a position of strategy, and partly an attitude, to taking an innovative and authentic position of change in the market.

To reflect our challenger spirit, we've chosen to reimagine our banks brand and identification, including our logo. You will now see on all public and investor facing communications. We believe our new branding is bright, clear, powerful, and indicative of a commitment to rethinking all elements of banking as a service focused innovator.

All of the great work involved in this redesign was done internally by our marketing team at Equitable, and I sincerely thank them for their creativity and passion. I must admit, I'm pretty damn impressed by the intellectual insight that underpins what you see in the branding change.

In closing, the record earnings we’ve reported and the strong growth we’ve deliver across all our business lines is very encouraging. Our plans for 2019 are taking shape. Our outlook for earnings growth is positive.

Our opportunities to build new businesses are many and we look forward to kind of challenge your bank delivering more value to its customers and shareholders in the years ahead.

That concludes our prepared remarks. And now we’d like to invite your questions. Joanna, can you please open the line to analysts that have questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question is from Marco Giurleo from CIBC. Marco, please go ahead.

Marco Giurleo

Good morning, guys.

Andrew Moor

Good morning, Marco.

Marco Giurleo

My first question today is on the Prime Single Family growth. You saw a very strong growth of 11% sequentially this quarter. I'm just wondering if you could give us some color on, one, what's driving the growth. And two, Andrew, I think you mentioned these loans are less profitable, but I think you were referring to mainly for lower NIM. Can you talk about maybe the ROE on this -- on these loans? And how you expect the growth of this business to impact your overall ROE?

Andrew Moor

Sure. Thanks Marco. It’s something that we’ve been thinking about that bit actually recent years as it terms out. In terms of growth it's really been a matter of the Prime team and may sound like they’re broking record on this, but we’re coming everyday to renter our service, our customers and our team has just done a fabulous job in this area over the last little while. It’s almost the simple as that. Combined though with a really state-of-the-art switch programs, so we’re seeing more opportunity for when bank – when mortgage reach then the term being able to switch them into the bank, so one could imagine the mortgage with another lender. And historically it’s been quite difficult for brokers to bring that mortgage on renewal to another bank. We however – regards to state-of-the-art switch and that’s helping to drive earnings.

Tim Wilson

In terms of ROE there’s very little capital in this business. It’s almost zero capital. These are -- CMHC, if they are ensured by private insurer or for that matter kind of the guarantee. If they are ensured by their private insurers, it’s more on the capital associated with the loans. [Indiscernible] margin, the ROE is effectively infinite, although it does use some of your leverage ratio.

We actually end up with the slightly different accounting result when we buy loans from third parties. We’ll pay a single upfront fee and amortized it over the life of the loan. And those do have a positive impact on ROE right from the day we buy them. When we originate them internal, the internal cost structure expense right upfront. So it kind of the accounting impact is actually to be probably to even make a loss in the first year which is recover in later years.

So, this doesn’t really have much of an impact on earnings in the year of origination that any impact over the last plus three or four years. Once you get to renew this mortgage, though, the cost associated with re-underwriting are much lower and any fees to brokers typically more modest, so there’s a higher margin at that point. So the spreads are very tight right now.

Marco Giurleo

All right. So what proportion of the growth would you say is acquisition versus EQB originated?

Tim Wilson

They were roughly $300 million of acquired mortgages adding that portfolio in the quarter, Marco.

Marco Giurleo

Okay.

Tim Wilson

That’s the number that we expect roughly to repeat in Q4. Beyond that we’re still in negotiations in term of these sourcing partners. So don't have visibility into the original – in the origination potential beyond Q4 at the moment.

Andrew Moor

Tim, we report what we originate on our own account as well separately in the MD&A?

Tim Wilson

No separate, no.

Marco Giurleo

And so the term on these mortgages, is that similar to your traditional business or your non-Prime business?

Andrew Moor

This would be mostly five-year loans.

Marco Giurleo

Five-year loans, okay. So, and then on renewal you get better terms?

Andrew Moor

That’s right.

Marco Giurleo

My last question is just on the tighter rules around HELOCs introduced by some of the big six banks this week. Just wondering if we can get your take on the tightening of the rules, and if you think it will be a tailwind for your mortgage business?

Andrew Moor

I think it’s sort of too early to say. I mean, I’ve been ask recently about what we think the next regulatory change might be if there are any – it does seem that HELOCs are bit of haven’t really fully embraced into B20 World. One of the obvious gaps is that if you qualify for HELOC it appears that the qualification level has newer revisited. However, you could be in your mid-50s earnings at a peak -- peak earnings power and you still have that drawable amount as we approach credit 20 years later without have been revisited under the most banks, which clearly doesn’t make much sense when you think about the 5Cs of credit and their capacity repay.

So, generally speaking we would think this is some of a tailwind for our reverse mortgage business if HELOC will start come back to the more rationale around how we think about these things. I’m not saying by the way there’s any need for change but there’s clearly a much more rigorous approach to new regular mortgage advances than there is to HELOCs, and so, it’s an area that wouldn’t surprise to see regulatory pressure.

Marco Giurleo

Thanks a lot guys. I’ll re-queue.

Operator

Thank you. Your next question is from Jaeme Gloyn of National Bank Financial. Jaeme, please go ahead.

Jaeme Gloyn

Thanks. Good morning. Good morning, Jaeme. My first question is related to some commentary in your outlook and its regarding some specialty lending programs and financing some of these specialty lending programs, three of them in particular and you highlight equipment leasing as part of the – one of the strategic initiatives. Can you give us some color around what kind of specialty lending programs these are with center line assets, size, expected revenues, things of that nature?

Andrew Moor

Yes, sort of modest revenue. I think the facilities, roughly speaking three facilities, 25 million a piece secured by hard assets typically, things of things like trailers or construction equipments where we’re in the senior lender position, so the owner of the specialty lender has subordinated position behind us and effectively as a cross collateralized across all the asset pool. So feel pretty good about the structures we’re putting in place and this is clearly part of a broader push to understand equipment financing markets in general, but if you that over time that might be something that the bank will hold is more encouraging, participating in more directly and seems like a pretty interesting area of lending to us, turns out that we got couple of senior people in our risk area that really understand this market, I mean, coming from one of the leaders in this business few years ago. So it’s a bit of kind of evolution in development.

Jaeme Gloyn

And so your – the programs are set up to finance the lenders activities. Are any of these lenders publicly traded or is it – I’m just trying to get sense as to like who your financing, whose doing the jubilation [ph] of some of these loans as well?

Andrew Moor

None of them are publicly traded. These are smaller especially finance shops typically backed by private equity bankers.

Jaeme Gloyn

Okay. Thanks. One of the comments on page 15 of the MD&A around your non-interest income is lower gains on sale foreclosed homes as a driver of year-over-year decline in non-interest income, as well as amortization and characterization of certain fees. Can you talk about I guess why that lower gains on sale foreclosed homes didn’t show up in the sequential decline as well? And then also about what kind of changes happen to your non-interest to adjust amortization periods and characterizations?

Tim Wilson

Yes. I can take that one, Jaeme, I mean, on that first point of that foreclosed homes, I mean, the gains and losses we realized are really individual property dependent, so I’d have to go back and reference the exact properties.

Andrew Moor

I think it wasn’t home. I think it was one commercial property [Indiscernible] that we had foreclosed on a few years ago that we sold for gain last summer, small mole, but I think it’s actually homes.

Jaeme Gloyn

And then, and the other point about the fee income that was easier to explain, there are certain fees which are generals of mortgages. And we actually changed our categorization of the reporting of those fees during the quarter. And we moved them from other income into NII, which is more consistent with the way we treat every other fee.

So, while it was the change was significant that it created a bit of blip in other income, it's not significant enough that you'd actually notice the difference in NII. And going forward, we will be reporting at its part of net interest income.

Jaeme Gloyn

Okay. So, safe to say the Q3 number is fairly clean number at this point?

Tim Wilson

It's a clean number and I view that as your run rate.

Jaeme Gloyn

Right. Next question's related to some changes in the stage two mortgages, mortgage commitment risk in stage two mortgages receivable in both in the standard risk homes or rows I guess. Seen an uptick there from Q2 and Q1. Can you just explain or maybe just give us a little more color as to what's driving the increase in those stage two mortgages, commitments and mortgage receivables?

Tim Wilson

I wouldn’t say there is anything in particular I'd note there. I mean the stage two can be effected by the performance of individual loan but also by macroeconomic factors. Though, to the extent that the macroeconomic forecast that we obtained from a third party agency to curate a little bit in the quarter that can move more loans in into stage two. Which is exactly the dynamic we saw. It wasn’t a significant change in the credit performance of our mortgages.

Jaeme Gloyn

Okay. And where there be any particular geographic focus in that change or underlying asset type that drove the increase?

Tim Wilson

No, not that I'm aware of. A very small change but across the board.

Jaeme Gloyn

Okay, some more broad as opposed to let's say PC get in there troubles.

Tim Wilson

Yes. But I'll take that away and loop back with you if that wasn’t right.

Jaeme Gloyn

Okay, thank you. And last one from me is around basal III and potential velocity changes on commercial mortgages. How are you guys thinking through the potential increase in risk weights on those products and any potential impacts there or thoughts?

Andrew Moor

Well, I think to sort of since I'll say that hasn’t kind of come out with any guidance. In general, the change is finalized. We think we'll get price you provide risk quite relief. So, when you think it's an aggregate. So, we'll wait and see and see what else he has to say on that. And we have had dialogue with the regulators about that how this might evolve is clear.

Just kind of thinking about it constructively and sensibly and no decisions have been made yet. Really the only sort of word on standard I so far is about flows is it makes that here with these sets and the fact that the standardized approach using the P/E SIP flow calculation will be different than the Made in Canada solution for the standardized banks.

But this so far includes equitable we'd have a slightly different will have some different calculation methodology to reflect the regulated view of risk as whereas the asset loss is.

Jaeme Gloyn

Okay, thank you.

Operator

Thank you. [Operator Instructions] Your next question is from Stephen Boland from GMP. Stephen, please go ahead.

Stephen Boland

Thanks. Just following up on Jaeme's question on the equipment leasing. I guess I just want to uncover, these are not securitization facilities. There is you there is recourse to you, it's not like a credit enhancement type facility. You're actually the like you said the senior lender on this equipment.

Andrew Moor

That's right. I mean, use this. We wouldn’t think about it as a securitization but uses securitization technology if you like. It's there certain careers rates rise to certain higher levels than we would get sort of turbo collection of all the cash flows out of these portfolios and so on. But it is a cover loan.

Stephen Boland

Okay. And just in your commentary in the beginning, you talked about the backstop facility, it almost seems that you're in a position where you do you feel that you don’t need that backstop facility when a maturity comes around next year since your funding mix has changed so much over the past couple of years?

Tim Wilson

That's where I'm at, Steve, you know personally. But this is still a conversation we're having with our board. We have the stakeholders, we want this is an important decision to make and get it right. And so, we're thinking it through. My own belief is that our liquidity position or avenues and taps to liquidity the structural funding position of our balance sheet is such that we shouldn’t need this.

But this is a sort of decision the board makes and other members of senior executive team have fears and where would take and people in the community broadly. So, this only welcome to listen the views from shareholders, private list and so on about how they think about this. But my sense is coming next here and that we'll be in a position to eliminate the backstop.

Stephen Boland

Okay. And just last question on getting another trust license. I mean, I remember when you converted from a trust to a bank, part of it was the lack of recognition about a trust and certainly that you are paying more on deposits more for you had to give out more on GICs. Is this really just to allow people to diversify if they want to sort of get the insurance as opposed to going out to the market with a trust here.

I see that might be 10 or 20 basis points more than what you that you're offering with the bank.

Tim Wilson

Certainly, we want to build our higher limits to our customers from CDIC coverage more type is. So, you can imagine that as we built the text stack within EQ bank and the first 100,000 will be sitting with EQ bank. In short, CDIC loan deposit. Second 200,000 would actually move to automatically down to the trust company where it will so have the benefit of trust of CDIC coverage because it's a separate legal entity with separate CDIC coverage.

More than that is as I mentioned earlier, we are thinking about as I thought about Challenger Bank agenda, the dissimulation of assets and the station in people's lives when that's relevant to them and having trust powers allow may allow us to develop other line of the businesses using this trust license. So, it's yes it's about CDIC but it's about delivering other value to the Canadian consumer.

Stephen Boland

Okay. Thanks, guys.

Tim Wilson

Thanks, Steve.

Operator

Thank you. Your next question comes from Geoff Kwan from RBC. Geoff, please go ahead.

Geoff Kwan

Hi, good morning. You mentioned I think its page seven of the MD&A referencing market conditions causing non-prime origination shift a higher credit quality. And your comments and on the call seem to suggest that you don’t see market conditions turning the wrong way. Is it then just a matter of seeing maybe a higher proportion of borrowers with weaker credits or is there something else and that's behind those comments?

Andrew Moor

And look, not quite sure that I understood that quite right, Geoff. Could you give me more?

Geoff Kwan

Well, it's just in page seven of your MD&A, there's a reference talking about the market conditions and the way that they are is causing the non-prime originations to shift to higher credit quality borrowers. I think it's trying to get a sentence to what's driving that?

Andrew Moor

Oh, I think it's primary because the with the B-20 stress tests, we got 2% and so on to make the GDS TDS work on those subs coverage. Some of the lower beacon borrowers are getting knocked out by that this proportionate number of the lower beacon borrowers are getting knocked out its lending opportunity. So, it's causing a migration with credit quality.

Geoff Kwan

Okay. So, it's just purely it's a B-20 as to what ever in this there's nothing else that you've been seeing in terms of the applicants or the market conditions.

Andrew Moor

No, I think that's right, it is B-20.

Geoff Kwan

Okay. Just the other question I had was the gross impaired in the quarter on the single family side went from 23 million to 29 million quarter-over-quarter. But the specific provisions was unchanged. And just wanted your color on that. Is what is it just the LTVs on the new gross impaired was really lower. Is there some other factors there?

Tim Wilson

Yes. I think that's exactly right. I mean, it was a collection, I think the number is 14 single family loans that became new impaired during the quarter. And broad-based, no particular region of the country and we don’t expect really any losses or material losses on any of those loans.

Geoff Kwan

Okay, thank you.

Operator

Thank you. Your next question comes from Graham Ryding from TD. Graham, please go ahead.

Graham Ryding

Hi, good morning.

Andrew Moor

Good morning, Graham.

Graham Ryding

Could I start with capital? There was some just the drop in your C Tier 1 ratio, was that maybe I missed it on your call. So, is that a reflection of the strong growth your commercial book this quarter?

Andrew Moor

That's certainly one of the bigger drivers in risk weights. And of course as earnings go up, we also put more risk weight against operational risk. It's a curious thing, the better you do the more capital you have to put away. But those will be two of the drivers for sure.

Graham Ryding

And then, so given in your outlook, I guess for both commercial and residential growth going into next year. How are you thinking about managing your capital? Do you see commercial growth slowing or if not, do you need to raise capital to keep that common equity to one ratio at this level?

Andrew Moor

The best view we have today is that we wouldn’t need to -- we don’t need to raise capital and to that kind of organic growth as we continue to face the markets in a constructive fashion with just about match the retained growth from earnings. So, it's, it feels like a pretty good level flight where set one should be relatively stable around these levels of next for a while. When you do see seasonality, I think set one might grow a little bit in the slower winter months but we need to kind of restore it a little bit to have to head a more seasonal peaks again next summer.

Tim Wilson

And I think employed in that Graham is that the growth rate of our commercial portfolio will come down. I think that roughly mid-20 rates we've seen this year aren’t sustainable over the longer term. We wouldn’t want to be growing that portfolio at those rates indefinitely. So, it will drop as we sort of move into 2019.

Graham Ryding

And what sort of, what is a more sustainable growth rate for that commercial book?

Tim Wilson

I think, generally you should think about growth rates of our risk related assets. And those growing just below the rate where return on equity. So, our organic growth in capital, how commercial growths relative to single family is going to privately a function of opportunities at a particular point in time.

So, to the extent one market offers more attractive returns than the other will deploy our capital to that market. Can't come in conclusively other than at the portfolio level.

Andrew Moor

Yes. So, I mean I think that we would expect, we would continue to first choice is to put capital in the single family market but if that's growing let's say. Some of that cadence to this year, then the net result is you end up with the commercial book growing by 15% to 20% next year.

Graham Ryding

Okay. And then just sticking with capital, I guess there any discussion at the board level, I guess we're looking at a rising rate environment, fairly soft residential market. Is there any discussion around holding a bit more capital going forward relative to perhaps your last 5-year average or how are you sort of thinking about our capital given you outlook?

Andrew Moor

I think, with the certainly discussions at the board always about capital levels and [temp] holding. I think when we think about our sort of sweet spot though 13.5%, set one is kind of 13.5% plus or minus 0.5 is really how we think about our optimal capital position. We don’t think there's anything, so evident in front of us, the need to change that. But it’s a very active composition every quarter is part of our ICAP process and to consider what appropriate capital level is.

Yes, it's reviewed very regularly and that might change. But all the conversation we've had to-date have left us sitting in that same position.

Graham Ryding

Okay, got it. And then, when you talk about your commercial growth, you made a comment about increased depths and breadths of your partner relationships, much of that was this quarter or last quarter. But are you referring to syndications with other lenders or are these the relationships with the actual commercial investors that are becoming deeper and broader?

Andrew Moor

I think, as you know we have a longer history with as national Timbercreek, pretty much all of the commercial specialist mortgage banks. In many cases, we're putting [pay] loans ahead without putting significant chunks of mezzanine or equity behind us. So, it's really those partners that I'm speaking of.

So, high quality commercial are which made it's that then if a lot of this came in and came behind this.

Graham Ryding

Okay. And then just my last question if I could. Equipment leasing, how much are you originating right now and what is the size of this portfolio?

Andrew Moor

So, it is I think its three facilities of [25 million apiece in place and I think they got drawn less than 20 million] I believe. So, it's that that's what is got.

Graham Ryding

Got it. Okay, that's it from me. Thank you.

Operator

Thank you. Next question comes from Nik Priebe from BMO. You may please go ahead.

Nik Priebe

Hi, good morning. I just want to start by asking a few questions on some of the factors that might have impacted reported net interest margins in the quarter. I thought it shares with liquidity. It looks like liquidity levels were a bit lower sequentially. I was just wondering if you could talk about whether there is like a bit of a seasonal influence on liquidity there and how we should expect that to evolve over the next few quarters?

Tim Wilson

Yes. Hi Nik, it's Tim. There's definitely a seasonal influence in the liquidity numbers you have seen. In fact, it's almost entirely driven by seasonal factors. And so, the way we think about liquidity is we look ahead at our cash per needs which would involve mortgage funding, and GSE maturities over the coming months.

And then we hold liquidity partially based on those factors. So, as we enter a period of lower mortgage funding which would be Q4 and Q1, our need for a larger liquidity portfolio drops. So, it's a normal pattern you'd see and then we expect liquidity to move up again as we move into late Q1, Q2 of next year.

Nik Priebe

Got it, okay. And then maybe just one clarifying question as well kind of staying along the same thing of on the seasonal factor, but on prepayment income in the single family portfolio. I understand that they're both kind of secular in cyclical forces affecting the level of prepayment income that you guys realize in any given quarter. But just wondering if you can talk about seasonality there as well. Should we expect a higher levels of prepayments as well in the more seasonally active quarters kind of associated with above average discharges and then again lower in Q4 and Q1 similar to liquidity? I just want to make sure I'm thinking about that correctly.

Andrew Moor

Yes. You're thinking about it absolutely right. Prepayment does peak in, prepayment income does peak in Q2 and typically drops off on either side of that. Q2 being highest, Q3 second, Q4 and Q1 are both typically quite low.

Nik Priebe

Got it, okay perfect. And then maybe one last one here. And Andrew, you alluded to this in your prepared remarks but I was just wondering if you could expand a little bit on the advantages, you kind of expecting to obtain from the investment in the Portage fund. I recognize the connection with 20 of your new partners but are there any other sort of opportunities you see rising there?

Andrew Moor

Yes. It’s lot, in fact it’s been three days at Montreal a couple of weeks ago, talking to many of the CEOs of their startup, how their investing companies and so many learnings they're bringing from more around the world. You may not think that a mortgage broker in -- sorry, insurance broker in Germany was a very interesting model.

Has much to sort of deal with how a challenge a bank account that may be operating. But there were lots of things to learn from all of these different approaches. And I think you've only we highlight two relationships within the Portage ecosystem but I'm extremely confident they're going to be many over little while, the ways ahead.

Some of them may just be a sort of point solution and part of our value chains, there's some clever widget whatever to help us with the mortgage application. But Portage has investment in one of the leading AI firms in financial services space. Very interesting financial help out of California.

It just opens your eyes to the possibility or what a challenger bank can be. But it be in the middle of that ecosystem is actually is incredibly exciting for us and I think we're very realistic about it. We know what we are trying to do and build our own brand but to see and think about what others are doing and how they're building markets and customer bases is really interesting.

And I sort of sat next to the dent one of the leading guys, Chinese ventures and financial services. So, this is kind of learning that Equitable never had before and I think our opportunity to really expand on our business is kind of this challenger bank through this relationship is really enhanced.

Nik Priebe

Okay. Thank you, very much.

Operator

The next question comes from Jaeme Gloyn of National Bank Financial. Jaeme, please go ahead.

Jaeme Gloyn

Yes, hi. Thanks. Just a follow-up here on the gross impaired loan question. It increased 7 million in the quarter and I think you said it was related to 14 loans. So, let's say 500 million a loan. That seems a little bit larger than your average loan that we sort of discussed maybe a couple of years ago at the Investor Day, I think it was closer to sort of like a 300.

So, can you talk about maybe what those loans, are they within the last 12 months or are they a different loan than your typical loan that you would be running into, maybe just a little more color on that?

Tim Wilson

Yes. I mean, obviously, I’m happy to answer that Jaeme. I'm not sure I have all the details at my fingertips on this call. But if I don’t answer your question now, we can regroup later. I mean, obviously since a couple of years ago our average loan size would have increased given general inflation and the trends in the housing market. I wouldn’t see any of these loans were typically outsized.

Again, they're broadly, geographically diversified and there I mean they refer to in single family loans. There are also other movements within that portfolio right in -- there is commercial properties and so forth. I wouldn’t say there was anything again particularly outstanding about these loans. They were roughly in line with the average of the portfolio.

Jaeme Gloyn

Okay. Thanks.

Operator

Thank you. There are no further questions. I will now turn the call back over to Andrew Moor.

Andrew Moor

Thanks, Joanna. To conclude, we look forward to delivering the next quarterly report which will be in 2019. So, everybody have a great holiday season and we'll talk to you then.

Thank you for listening.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that to please disconnect your line.