Canadian Western Bank (OTCPK:CBWBF) Q3 2022 Earnings Conference Call August 26, 2022 10:00 AM ET
Company Participants
Patrick Gallagher – Vice President, Strategy and Investor Relations
Chris Fowler – President and Chief Executive Officer
Matt Rudd – Chief Financial Officer
Conference Call Participants
Gabriel Dechaine – National Bank Financial
Nigel D’Souza – Veritas
Sohrab Movahedi – BMO
Meny Grauman – Scotiabank
Lemar Persaud – Cormark
Doug Young – Desjardins Capital Markets
Mike Rizvanovic – KBW
Paul Holden – CIBC
Joo Ho Kim – Credit Suisse
Operator
Good morning. My name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to CWB’s Third Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. Mr. Patrick Gallagher, you may begin your conference.
Patrick Gallagher
Thank you, Joanna. Good morning and welcome to our third quarter 2022 financial results conference call. My name is Patrick Gallagher and I am the Vice President, leading our Strategy and Investor Relations team. I would like to remind listeners and webcast participants that statements about future events made on this call are forward-looking in nature and based on certain assumptions and analysis made by management.
Actual results could differ materially from expectations due to various risks and uncertainties associated with CWB’s business. Please refer to our forward-looking statement advisory on Slide #2. The agenda for today’s call is on the third slide. Presenting to you today are Chris Fowler, our President and Chief Executive Officer and Matt Rudd, our Chief Financial Officer. Following their presentations, we will open the lines for question-and-answer session.
I will now turn the call over to Chris who will begin his discussion on Slide 4.
Chris Fowler
Thank you, Patrick and good morning. Our teams delivered very strong loan growth this quarter from clients within our risk appetite that met our strict underwriting and pricing criteria. We also delivered very strong sequential branch raise deposit growth supported by our focus on deepening customer relationships and winning new full service clients.
Our strategy remains focused on building the best full service bank for business owners in Canada and our teams made strong progress this quarter. We successfully launched our new personal and small business digital banking platforms that feature a rich user interface underpinned by enhanced series security capabilities. Our small business platform provides cash flow, predictive modeling and integration with third-party accounting platforms. Incremental features will be integrated into the platform as part of the full virtual COO launch later this year, which includes the ability to perform simulations that enable small businesses to better understand and predict the cash flow needs and financial health of their operations. These expanded capabilities enhance our client experience and support efficient and full service client growth.
We continue to build momentum in our ongoing expansion in Ontario. Success of our Mississauga banking center established the business owner clients’ value, the personalized service and specialized advice provided at CWB. We delivered 13% annual loan growth in Ontario. We expect even more momentum from the opening of our new mark on banking center this quarter. More Ontario business owners are choosing CWB for their full service needs and our enhanced digital capabilities and the target expansion of our banking center footprint there supports further geographic diversification of our business.
We are also making significant progress on our AIRB transition project to support our long-term growth and diversification aspirations with a sustainable and scalable operating model. Our parallel run activities identified enhancements to support increased precision in the measurement of credit risk and drive efficiencies in the use of our AIRB tools and processes by our teams. We have made significant progress on the development of revised AIRB tools incorporating both the enhancements and the coming new CAR 2023 capital adequacy requirements, with completion of the material portion targeted around the end of the current fiscal year. Upon completion, we will implement and operate our revised AIRB tools across the business for a sufficient period of time to support a successful resubmission of our application.
While economic forecasts anticipate continued growth of the Canadian economy over the next year, expectations of potential recessionary conditions continue to evolve. We are in a strong credit position, should a mild recession in Canada emerge over the next year. Our prudent approach to risk management underpinned by our secured lending model and enhanced capabilities delivered by your strategic execute execution position us to continue to deliver strong growth of full service clients and enhance our profitability.
I will now turn the call over to Matt who will provide a greater detail on our third quarter performance and outlook.
Matt Rudd
Thanks, Chris. Good morning, everyone. To begin on Slide 5, our branch raise deposits are up 9% from last year reflecting our franchise building strategy to expand our full service client relationships. Branch raise deposits represent 57% of our total funding consistent with the same quarter last year. On a sequential basis, our branch raise deposits increased 3%, which reflected strong growth of branch raise term deposits. Our branch raise noticing demand deposits were flat to last quarter has very strong growth from new to bank deposits was offset by a decline in the deposit balance of existing clients during the quarter. Sequentially, our broker deposit balance increased 12%. The broker deposit market is a deep liquid funding source where we raised fixed term insured deposits more favorable than usual pricing compared to the debt capital markets in the quarter. Our capital market deposits decreased by 8% from last quarter primarily driven by senior deposit note maturity.
Turning to Slide 6, our total loans are up 9% in the past year. Our focus to increase full service client relationships across our national footprint supported 12% growth in the strategically targeted general commercial portfolio. Ontario loans grew 13% over the last year, supported by our increased presence from the Mississauga banking center and now represent 24% of our total loans. 11% growth in DC reflected strong commercial mortgage and general commercial lending. Our total loans in Alberta grew 7% over the last year. This was supported by a 14% increase in the general commercial portfolio with mid single-digit growth in both commercial and retail mortgages. As Chris mentioned, our very strong loan growth this quarter has been focused on full service clients that met our risk adjusted return criteria. On a sequential basis, total loans were up 4%, with 6% growth in our strategically targeted general commercial portfolio.
Our sequential performance is shown on Slide 7. Common shareholders net income increased 9%, reflecting the impact of 5% revenue growth partially offset by a 2 basis point increase in the total provision for credit losses as a percentage of average loans. Pre-tax pre-provision income increased 10% as non-interest expenses were held flat to the previous quarter. Adjusted and diluted EPS both increased $0.06 compared to the prior quarter.
Higher net interest income contributed $0.12. Non-interest income reduced EPS by $0.01 primarily due to lower foreign exchange revenue and lower wealth management fees associated with lower assets under management due to market value declines. The provision for credit losses reduced EPS by $0.02 due to the increase we recognized this quarter in our performing loan allowance for credit losses. Other items reduced EPS by $0.03 in total primarily related to the impact of a lower effective tax rate in the prior quarter. Lower LRCN distributions increased EPS by $0.01 and that was offset by $0.01 isolated impact of the incremental shares issued under our ATM program. Common equity raised under the ATM supported incremental loan growth this quarter with an income contribution that exceeds the dilutive impact of the incremental shares.
Our performance compared to the same quarter last year as was shown on Slide 8. Our common shareholders’ net income decreased 6% and pre-tax pre-provision income decreased 4% compared to last year. Adjusted and diluted EPS decreased $0.11 and $0.10 respectively from the same quarter last year. Increased net interest income contributed $0.09. Lower non-interest income decreased EPS by $0.02 primarily due to higher net gains on security sales recognized last year.
Higher net interest expenses reduced EPS by $0.12, that’s reflected our continued investment in our people, AIRB tools and processes, digital capabilities and product offering to optimize our business deliver an unrivaled experience to our clients and accelerate full service client growth. A higher total provision for credit losses as a percentage of average loans reduced EPS by $0.04 and reflects a 13 basis point increase in the performing loan provision as we recognized a performing loan recovery last year compared to a build this year. This was partially offset by an 8 basis point decline in the impaired loan provision. The net effect of lower preferred share dividends partially offset by higher LRCN distributions increased EPS by $0.02. Other items reduced EPS by $0.03 primarily related to the isolated impact of the incremental shares issued under our ATM.
As shown on Slide 9, the 5% increase – sequential increase in total revenue reflects a 6% increase in net interest income partially offset by a 5% decline in non-interest income due to lower foreign exchange revenue and lower wealth management fees. The increase in net interest income from last quarter was driven by 4% loan growth, 3 additional interest earning days, and a 1% increase in net interest margin. Net interest income was 5% higher than the same quarter last year as 9% loan growth was partially offset by an 8 basis point decline in NIM. Non-interest income decreased 6% primarily due to higher net gains on security sales recognized last year.
Our net interest margin was 1 basis point higher than the previous quarter with the drivers shown on Slide 10. Rapid increase in market interest rates this year has driven an increase in funding costs that have outpaced the growth in loan pricing so far, with loan pricing remaining highly competitive in certain portfolios. We expect these conditions to normalize with sustained stability in funding cost. Through Bank of Canada policy interest rate increases totaled 150 basis points during the quarter and contributed 7 basis points to our net interest margin as expected. These rate changes increased floating rate loan yields, which were partially offset by the repricing of floating rate branch raise deposits. The increase in non-floating rate loan yields net of the impact of lower loan related fees contributed 13 basis points to NIM. Higher funding costs had a negative impact of 15 basis points primarily driven by higher rates on broker term and branch raise fixed term deposits. The proportion of higher cost broker deposits in our funding mix reduced NIM by 3 basis points. Our asset mix was relatively consistent with the previous quarter and did not impact our NIM.
Highlighted on Slide 11, our credit performance remained very strong. Our third quarter provision for credit losses on total loans was 16 basis points compared to 14 basis points last quarter. Our performing loan provision for credit losses was 4 basis points this quarter. We recognized an impaired loan provision of 12 basis points compared to 14 basis points in the prior quarter, which remained well below our 5-year historical average of 19 basis points. Impaired loans of $187 million were consistent with the prior quarter and represent 53 basis points of gross loans still well below pre-COVID levels. Quarterly write-offs of 4 basis points remained well below our historical average. We continue to generate timely resolutions of impaired loans and remain in a very strong credit position.
The sequential change in our CET1 ratio is shown on Slide 12. Calculated using the standardized approach at 8.9%, our CET1 ratio was consistent with last quarter. Risk weighted asset growth during the quarter was mostly offset by the combination of retained earnings growth and ATM issuances. To support strong loan growth while prudently managing our capital, we issued common shares for net proceeds of $35 million at an average share price of $26.10 under our ATM program. Despite the downward pressure on our share price, the net earnings contributed by the incremental loan growth supported by the ATM issuances this quarter more than offsets the dilutive impact of the incremental common shares driving an ongoing increase in EPS and ROE. Looking forward, we will continue to prudently manage our CET1 ratio to around 9%. Yesterday, our Board declared a common share dividend of $0.31 per share, which is consistent with the dividend declared last quarter.
Looking forward on Slide 13, as Chris mentioned, economic forecasts remain positive, but have softened over the last quarter. We now expect annual percentage loan growth in the high single-digits for fiscal 2022 as we maintain our disciplined lending approach in the current environment. We continue to expect double-digit annual growth of branch raise deposits through deepening customer relationships and winning new full service banking clients. Supported by the secured nature of our lending portfolio at conservative loan to value ratios, we remain in a strong credit position to face continued volatility and economic conditions.
For the fourth quarter of 2022, we expect a total provision for credit losses of approximately 20 basis points. We expect our quarterly net interest margin to expand sequentially in Q4 by 2 to 4 basis points reflects the benefit of rising Bank of Canada policy interest rates. But the rapid increase in market interest rates this year has driven an increase in funding costs that outpaced the growth in competitive loan pricing, which we expect to continue to dampen a portion of the benefit of the higher Bank of Canada policy rates. Further expansion of net interest margin could occur with sustained stability in funding cost and strong growth of lower costs noticed in demand branch raise deposits.
Based on our expected loan branch raise deposit growth and net interest margin assumptions, we anticipate annual revenue growth in fiscal 2022 of between 6% and 7%. Reflecting the lower revenue expectations, we have prudently reduced expenditures from previously planned levels, while continuing to focus on investing in our strategic priorities. Concurrent with the completion of a material portion of our revised AIRB tools targeted for around the end of the fiscal year, we expect to recognize approximately $13 million to $15 million of incremental non-interest expenses related to the accelerated depreciation of our legacy AIRB intangible assets. Excluding this accelerated depreciation, we expect annual growth of non-interest expenses to be in the low double-digits, targeting an annual efficiency ratio of around 51% with annual percentage growth in pre-tax pre-provision income in the low single-digits. With a prudent focus on our growth in our expenditures, we now project our fiscal 2022 adjusted EPS will remain in range of our previous expectations, but on the lower end, with the mid single-digit percentage decline from the prior year.
With that, Joanna, let’s open the lines for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] First question comes from Gabriel Dechaine at National Bank Financial. Please go ahead.
Gabriel Dechaine
Good morning. So on the margin, I just wanted to get a bit more detail on the expected increase in Q4, you mentioned Bank of Canada rate hikes, is it really just a lagged effect of the mid July hike on expenses? I got the sense that Q4 excluding that one-timer is going to be – it’s going to be similar to what we just saw this quarter. What about 2023? Is it likely that we get back into the high single-digits or is it going to be another year of double-digit expense growth? And lastly, the commentary on the front page of your press release there, you are making progress on the AIRB transition? Maybe I had a little bit more to not comment just to kind of figure out what you mean? Thanks.
Matt Rudd
Okay. Thanks, Dave. I will take your first two and then maybe Chris starts on the third. On the margin, you are right in fourth quarter, most of the margin expansion from the Bank of Canada isolated impact comes from the July hike. It really didn’t impact Q3 margin that much. We will get the full quarter benefit of that in fourth quarter. That in itself likely drives in or around 5 basis points of margin expansion. We are expecting further hikes in Q4 one would be 50 basis points in September. So I mean that will have a modest impact on net interest margin in Q4 and then we had another 25 basis points at the end of October, which really won’t impact NIM at all. So offsetting those Bank of Canada rate increases, we are expecting a bit further pressure on funding costs relative to asset yields. I mean, that will eventually catch up and turn the other way. And we are making assumptions on our branch raise deposit growth this quarter you saw it focused on term deposits. We think that growth continues. One factor we saw this quarter and we are being fairly conservative on our view in fourth quarter, we’ve on the notice in demand side in commercial deposits really strong new volume, but that was offset by a bit of churn. Some of that going into churn, some of that being deployed into client’s businesses. So, it really dampened that growth in third quarter. We expect that to continue in fourth quarter, but that could be room for some upside if we do see that abate a bit.
On expenses, so in fourth quarter, you are right like we will see something a little bit closer to third quarter, but I would expect a modest sequential increase in our expenses. It’s not unusual for us to see seasonality in our expenses. A few items tick up a bit higher in fourth quarter. We still have a big push on development costs on our new AIRB assets landing in fourth quarter. So, it does push it up a bit compared to third quarter. On 2023, bit too early to give you outlook. But I can tell you that as we are thinking about the budget, as we are charting out the next year, there are a few elements that that will give us a bit of relief that could push that expense growth a bit lower. The big push on AIRB this year, we did incur expenses related to the development, to the build and just normal course depreciation of our previous assets. We will get some relief on that going into next year. I think if you chunk out our AIRB project in terms of build, implementation and then into just running the models. The most intense activities and the most costly activities come in a build phase. Implementation you see a step down, a bit of a moderation and then in actually running the models in the business, you see that incremental expense kind of falloff for the most part. So, possible positive contribution there to lower expense growth. And then digital, we landed a couple of really big pieces this year in the retail and small business portion of those platforms. So, those will look to scale off into the next year. So a few positive things that we have us thinking pretty constructively about our level of expenses next year. And I’ll turn to Chris to talk about AIRB and start there.
Chris Fowler
Yes. Thanks, Matt and thanks for your questions, Gabe. Yes, AIRB of course, is an important strategic part of how we are thinking about the long-term growth of the bank and sort of levering that on top of the other capabilities we have put in place, including the advancements we made in digital which we see as a real strong way for us to generate more full service clients really stabilize that ability to continue to increase branch raise deposits and as we think about our overall cost of funds. So really good progress, AIRB we did a lot of work in our parallel run that showed us ways that we could be more efficient both in the manner under which the process calculates credit risk, but also the implementation of how we manage and run the models. We have also incorporated the new CAR 2023 guidelines into the model. So we will have these all launched into fiscal ‘23 and have a period of time when we run them, just to confirm them prior to resubmission. So we are very positive on the progress we have made. We have got good teams we wanted and with external help and we are looking forward to bringing those forward.
Gabriel Dechaine
Alright. Thanks for that. Have a good weekend.
Chris Fowler
Great. Thanks Gabe.
Operator
Thank you. Next question comes from Nigel D’Souza at Veritas. Please go ahead.
Nigel D’Souza
Thank you. Good morning. I wanted to just touch base on the margins again and just get a sense of the trends you are seeing on the funding side of term versus demand deposits you benefited through the pandemic or shift towards demand and notice both rates are rising, are you seeing that trend reverse and how do you think that will impact your margins over the next year?
Matt Rudd
Yes, you are right, Nigel, we did and this quarter pulled out that we did see a bit of a churn there and customers moving from favoring liquidity to favoring term and I think that makes sense. I’d say GIC rates were very attractive through the quarter. So that trend doesn’t surprise me. So, we have seen that. We have again seen some of these deposits be put to work by our clients as well. So that absolutely is a fact that we have seen occur. We expect that to continue into fourth quarter. Beyond, I am not sure this will be a persistent trend through much of 2023, but of course, we monitor it closely. Our intent is continue to grow new full service clients, target clients that are lending only today, get them over to full service get new deposit money in. So really continue to grow new to bank deposits focusing on notice and demand. Our view would be we can generate new growth that outruns what gets deployed into businesses or what’s get locked into term, but that’s definitely a factor we have been seeing.
Nigel D’Souza
Right. And to clarify even with the shift back to term, you still expect margin expansion, right. So, for example, in Q4, 2 to 4 basis points, there is some, I guess, shift towards certain higher funding cost in there or is that not the case?
Matt Rudd
That’s absolutely the case. We expect further dampening of what you see otherwise in terms of contribution from Bank of Canada policy rates that is being dampened by a bit of a shift into term.
Nigel D’Souza
Got it. And if I could shift to the credit loss picture, I just want to clarify, I am not sure if you mentioned or not, but the 20 basis points was that expected be driven primarily by provisions on performing loans?
Matt Rudd
No. We would expect majority of that to come from impaired loans, maybe another slight build in performing it, but that will depend on economic conditions when we run the models. But we are thinking most of that comes from impaired loans at this point. And that’s really just a reversion of getting a little bit closer to back to normal, 20 basis points would be right in the mid range of what we would typically target for gross impaired loans and PCL formations coming from them.
Nigel D’Souza
So, it sounds like it’s not something idiosyncratic, I mean, just getting a sense because we aren’t quite seeing a pickup and preparedness across that, is there any aspects of a portfolio? Is it more rate sensitive than if they are good for anything else you are seeing that would result in higher PCLs?
Matt Rudd
I wouldn’t expect anything that we would be seeing would be different than our peer group. We have got a very solid approach to credit, very defined market that we zero in on. We very well structured in how we do our underwriting. We don’t really see anything that we are going to match point we are looking at – we are still at a point where we are below the pre-pandemic levels of provisioning and gross impaired. So I think we are just saying that we are seeing some likelihood of return to normal, we have got on the performing side expectation that deteriorating macroeconomic conditions, it’s prudent to look at how we would assess our performing loans, but looking at our portfolio and where we sit with impaired, we are very comfortable we feel the credit quality strong, and that we will continue to manage it very closely.
Nigel D’Souza
Got it. And last question for me on this, when I look at your forward-looking indicators quarter-over-quarter, the only field I guess variable that’s been considerably [indiscernible] interest rate for 3-month treasury bill, just wondering if you could elaborate on if the macroeconomic variables that you use as inputs, is there one in particular that you think would have a more pronounced impact on your performing loan loss provisions, any variable that I think is more important [indiscernible] credit risk for your loan portfolio?
Matt Rudd
Yes, the ones that I’d call primary indicators relative to secondary, I mean, GDP obviously, when we think about our commercial portfolio, that’s the key driver of that book. And then unemployment when we think about residential mortgages as an example, that’s a key driver of that book. So I think the other piece that shifted a little bit quarter-over-quarter was GDP outlook, looking into to the next year softened a bit. So that was one of the factors that drove the slight build.
Nigel D’Souza
Okay, that’s it for me. Thank you.
Chris Fowler
Thank you, Nigel.
Operator
Thank you. Next question comes from a Sohrab Movahedi at BMO. Please go ahead.
Sohrab Movahedi
Hi, guys. Couple of questions. No particular order, but maybe we’ll stay with the NIM. You have mentioned the higher funding costs. You have mentioned the more moderate asset yields. I am just curious just how is this comparing to what would have been your expectations? Where are there surprises here that you were not anticipating in the evolution of your margins? I am not talking about just last quarter, but since the rate hikes I could start – are the funding costs drifting higher than you expected?
Matt Rudd
Yes. So what we have seen and I’d say is not unusual, I’d say the movement has been a bit unusual compared to what we would have expected. GIC rates for them to front run Bank of Canada policy interest rates, is not unusual. If you look at just bond yields through the quarter and GIC rates relative to those yields, you can see that well in advance of that 100 basis point move by Bank of Canada that rates went up pretty significantly. We find that loan pricing a bit stickier takes a bit more time for that to churn through and that generally lags the Bank of Canada policy rate increases. So that that factor was not unexpected. I’d say the upward movement the how rapid it occurred, when you look at just bond yields through the quarter just how quickly they went up early in the quarter and front run that pretty large Bank of Canada increase. I’d say that was the piece that surprised us relative to the pricing dynamics. And then the other piece when we just think you know NIM, what did we expect versus what did we deliver in third quarter. We delivered the strong commercial branch raise deposit growth that we wanted to in terms of new to bank clients. We expected some churn, but we got a bit more there than we expected.
Sohrab Movahedi
I mean, Chris, on that I guess both of you, I mean, on the competitive dynamics look if we just go into a slower but not a recessionary, which is we get into a slower economic growth environment. Do you not expect competition to even get more intense and maybe you asked the deals stay kind of depressed compared to I guess, what would be needed to provide a bit of buoyancy through margins?
Chris Fowler
Yes, obviously we will monitor that and we’ll look at the different areas of the market in which we would really chose to work through. If we think about what we have seen this year and particularly in Q3 was very strong, general commercial loan growth, which when we think about that in terms of rate and return is a very strongly performing book for us. The challenge would be in other rates – in sorry other markets where the rates are more challenging, say, the general, like the commercial mortgage market and the residential mortgage market. Those are our areas where – I think we will be very focused on ensuring we are underwriting exactly the ones that provide us the risk adjusted return that we are looking for. So being, we are going to – we pick and choose, we have got the opportunity here where we can provide a differentiated product to the client and the general commercial is one in particular that is of keen interest for us. And we are seeing great progress in that area. And it does deliver the full client to both sides of the balance sheet, which is one of our key focus areas.
Sohrab Movahedi
Chris, not to belabor the point too much, but aren’t both of those you mentioned you will underwrite your risk adjusted margins and I appreciate that, but those are both relatively low risk type products, doesn’t it basically mean then that your risk adjusted margins are going to get squeezed because of CDOs? And if that’s the case, are you suggesting that you will trade-off growth to preserve the margins or are you suggesting no, I will – we will continue to write even if it’s lower margin as long as it’s giving us the growth?
Chris Fowler
Well, we are going to manage growth appropriately as we think about how we deploy our capital and think about the best return that we can derive from it. Clearly we have got areas of this market, it’s been very price competitive and we are going to look at those ones that we know that we can deliver the appropriate returns along with the risk. And yes, we want to make sure we are prudently underwriting that we have a credit portfolio that reflects our history of strong growth and strong quality. So we are not going to undermine our yields or our quality just to grow. We are going to pick our spots and really hit the areas that we really can provide that difference to them and grow the client.
Sohrab Movahedi
Even if it’s at diluted margin?
Chris Fowler
Well, again, we always adjust with risk return based on how we are evaluating those. So we will – we are not going to just take a loan because of return, we want to deploy capital appropriately.
Sohrab Movahedi
Okay. I appreciate the additional color you provided with the AIRB parallel runs and the like. And if I look at your Slide 12 here, Matt, where you are going to give us a common equity Tier 1 kind of progression RWA growth consumed under the standardized approach about 32 basis points this quarter, just looking at this quarter, if you had been under AIRB, what would that RWA growth have looked like?
Matt Rudd
It’s a very good question, Sohrab. And I am not prepared to answer it, I’d say you saw in our disclosure that we are progressing and nearing completion of development of revised models, but not complete. So we will have to share a bit more specifics on upside once we are ready to. But I bet you have heard me say before and I can repeat here, I feel confident enough in saying a statement like this, like with, if we were in AIRB Bank, having a tool like an ATM likely would not be required. I mean, that’s why we are pursuing. AIRB is to reduce the risk weighted density of our lending, though based on the way we lend and the way we target low risk exposures, we would get credit for that in such an approach. And I think what we have been putting on the books in the last quarter we are talking high quality, low risk type clients. We are not stretching, in fact, probably going the other way and very happy. From a credit quality perspective with – what we generated this quarter, I get absolutely no credit for that under a standardized approach. So, I mean, that’s the benefit.
Sohrab Movahedi
I mean I would add on and say not only you don’t get credit for it you probably get penalized for issuing below book value. You have been doing like for a limited period of time. That’s my question. Thank you very much.
Chris Fowler
Thank you, Sohrab.
Operator
Thank you. Next question comes from Meny Grauman at Scotiabank. Please go ahead.
Meny Grauman
Hi, good morning. Chris, you outlined some of the steps that you’ll need to take in your transition to AIRB. When you describe that it sounds like it’s not realistic to expect approval and official transition until maybe later in 2023 at the earliest. I am just wondering if that’s a correct sort of assumption based on the steps you have outlined?
Chris Fowler
So, I mean, where we sit today as we are, we have the revised approach for our tools, we are going to have them implemented and we are going to run them to ensure that we’re very comfortable with their operation. We see it providing more efficiency in the process of how we manage our whole AIRB process. And it is an operating model, as you know many, it’s a way that you can operate your bank and run it in a very efficient way. And we really believe we have done a big upgrade in how we can deliver that with the revisions that we have put in place. So we will give updates as we think about our progress in that but we are not really setting a date today. We need to run them and see how they operate and provide us the kind of feedback from that operation to know that we are ready for a real application.
Meny Grauman
I guess maybe that’s another way to ask it in terms of that runtime, are you talking about a few quarters or like what kind of order of magnitude in terms of time that’s needed for that kind of process before you can actually resubmit?
Chris Fowler
Well, again, that will be dependent on the operation. We have our teams in our banking centers that are utilizing our AIRB tools being of course, they have been operating under this process for a few years. So we don’t anticipate that to be a significant change in our operating environment. What we do believe is they will improve their efficiency. But again, Meny we are going to run it and make sure that we have got, it’s working the way we expect it to work. It’s providing the outputs and outcomes that we are looking for. And so we are going to make sure that all those steps are in place that allow us to deliver that full submission that gives us all the elements that were very satisfied that lead us to approval. And for the long-term running of the bank with as an AIRB operation model based bank, that gives us all of the opportunities that that Matt just talked about with reducing RWA density and all the ability for us to just manage our business in a very much more efficient way and again leveled the playing field as we think about our larger peers. The lots of opportunities are coming, we are just going to make sure that we go forward with exactly the right processes and have the sort of that implementation structure such that we are extremely comfortable with the delivery.
Meny Grauman
Understood. And then I wanted to ask a question about cash management. In Q2, you talked about lead times, delays in lead times or long lead times transitioning clients to the cash management platform wondering what that looks like. Now, is there any change there or is that still sort of a challenge you dealing with?
Chris Fowler
I think that’s every bank would have that when they are looking at bringing a new full commercial client over. You need to create that, you can – it’s easy to book loans. But when you are actually having that switch for full cash management in a whole sort of main banking relationship, it always takes a lead time. So for us, we’ve really invested in capabilities, and you’ve seen our wins that have come from our increase in branch race deposit. So we’re still continuing to focus on that. And as we look into fiscal ‘23, we will deliver the commercial banking side of our digital platform, which provides a single sign on approach and ways that we can even further enhance the cash management offer to the clients. So we think that onboarding continues to improve, it is a key focus of us. And we are seeing that great growth in general commercial. And that general commercial growth comes with that full service banking opportunity, which of course, is both sides of their balance sheets and both sides of ours. So that’s our focus. And we’re very happy with the progress there. And it will just continue to improve in the delivery of that digital platform that’s coming in fiscal 23 will be a big part of that.
Matt Rudd
Yes, we’re pretty happy, Meny, with the new volume we saw just new to bank deposits from the commercial side of the book and in grants raised. Just to give you a sense of the volume, like the amount we put on a new deposit volume for new commercial deposit clients. It was about the same in third quarter as it was through the first half of the year. So we definitely saw the accelerate we were expecting and pretty encouraged by the new volume. And we just – we think there’s room for that to even grow further.
Meny Grauman
So, just to clarify, the delays that you were talking about in Q2, I mean, obviously, we saw the sequential long growth, but are they just not a factor going forward? And they were into factoring Q3 not a factor going forward, are they still having some sort of slowing impact on your overall loan growth?
Matt Rudd
I think it would deposit growth. But I think the point is variable, the timing of when clients ultimately decide to make this move. So we had a lot, make that call and bring their deposit business over and drive really good new growth within the quarter, but that timing will be client dependent. And for us, it’s about creating the volume of opportunities and just really getting that sales flow of new money coming in and prospects coming in, where they ultimately land will be client dependent. So you build the big pipeline, and then you work like hell to close them and get the cash in the door.
Meny Grauman
That’s great. Thank you.
Chris Fowler
Thank you, Meny.
Operator
Thank you. Next question comes from Lemar Persaud at Cormark. Please go ahead.
Lemar Persaud
Yes, thanks. I wanted to started off on the loan growth [indiscernible] sound like would it be fair to suggest that because some of the loans that were supposed to be booked in Q2 got pushed into Q3, so the sequential loan growth was a little bit elevated in Q3, and that’s kind of why you guys revised your year-over-year loan growth guidance down from the double digits to the high single digits, because if I use the same to get similar sequential loan growth, for next quarter, I get pretty comfortably into the double-digits. And so, that that kind of the right way to think about it?
Matt Rudd
So I’ll start on mechanics of Q2 to Q3, and then Chris can flush out Q4. So Lamar, what we saw is exactly what we expected to see, we had growth that was slated for Q2 and drifted into third quarter, and we closed that growth as expected. But then that elevated third quarter loan growth to the point where I would say that that would not be what we’d expect, just thinking near-term about sustainable level of growth, we just had an unusual drift that we don’t usually see happen to that magnitude and happened all at once. You heard us characterize it as unusual last quarter, and I’d stick to that characterization, we in likely boosted third quarter loan growth to the point where I’d say that wouldn’t be a sustainable run rate in the near-term. Especially not looking into Q4 with some of the pricing dynamics we see in the market right now relative to rest. But Chris, if you want to start…
Chris Fowler
Yes, I would say the – I mean, let’s be clear, Q3 was our largest organic growth in any quarter in our history. So, it was a very significant growth. So, to your point, we did have Q2 pipeline pushed into Q3. So, as you think about Q4, again, we are looking at that risk return making sure we are booking the right loans that makes sense from us from a risk perspective, but also return. We want to be zeroing in and the clients that provide the best value to the bank, both sides of our balance sheet, so we are going to pick and choose the ones that are the ones that really support us for our growth. So, we are positive on growth. We are looking at high-single digits for this year. But as we move into – we will be in Q4 talking about what 2023 will look like. We will be focused on the areas of the market that we continue to have very strong underwriting in with our teams that are very attuned to how they can structure and build that solid portfolio with the correct underwriting that allows us to have that strong credit backdrop. So, we are focused on credit. We are focused on client growth. And we are focused on that general commercial full service opportunity. So, we will continue to push forward on that.
Lemar Persaud
Thanks. That sounds great. I am sorry, were you guys saying something.
Chris Fowler
No.
Lemar Persaud
Okay. Then my next question, just wanted to go back to the financial outlook for 2022. The accelerated depreciation for the legacy AIRB intangibles, is that going to be included in adjusted EPS or will it be treated as an item of note?
Matt Rudd
Yes. We will treat that as an adjusting item. It’s sufficiently unusual in nature and non-recurring. And that for us, when we think about our operating performance, we believe it should be excluded.
Lemar Persaud
Okay. And then more broadly, can you guys talk about what last quarter versus this quarter, the reduction in your EPS growth targets?
Matt Rudd
Yes. I mean we have moved from I would say within a range to now, to the lower end of that range. And just really a couple of key drivers. A little bit lower on loan growth expectations. And the NIM we are exiting this quarter with is a little lower than what we would have expected relative to last quarter. So, those are drivers that are putting a little bit of a dampening on revenue outlook compared to what we would have expected last quarter. We are offsetting that by being really prudent in managing our expenses, but not to the full impact of it, because we still do have a couple of strategic things we are looking to land, not the least of it AIRB, but a few other important things from a strategic priorities perspective. It helped a bit. PCL, I would say, despite us expecting a bit of a step up from where we are, and really just to get back to normal. I suppose we keep thinking we are going to have this return to normal and what would seem like a likely outcome just impaired loan PCL ticking up. Haven’t really seen it yet and I would say our look at Q4 now compared to what we would have said at the end of last quarter is a bit wider in terms of impaired loan PCL. We were thinking it might be a little bit higher than that, but we are just to Chris’ point, a lot of indicators in our current portfolio that point to something beyond what we are looking at in fourth quarter now and the revised guidance. So, a few ins and outs is the answer.
Lemar Persaud
Okay. My final question, I am probably front running the 2023 outlook here, but I am going to try it anyways. So, just on the margin discussion, looking at beyond Q4 of 2022, would it be fair to suggest that based on what we know today, the lagged impact of hyper asset yields and rate hikes should drive higher sequential increases in 2023, just given that we are in the front running of higher funding costs come through in 2022, is that a fair statement or no?
Chris Fowler
Well, you are front running our outlook. But I think I can give you a bit of color without doing that. So, I would say if current curves, current bond yields, like if you saw stability in curves, stability in market interest rates, what you would normally see and what we would expect to see is that asset yields start ticking up to reflect those because they typically lag and it’s our opinion, they have lagged. The big call will be on the speed of that factor. And over what period and how quickly do you see it. How do competitive factors maybe continue to dampen that a bit, by just looking at normal pricing dynamics, that is what you would expect to occur. In the normal course, how is competition, how do bond yields move from here, there is a lot of unresolved factors that you will hear us talk a bit more about when we give you our 2023 outlook.
Lemar Persaud
Okay. Thanks. That’s it for me.
Operator
Thank you. Next question comes from Doug Young at Desjardins Capital Markets. Please go ahead.
Doug Young
Good morning. Just hopefully a few quick ones. On the demand, I noticed deposit in the branch side, thanks for the color in terms of the new volumes coming in. I am just wondering the churn side from the existing clients. Can you provide some context to that? And why, like what is this just a normal evolution of liquidity being drawn down or just hoping to get a little color on why the churn has picked up?
Matt Rudd
Yes. So, we are just looking at notice and demand and isolating that as a component of branch raised. Yes, there is the normal, sort of like what we expected to occur of bank, our clients, taking a bit of excess liquidity using it in their operations. So, that’s normal. The timing is always variable and tough to predict and will depend on individual businesses and their needs. But that occurring would not be unusual. Part of it, Doug, is clients also taking a bit more term. So, you saw strong growth in term deposits this quarter and a bit of churn out of notice and demand and into term supported that trend as well. And that’s, I would say looking at the rates, not unusual either.
Doug Young
So, it’s not like you are losing some of these clients that you have brought in more recently, like that’s not what you are seeing?
Matt Rudd
No.
Chris Fowler
No. Yes. No, it’s definitely people deploying cash into their business. And then that obviously, you see that with loan growth too. They are just expanding as they were turned to the recovery that we are in now. From COVID, we see definitely some redeployment of cash into the business and then of course, just the switch from being in the demand and notice side into term.
Doug Young
Okay. And then I think it was mentioned a few times loan pricing competition has picked up a bit in certain portfolios. Can you talk a bit about what portfolios you are seeing more price competition is?
Matt Rudd
I think it’s primarily we are seeing it in the commercial mortgage and residential mortgage portfolios. Those are the two highest competition areas. We see some of it in equipment finance too, and those would be the biggest ones.
Doug Young
And that has faded. That’s just like that’s continues on as you as you have gone into Q4, is that correct?
Matt Rudd
Well, we will evaluate it. I mean commercial mortgages are the most competitive market because everybody is participating. You have got all the banks. You have got credit unions. You have got pension funds. You have got life projects. You have got everybody in that market. So, what we do is just pick the product be the rate and the return that – and risk return that we are looking for there. But it’s definitely price competitive.
Doug Young
Okay. And then on expenses, you have clearly done a good job scaling impact, given the tougher revenue outlook. Can you provide some examples of where you are cutting back on expenses, because it’s a decent amount? And I am just wondering how sustainable that is?
Matt Rudd
Yes. So, where we haven’t I mean we have been clear, we are not going to cut for our kind of key core strategic projects. We want to keep advancing those. I would say there are other projects that well, you look and they provide revenue benefit. There is a lag period between when you are making and incurring the expense to when that revenue benefit is coming. So, you look at those and say, I mean it’ll be helpful. But if you are in an environment, and for us we want to prudently manage our expenses relative to our current growth as well. And just be really prudent about that, you can make a call on timing of some of those items. So, I would say there has been a bit of that. Other discretionary expenses, I mean you look at marketing, there is, that’s always a likely culprit, where there is elements of that, that you want to continue to build your brand. We are expanding in Ontario, big opportunity there. Want to increase our brand profile and presence in that market. So, we will make those investments. But there is always an element of that spend, that can be variable in terms of timing, can be variable in terms of whether you deploy it or not. And then you think about other discretionary costs within a corporate operation, the travel, things like that. There are elements you can do, especially with us being very comfortable working in a hybrid environment, very comfortable with our ability to get jobs done remotely, that’s given us another lever to think about expenses like that, and how to manage them. So, no big items, just really focused across our P&L and just laser focused on where we are spending our money.
Doug Young
And have you pulled that lever Matt, the most you can pull it or is there still some if need be, is there still room for you to pull that lever even further?
Matt Rudd
Yes. I would say we have not emptied the full bag of tricks. There is always things you can do and adjustments you can make if you need to. For us, we just really want to prudently manage expenses and manage them in accordance with what we are seeing on the revenue front and just in terms of current performance, as well as looking ahead. So, we will manage this very closely and adjust as needed.
Doug Young
Matt, just you might add on that. And then lastly, I think you have made some investments recently in Portage funds on the fintech side. And I think they are more in the early stages committed, not maybe invested in that. There is another financial that took some write-downs on some of their investments. That wasn’t the case, I don’t think this quarter. But I am just looking forward and wondering if there is anything unusual, we should be expecting on the non-interest income from some of those investments
Chris Fowler
Would not impact non-interest income. So, for us, we look at that as a strategic investment. It’s not one that we made to try to generate investment returns. And so our accounting for that investment has mirrored that view. We have recognized it and we will measure it to fair value each quarter. But those fair value changes would be recognized in other comprehensive income rather than non-interest income. And you are right, our actual outlay to Portage so far has been quite small.
Doug Young
Perfect. That’s all for me. Appreciate it. Thank you.
Matt Rudd
Thanks Doug.
Operator
Thank you. Next question comes from Mike Rizvanovic at KBW. Please go ahead.
Mike Rizvanovic
Thanks. Good morning. A question on the AIRB, just as a quick follow-up. So, when you make the comment that you made significant progress a quarter, is there any way you could quantify that like what does that actually mean? Have you cut the timeline by three months, by six months? I am just trying to get a better understanding of incrementally what the delta is, given what you have done during the current quarter?
Chris Fowler
Well, I would say significant, means that we are close to us having them ready to be implemented, so that’s really the story. The fact we might were accelerating the depreciation of what we had built before should tell you that our timeline on the build phase has gone better than expected.
Mike Rizvanovic
Okay. Fair enough. And then maybe for Matt, I am not sure if you have provided guidance on this in the past, but I don’t recall hearing it. But just in terms of the ATM as you use it here and your stock being below book value. So, when – is there a cutoff point where it maybe becomes negligible, or close to neutral, on using your ATM to fund a loan in terms of EPS accretion, like how does the math work? I am guessing it’s still probably a pretty decent buffer. But at what point does it become a lot less favorable in using the ATM?
Matt Rudd
Yes. So, if we just looked at spreads on new lending consistent with what we are seeing in current quarter and kind of projected outwards. Yes, you are kind of the point where you get to neutral in terms of dilutive impact of the shares compared to the profit expansion coming from the new lending. You need to get into about the mid-teens before this starts to tip into being dilutive. But I think beyond just the math equation, like if even if we can make the math work, we are still thinking about risk adjusted returns, the right loans, right borrowers, right credit quality. So, that’s the other angle we are putting on this besides just the pure kind of math on the accretion.
Mike Rizvanovic
Okay. So, fair to say he is here to stay all the way through potentially, I guess until your AIRB is well further along the process, is that fair?
Matt Rudd
I mean it’s a tool, it’s good capital flexibility. I think as we look into next year, think about adopting, it’s not quite AIRB, but we adopt new CAR guidelines, which do introduce some risk sensitivity, not the same as we would have if we could use our actual credit performance and credit quality. But that does give you pockets where you can attract lower-risk weighted densities for higher quality lending in some pockets. So, a lower loan to value ratio at origination for a commercial mortgage or residential mortgages. Like, anything that introduces risk sensitivity is generally favorable to us as we think about how we lend and who we lend to and the structures. So, I mean that’s something we are thinking about for fiscal ‘23, vis-à-vis how much we grow and potential usage of an ATM, and would it be required and at what level. So, you will hear a bit more from us on that as we present our full outlook for next year.
Mike Rizvanovic
Okay. Thank you.
Operator
Thank you. Next question comes from Paul Holden at CIBC. Please go ahead.
Paul Holden
Good morning. So, just one line of question for me and that’s just to get a better understanding of the reasons behind the revision to the loan growth guidance for this year. You mentioned competitive pricing, at least a couple of times on this call, is that the primary driver, or I would also know, less robust growth in real estate project loans and equipment finances or something particularly going on in either of those two buckets?
Chris Fowler
Obviously, there is nothing particularly going on in those two buckets. I mean we have had certainly good participation in the real estate project lending. We liked that book of business, of course, and we like equipment financing. Equipment financings are highest yielding book and real estate project loans are number two. I think as we look at real estate project loans we do, supply chain challenges are happening there with developers looking at cost of construction today and making sure that they can have a product that allows them to have the profit margins they are looking to. So, there could be some pauses occurring in that market. We will just play that by. We really focus on that Tier 1 builder that has all sorts of ways that they can get a well managed, well structured development in place. So, we will continue to manage that and monitor it. Same on the equipment finance side, I think we have seen some pockets in there where we have more supply chain challenges in others, but it’s a book that continues to grow. It’s not growing at the level that, that adds general commercials about 3%, whereas general commercials are 13%. But they – these are books that we are going to continue to focus on. We like them. We think we have great counterparties that we deal with and we will continue to work on that. But overall, from a growth for the whole year, we are just approaching our market in the – in that approach, as I said before, it’s really that risk-adjusted return approach, making sure that we are underwriting to our risk appetite that we are comfortable with the return based on the risk we are taking on and zeroing on those clients that think continue to build the bank.
Matt Rudd
Whenever we give our look on loan growth, its accompanied by the words were prudent and prudent, we think about, obviously, from a credit perspective, but also pricing relative to the risk. And so I think what we have been seeing, there is lots of availability of lending opportunities out there. But we are looking at a good volume of deals that, frankly, the spreads look a bit skinny, relative to the underlying risk, and to us that doesn’t feel prudent right now.
Paul Holden
That’s very helpful. So then, I guess the follow-up question would be based on what you have seen in the competitive cycle in the past, what do you think needs to take place to change that competitive dynamic to make those spreads more attractive?
Chris Fowler
Well, I think our – well, I think that’s a difficult question. I mean certainly competition in there, we have got players that are looking at the market differently, that potentially are taking on more risk without the return. So, I think from our perspective, we will then continue to evaluate those sections and sectors that we are quite comfortable with. And from that risk, that – starting with the risks, making sure that there is areas that we are comfortable, we can really manage the way that we are growing and have a very sound approach to and to use the word Matt used like a very prudent approach to that risk we are taking on. And we want to make sure that the return is there. So, we can’t dictate what other people choose to accept further return, but we can certainly dictate what we choose to accept.
Paul Holden
Okay. Got it. I will leave it there in the interest of time. Thank you.
Chris Fowler
Okay. Thank you, Paul.
Operator
Thank you. The last question comes from Joo Ho Kim at Credit Suisse. Please go ahead.
Joo Ho Kim
Hi. Good morning and thanks for taking my question. Just a couple of quick ones here. On gross impaired loans, we saw some increased real estate project loans. And I wanted to ask if you could comment on any significant formations there this quarter. And also wondering if this is a segment you will be concerned about from credit perspective, just given some of the headlines for slowdown in the residential construction sector?
Chris Fowler
So, that portfolio, we have always had very strong success, and we do focus on our Tier 1 clients. As we look at the book, we often have credit that can go into an impairment, but ultimately, then it comes back to how does that get resolved. And our history would show that gross impaired loans don’t mean higher credit losses necessarily. So, we will continue to focus on that from the outset, having a counterparty that we are really comfortable with. And then as we evaluate projects, we are choosing to participate on the financing for that we validated depth of market on top of the ability of that developers actually finish it. Where we sit today, we haven’t seen any significant recessions on projects as they have come to completion. So, we have got no projects today that have a challenge on like, both on the completing the building or completing sales at the termination of when it’s ready for occupancy. So, we still remain very comfortable with that portfolio and feel we have got a strong, specialized team that is working for the very strong risk management of that book. So, we remain very comfortable with our project lending book.
Matt Rudd
I would only point out on real estate project loans if you are looking at the sequential increase, I mean we are working off of a pretty low base relative to where it normally is. So, I think that’s just reversion back to something more closer to normal. Whereas, I would say, just looking at last quarter and the number, I mean that’s quite a low number for that book.
Joo Ho Kim
Okay. Thanks for that. And just last one for me, just on loan growth and specifically equipment financing. We are seeing some nice sequential growth in that bucket this quarter. So, wondering if you could comment on what you are seeing in terms of the supply chain side, whether there are the constraints that were up there or easing up and what you would expect in terms of the growth ahead?
Chris Fowler
Well, again, it is a portfolio we are very focused on. We have done a lot of work internally to sort of integrate how we deliver equipment finance. Again, that portfolio has seen supply chain challenges in it. And with that, there has been competition too. So, our goal is to make sure that we are focusing again in the areas that we are very comfortable from a risk perspective. And as we look forward, we do anticipate it to be a good participant in our growth of the bank, and we are putting the resources into really support that.
Joo Ho Kim
Thank you.
Operator
Thank you. There are no further questions. You may proceed.
Chris Fowler
Thank you, Joanne. Execution of our strategic priorities continues to strengthen our organization. Our demonstrated history of prudent risk management positions as well to navigate through recessionary conditions should they arise. The progress we have made to transform our business provides a strong foundation to accelerate growth of full service client relationships and enhance our profitability. Thank you all very much for your continued interest in Canadian Western Bank. We will be reporting our fourth quarter and our fiscal 2022 financial results on December 2nd, and we are looking forward to hosting Investor Day in Toronto on December 7th. Additional details about that event will be released at a later date.
With that, we wish you all a great day. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference call. We thank you for participating. And ask that you please disconnect your lines.
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