Versabank (VBNK) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the VersaBank third quarter results conference call.

I would now like to turn the meeting over to David Taylor.

Please go ahead, Mr. Taylor.

Thank you, and good morning, ladies and gentlemen.

Welcome to VersaBank's 2019 Third Quarter Financial Results.

Also with me today, I have Shawn Clarke, who's our CFO.

Before we begin, please note that the conference call slides, quarterly results, news releases and supplemental financial information are all available on VersaBank's website.

All righty.

I'd like to draw your attention to, I think it's Slide 2, which alerts you to the cautionary remarks that are customary for these type of presentations.

Looking at Slide 4, we've summarized some of the key figures in our results.

You'll note that this quarter, we produced a $5 million net income figure, $0.21 per share.

And on a year-to-date basis, $14.8 million, which was a 15% year-over-year increase.

Also, that translated through to $0.62 a share on a year-to-date basis, a 17% year-over-year increase.

And our CET1 capital, which of course is a key regulatory statistic, improved to a very high 12.71%.

Other statistics that I think are quite noteworthy is our net interest margin improved to 3% on a year-to-date basis, and on a quarterly basis, was even higher than that.

Our efficiency ratio for the quarter I think was about 48.7% or so.

So getting to be a fairly good ratio, much better than most financial institutions in our industry, and on a year-to-date basis was about 50%.

EPS, again, was up 17% year-over-year.

So turning to Slide 5, which just gives you some of the financial highlights.

Again, it's noteworthy that revenues increased fairly significantly, 10.4% quarter-over-quarter, 6.4% on a year-to-date basis.

Also, we're very proud of this figure, that our noninterest expense on a year-to-date basis is only up about 1%, which, considering the significant growth in earnings, we think is quite remarkable.

Also, in the -- we have spent a lot of time and effort and money on developing new products and enhancing our existing products and been able to do all this without more than a marginal increase in noninterest expenses.

We're proud to do that.

Again, net income, a nice increase.

Core cash earnings was a substantial increase also on a year-to-date basis, getting to $20.4 million.

Core cash with this bank is quite important, in that we don't pay cash taxes as we still have loss-carryforwards to use up.

And that means that the core cash earnings go directly into our CET1 capital, which is one of the reasons why that capital ratio is growing so quickly and producing a greater and greater lending capacity for our bank.

So turning to the next slide.

This is what was I alluding to with respect to capital.

This slide shows the components of the increase in our CET1 capital.

And so looking at the first bar -- or the second bar, 38 basis points can be attributed to internal capital generation, and that's, of course, directly related to our increase in core cash earnings because that's what drives that component.

And secondly, I'm sure those that follow us will probably note that there's continuing to be a reconfiguration in the proportion of e-banking assets versus commercial banking assets.

And the e-banking assets, the e-commerce assets, the small loans and leases that we gather electronically, are risk-weighted somewhat less than our commercial loans.

So as we put more and more emphasis on the e side of our business, we get a little bit of a pick up on the capital side, and that they're not risk-weighted quite as high as the commercial loans.

So that worked out this quarter to 16 basis points.

So in total, that meant that our CET1 in the quarter increased from a very high 12.17% to an even higher 12.71%.

Which, of course, is in line with our strategy over the decades to run our bank in a -- with a little less of a risk appetite than the industry, and having good strong capital ratios is part and parcel for that, of course.

So switching over to the next slide, lending assets.

So we had a fair amount of growth in our e portfolio, about 8% year-to-date growth.

With the decline in the commercial banking portfolio, which is, of course, in line as I was saying earlier, with our plan to grow the e-bank side of our business and keep the commercial lending business at sort of a static position.

Now, after saying that, I mean, on a year-to-date basis, those that look at the figures carefully will note there's about a 15% decline in the commercial banking total portfolio.

And most of that decline is attributable to what we call noncore e-bank commercial banking assets.

So noncore are sort of the legacy portfolio that our bank has from the past, when we were more focused on commercial banking, particularly in term commercial loans and in public sector lending.

And what we have done is we've let this part of the portfolio run off.

And it's also had a kind of positive impact in that a lot of these assets are priced fairly thin with respect to NIM, net interest margin.

Public sector portfolio is very thin.

And we chose, some time ago, to change our tactics in lending and emphasize e-commerce, which in fact has much, much greater margins, and let the legacy public sector portfolio and the commercial term business.

Some of the commercial term business is priced with very thin margins also.

It's a result of the larger banks having the ability to risk weight their assets in accordance with their own models, utilizing the advanced IRB approach versus our small bank that uses a standardized approach.

So where the intrinsic risk in these commercial mortgages might be very low, under the standardized approach, we are risk-weighted as though they were construction loans, where we have a high degree of expertise and earn a much wider net interest margin.

So as time progresses, you'll see us emphasizing the commercial construction mortgages where we have -- that's our sweet spot, our expertise lies and we get -- we are paid for the additional risk and the time and effort that's required to put a construction loan together.

And we'll let the other side of the commercial portfolio continue to run off.

On the lower left-hand corner of that slide, it's a nice shot.

For those of you that have got the slide, you can always go back and have a look later.

You got that nice trend of NIM, in this quarter it was 3.12%.

Which I think from a lending bank perspective is a record, it's very high net interest margin.

And it's particularly noteworthy when you consider that we get very little back in terms of provisions for losses.

So I'm turning to the next slide, which is the risk review.

And picking up from what I was just saying earlier, on this slide, it points out a strength of our bank, a strength that we've been able to boast about for decades now.

And that's that we run a very, very clean lending book.

And in accordance with that, our provisions for credit losses tend to be a lot less than the industry, maybe half, maybe a quarter, maybe a third at times, but much, much less.

So we are in that very happy position where we earn extraordinary wide net interest margins and then give very little back in terms of provisions for credit losses.

I think on a year-to-date basis, we're actually in a recapture -- recovery, so we're negative on provisions for credit losses.

Those that have followed us for years will know that some years we're up a few basis points, some years we're down a few basis points, but always, we lead the industry in provisions for losses.

So turning to the next slide.

Let's see what we've got here.

Now this is a bit of an anomaly.

I'm going to talk about our gross impaired loans.

We have a fairly high percentage from our perception on gross impaired loans.

It's 1.58% at the end of the quarter.

And that's mainly attributable to 1 large loan that we've had in the gross impaired loan category for a quarter or 2. I think that during this quarter, we'll be able to resolve that, and hopefully, you'll see that gross impaired loan percentage drop back to its traditional level, which is usually a few basis points.

On the graph that I'm looking at, it shows the quarter or 2 before, it's 4 basis points, which is about normal for us.

But again, we've had an anomalous situation with a well-secured loan that went into arrears.

And I'm hopeful that this quarter we'll have it resolved and we'll post the normal gross impaired loan percentage at the end of the fiscal year.

Turning to the next slide.

This slide shows the -- what I was talking about, the percentage of commercial banking assets versus e-commerce.

And it's starting to move to the percentage that I was looking for earlier, when we announced our e-commerce business about 3 or 4 years ago.

I was hoping that we could attribute about 66% of our lending portfolio to e-commerce, and the remainder being in commercial banking.

And in the commercial banking area, most of that being in our sweet spot, being construction lending.

So right now, we're at a 60/40 split.

So we're moving nicely towards that.

Also on this slide, we have shown what our geographic distribution for loans are.

And as it has been historically, a large percentage of our loans are located in Ontario.

As I think most of you know, our head office is here in London, Ontario.

And our commercial banking people are located here, and for the most part, do their business in Ontario.

Once in a while, they see opportunities throughout Canada and make commercial loans.

With the e-commerce, we're all across Canada, where our partners operate in every industry and every geographic region.

And that gives us nice diversity, but with the population being very high in Ontario vis-à-vis the other provinces, we still tend to do a lot of that business in Ontario also.

So turning to the next slide, it's called volume growth.

And the assets -- our lending assets on an average basis have continued to grow, there's a bit of a growth between Q2 to Q3.

We averaged $1.616 billion in loans, and in Q3 we were up to $1.621 billion.

So a little bit of growth, not as much as I'd like.

I'd like to see the e-commerce portfolio growing even more rapidly.

And so we've devoted a lot of time and energy into enhancing that program, coming out with new products and enhancements to our processes and our systems and our services, so that our clients will choose us as opposed to others.

Mind you, we don't mind sharing some of this business with others.

That's not a business we want to completely dominate, but we like to maintain our market share and see it increasing a little more rapidly than it has been in the past.

So turning into the next slide, which is our racier side of the business.

This is called VersaVault.

And again, for those that follow us will know that true to our mission of providing innovative financial solutions to our clients in selected niche markets, we turned our software expertise to another traditional area of banking, and that being safety deposit boxes and created the world's first digital safety deposit box that we named VersaVault.

And when we announced this, it created quite a stir.

I saw myself on YouTube or facsimiles of me on YouTube, speaking different languages and talking about this.

It was quite interesting.

So we received a tremendous amount of interest from the cryptocurrency industry, particularly the cryptocurrency exchanges, who of course have been subject to terrible hacking attacks, and in cases, lost millions and millions of their customers' money, so crypto money, and [well, I don't we lost good money yet], but they lost crypto money.

So quite rightly, they've showed a great interest in our product.

And in the quarter, we press released that we had licensed this technology to Chairmans.

And Chairmans operates in Europe and in the U.K. and have been able to talk to most of the big players in this industry.

So I'm thinking that in the near future, we'll probably be in a position to start -- in conjunction with Chairmans, press releasing those new customers that Chairmans has acquired by virtue of having access to our, what we think, state-of-the-art VersaVault technology.

There's also something else that I'm contemplating with this technology, and that's the traditional safety deposit box-type business.

And this is what we originally contemplated before we press released it and were overwhelmed with enthusiasm from the crypto industry.

And this is the storage of highly sensitive documents that large corporations have, military departments of governments have, trade secrets, things that you really, really don't want getting out into somebody else's hands.

So we've had a fair amount of discussion on this topic with that industry, with those folks that have this need to keep certain digital information away from prying eyes and hands, and look forward to us moving into this in a bigger way.

In the future, you may see press releases coming out fairly soon on that topic.

We think it's a wonderful technology.

It's certainly appropriate for the times, and regrettably so, appropriate for the times.

Unfortunately, the digital age that we live in now and the global village we live in, not only can we have friends digitally talking to us and interacting with us and visiting with us on Facebook and such, but we also can have scallywags entering our living room, or our safe places and trying to help themselves to our assets.

So we think it's certainly a technology that's apropos for the times, and we're happy we're able to bring it to the market so rapidly.

And excited about what it could mean for the bank in terms of revenue and expansion and such.

So with that, I'm just going to turn to the slide I usually put up, and it's a correlation analysis.

And as those that follow banks and financial industry will know, there's a high correlation between the cash return on common equity -- core cash return on common equity versus book value that the banks and other FIs trade for.

And every so often, we put up this correlation analysis so much.

I don't have the r-squared on it, this one, but it's probably in order of 80.8 or something like that.

It's a very high correlation.

But there is an outlier, and my goodness, guess who it is?

It's VersaBank.

And we're not outlying on the high side, which we should be because of all these fantastic new things that we're doing, i.e., VersaVault and the other technologies we're developing.

We're an outlier on the low side.

So as our core cash return on common equity continues to increase, I think it was around 12.3% business this quarter, so we're nicely moving in the right direction.

Our stock has not responded at all.

In fact, if anything, it's probably declined a little.

So it shows us as an outlier from the trend line, and I like to show it to sort of provide those who are interested that perhaps it's a strong bank.

It's an opportunity to buy the stock that's underpriced.

So that's on our website.

You can have a look at that.

So finally, I'd like to thank you all for joining in.

It's early in the morning for a good portion of Canada and the United States.

We'd spoke to the lady that's arranged this call, she's in Colorado, so it's quite early.

Thank you very much for participating, look forward to your questions.

(Operator Instructions) We'll take our first question.

It's Steve Boland from INFOR.

I know it says one question and a follow-up, but maybe I'll just have 2 or 3, A, B and C. So just on commercial loan, last quarter you talked about growth coming in the second half of '19.

There was a decline in this quarter.

I know you've got 2, sort of, buckets in that.

So is the legacy run off, is that a point where it will stabilize and you would expect growth to come back in '19?

Or something happened, like I would say in -- since the last conference call?

Well, Steve, that's a great question.

I sort of anticipated that, considering I was expecting the component of our commercial loans being construction lending, that being commercial, and residential construction lending to be positive quarter-over-quarter.

In fact, it was down about 5%.

And that's because the -- a lot of construction loans repaid even faster than we were expecting.

And as you know, we do large construction loans and when we get earlier repayments, it takes a bite out of the balances.

We have been successful in booking a lot of new loans, but they take a while to draw up.

So what happened this quarter is the construction book declined by 5%.

The rest of the decline was attributable to the noncore lending assets.

So the majority is the noncore lending assets.

Now I see that to continue to decline, and there's sort of no reason for us to keep those type of assets on the books any longer.

Their net interest margin is a lot less, and doesn't add any value and the risk weight is usually very high.

So you'll see the construction book -- if you look in our MD&A, there's a nice note that lays this all out.

You can see the construction book will probably grow quarter-over-quarter a little bit and stabilize.

We are exercising an increased caution in this area of lending too, in that we believe that some of the major centers in Toronto, some are already showing a decline, are getting overly risky for construction lenders.

It's, from my perception, having been in the industry for more than 4 decades, gone through a number of these type of cycles, it's all too familiar.

I see covenants being reduced, I see loan-to-value ratios increasing, and I see margins the banks are able to earn being less.

And I see non sort of core lenders leaping in and making loans that we wouldn't make.

So this all bodes badly for a construction lender.

So we're being choosier than average to stay with our existing clients, people we've known and brokers that we've been dealing with for a long time.

But with respect to construction lending, you might see a little increase in that portfolio, declined quarter-over-quarter by 5%, but you'll see the rest of the portfolio continue to run off, and I was not looking to replace it.

Not that we are worried about the risk in the portfolio, we're not at all worried about the risk.

We think commercial term loans, for the most part, are a risk that sits well within our risk appetite.

And public sector lending, of course, very low risk.

It's just the margins are so low that we'd be better to use our capital in the e-commerce business where there's a lot of potential for growth.

We can add some value with our systems, our products.

The risk weighting is 75% for the most part because they're either a small business or consumer.

And then with our holdbacks, which average around 10%, we're into a net risk of 65%.

So there, it's a much more profitable business for us, but we do like commercial lending and we'll service our clients and we'll service our brokers.

We'll just be a little more choosy, mainly in the major centers.

Okay.

That's a good update.

And then maybe just following up on your comments on the e-commerce portfolio that you've developed some new products, some new systems.

Is it a period now that you're just waiting for your clients to take up some of those new things that you've just implemented?

And when -- what is the delay or just -- can you just give a little more detail on that?

Well, it is attributable mainly to the time it takes to put through a new product through our system.

It is developed, it is written up in a briefing note, it goes to our risk oversight committee for an in-depth review.

We usually give our regulator a heads up, with -- we have already done that with respect to one product, so they can get their minds around what we have in mind.

And then we -- when we've got the green light from everybody, then we launch.

So we're in that game now.

We're late in that game with one particular product that we think is another first for the industry.

It's another one of -- people ask where these ideas come from, I say, well, it's our mission.

We're supposed to come up with innovative solutions.

And so it's a first and it's a big deal, but we have a process we go through.

I've got our -- also in the audience here, I have our Chief Risk Officer, he's nodding approval with me on that process.

So that's it, Steve.

Exciting stuff, but does take a little bit of time to get through the machine before we're able to bring it to market.

I'm hoping in the next, say, 30 days, month, that that process will be finished.

So by -- in this quarter, one of those products will be out in the marketplace.

And right now, it has the potential to really increase the growth in the receivable program.

Okay.

And just -- I'll sneak one more in.

Just on VersaVault, I know -- I believe part of the revenue model is a standard license and then you get a fee, another fee on the assets that Chairman has under management I guess.

So one, is that process started where they have started to put assets through the service?

And when would you start to see some revenue coming in from that line of business?

Well, the licensing agreement is just that, a licensing agreement.

And it isn't dependent on the assets that Chairmans would be safeguarding with the technology.

But I would expect that we'll be in a position to start press releasing the new customers of Chairmans.

So it'll be a joint press release with Chairmans, probably after Labor Day, somewhere around there.

Again, the technology is great.

The enthusiasm to use the technology is tremendous.

However, even in Europe and U.K. where Chairmans operate, there's still a rigorous regulatory environment to go through.

And the paperwork, the sign-ups, the compliancy AML, that's all -- it all takes time, and we are blazing a new trail here -- or Chairmans is, with our technology, is blazing the trail.

So it does take us some time, but we are going to keep the market up-to-date with the uptake of this technology by way of joint press releases, and I'm expecting after Labor Day, we'll have one of those out.

Very good That was A, B and C, but that's okay.

Is there anybody else in the queue?

Yes.

(Operator Instructions) And we'll take our next question.

Hi David, hi Shawn.

Peter Leacock here from CIBC Wood Gundy.

Just wondering if you could comment on your dividend policy, if your capital is building up a little bit?

Is it likely that the dividend may see an increase over the next 12 months or so?

Well, Peter, good question.

You could see it creeping up a bit further.

I could see there's a bit of a wind at our back for further increases in the dividend.

You're right, we are building capital quite rapidly.

But as I was saying to Steve earlier, we're very close to launching a new product that -- it's a very profitable product and it will soak up some capital.

So keeping that in mind, we do have on the sort of radar screen the idea of a few more modest increases in the dividend.

But also with the new product, we may be burning up some of our excess capital fairly quickly.

(Operator Instructions) All right, and there are no further questions at this time.

I would like to turn the call back over to our presenters for any additional or closing remarks.

Well, thank you very much for those few but very good questions.

And again, it's a pleasure to address our shareholders and those others that are interested in our bank.

Stay tuned.

We think we have some exciting news coming in the not-too-distant future, as I was alluding to.

We see it our mission is to come up with new ideas that can be quickly brought to market to make money.

Our folks in the IT department are full of ideas, and some of them we think are pretty sexy, but it's a long time to see them turn into money.

So yes, you tend to see us kind of work on things that we can bring to market quickly and increase our earnings.

But even saying that, obviously with the VersaVault, with all the regulatory approvals and -- it might be that it took us about half the time to develop the software than it does to go through all the regulatory requirements to bring it to market.

And even this other product I'm referring to in the e-commerce area, just developing the software, the techniques, we're fairly -- we can do that fairly briskly.

But bringing it through the rest of a bank's -- our approval process, takes some time, but we're not worried about that.

We still think that there's a tremendous opportunity for an e-commerce-type bank in this market; much, much more than there used to be when I came up with the idea in '93 and there was no Internet, we were using telephone modems.

I think the opportunities now are everywhere.

And our thing is just to sort of pick and choose which ones can turn into earnings per share quickly.

So stay tuned.

Hopefully, we'll have some exciting news out in the not-too-distant future.

Thank you.

And that does conclude today's presentation.

Thank you for your participation, you may now disconnect.