Versabank (VBNK) 2020 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the VersaBank 2020 First Quarter Results Conference Call.

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

Please go ahead, Mr. Taylor.

Well, thank you, Paul, and good morning, ladies and gentlemen.

Welcome to VersaBank's 2020 first quarter financial results.

We're coming to you from the Winter Wonderland of London, Ontario.

I have with me today, Shawn Clarke, who's our CFO; and Aly Lalani, who's our Treasurer, who are standing by, if you have any detailed questions you'd like to ask.

Before we begin, please note that the conference call slides, quarterly results, news releases and supplemental financial information are available on our Investor Relations page of our website, versabank.com.

And they're also available on SEDAR.

I would like to remind you, our listeners that the statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by management.

Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses.

Please refer to our forward-looking statement advisory, which is on Slide 2.

So moving over to the presentation.

I'm on Slide 3, hopefully, you've looked at Slide 2, where I'll talk about the agenda.

So first, what I thought I would do for those of you that are new to the VersaBank, I would review our model and then get into the Q1 results, and then we move on to what we have in mind for the future.

So moving to Slide 4. This slide shows graphically the technology model that we have created.

And not to go over it in detail, but just to highlight this thought, we're using existing distribution channel to distribute our banking products.

We've created and maintained state-of-the-art custom-banking software that we hope provides us with financial independence from the other banks and other participants in the industry, and we have what we think is the modest risk appetite.

And looking at the triangle on the far right, you'll note that we have 92 employees.

And just to give you an example of the type of leverage that we use in our company and how our model is set up.

Of the 92 employees, about 9 of those would be of direct interface with our partners.

So we have 9 relationship people on staff and the rest are basically support staff.

The largest department in that support staff here would be our IT staff, then we have finance and accounting and other administrative functions.

Gives rise to 30 origination partners that the relationship managers look after 26,000 depositors, 156,000 borrowers.

And this quarter, we closed with about $1.85 billion in assets.

Turning to Slide 5. This graphically shows you how our deposits are raised.

And they're raised through a partnership with about 120-or-so other corporate entity that we call ourselves a B2B business.

We've got some of the logos on this slide that would show the deposit brokers that send us deposits each day.

And we've also got some of the logos that the larger accounting firms who we receive deposits from, from their insolvency practice.

Flipping to Slide 6, there she goes.

This is the sort of the opposite side of our business.

This is where we distribute our lending assets, and we have about 30 partners that we work with on that front, and that's all across Canada, too.

For the most part, that -- those partnerships are composed of point-of-sale finance companies.

And so what we're able to do is indirectly finance everything from hot water heaters to hot tubs and motorcycles all throughout Canada where the financing occurs at point-of-sale.

We also have partners that provide us with commercial mortgages.

Now flipping to Slide 7. Slide 7 is sort of a graphic demonstration of our model.

And I used last year's figures to illustrate how the bank's model works.

Last year, we would have collected about $88 million in interest income, and we would have paid about $34 million of that on interest expense, leaving us with $54 million or about a 3% return on our assets.

1.4% of that went to cover our fixed costs, that would be $26 million or so.

And the rest was left over, we call, core cash earnings of about $28 million.

Just looking through presentation here.

Slide 8 just gives you a visual of the type of real estate projects we often finance, mostly high-rise multifamily, but we do some commercial and we do some land development.

Now the next slide, Slide 9, a visual on some of the items that I mentioned that we financed through our point-of-sale finance people.

Those who are thinking about motorcycles, as I was this weekend, can forget it.

It looks like another month before the motorbike comes out.

The next slide is Slide 10, and that shows that we have been reducing our reliance on personal deposits.

In the personal deposit market, as I think most of you know, they're on the phone, is heated up, and it's quite a competitive market.

And some FIs are paying extraordinary high interest rates on their fixed and their daily interest savings accounts, in some cases, 1% higher than we're paying.

So we created another channel for deposits to take our reliance of that personal market that does heat up from time to time.

The other market we created is, we call it, commercial funding, and Slide 11 illustrates the progress we've made in raising deposits in this channel.

This channel is the channel where we add some value to our depositor with our software.

We give our depositors a software solution that hopefully makes their lives easier, makes it easier to deal with our bank.

So they're not decision factors and just interest rates, it's something else, its convenience.

We've done fairly well on this front, and it's served to keep our cost of funds at a competitive level.

Next slide is Slide 12.

This just gives you a sort of a pie chart, which shows the mix of our assets -- our lending assets that is.

So we hit the $1.1 billion mark, that was quite a number for us.

It's quite an achievement for us to crack through the $1 billion in our e-commerce business.

This quarter, we went over the $1.1 billion, which now composes 63% of our lending assets.

And as shown on the previous slides, these loans and lease receivables that we obtained from the point-of-sale finance partners are scattered all throughout Canada.

There's roughly in proportion to the population of Canada.

With the commercial banking, commercial banking, for the most part of those high-rise multifamily projects, and that now represents 37% of lending assets and the $605 million.

That portfolio, we've been letting run down, and that it was also composed of, what we call, non-core assets that were priced quite some time ago, and fairly thin -- had fairly thin spreads, fairly thin margins.

So we've been letting them run off and replacing them with higher margin, mainly construction loans and the term loans.

Looking at Slide 13, that just shows you a nice chart of the increase in the portfolio size of the e-commerce portfolio.

I'd love to see that.

I'm looking for a lot more growth in that area.

That's a business that we think is ideally suited to our bank.

We're, of course, adept at providing the software solutions.

And we think that the way the world is unfolding, convenience in banking is a deciding factor over interest rates are -- well, to a certain degree, over interest rates.

I think, we think consumers and businesses will up for the convenient bank over the cheap bank within a certainty -- a certain limits on interest rates, of course.

This slide, Slide 14, you're starting to see what all this wonderful digital banking technology applied to a banking industry has been able to do.

These are -- these, again, stood very good numbers.

You notice that our net interest margin has been hovering about 3%, a slight 4 basis point dip this quarter.

And next quarter, it could be up 4, down 4. It moves around depending how the portfolio mix changes slightly.

But those are big net interest margin figures in comparison to what our colleagues in the banking industry are able to earn.

And the net interest income, of course, it was $14 million.

If you annualize that, it's a little more than we would have achieved in 2019.

We're hoping for bigger and better things with that, of course, with all the various projects.

So I'm glad to start you on the future side, but looking good.

This slide, I'll cover kind of quickly.

When I say we have a modest risk appetite, you might say, what does that mean?

Well, what it means is that our portfolio generates provisions for losses that would be call negligible as opposed to the industry, which is running around the last year around 35 basis points.

This year, we're just starting to see the results of the other banks, some are up, some are down.

But as you can see, there's no comparison to the quality of our portfolio versus the other banks.

And how does this all sort of work for us?

Well, it means our economies of scale are kicking in, and the cost to earn $1 of revenue is decreasing.

The next slide, 17.

A nice slide, and I call it technology advantage.

It just shows that when you're able to leverage your software and put up more and more business without increasing your fixed cost, it goes straight to the bottom line to support cash earnings.

Now we're getting into the slides that were -- sorry, say where the rubber meets the road.

Over the past 5 years, we've turned a 40% compounded average growth rate of core cash earnings.

We're still on track to do that again -- well, maybe not quite 40% this upcoming year, but quite a nice growth trajectory.

Turning to Slide 19, and I apologize for this one.

It's a little busy.

And next quarters, we'll put it to half year mark.

So it's not so much of charts.

But you get the picture.

Our earnings per share has gone up by about 5x in the last 5 years from $0.07 up to around about $0.35 in the last few quarters.

That's fantastic.

And recently, I talked about core cash earnings per share.

It kind of levels the playing field, different FIs report in different ways.

Some of the adjusted earnings of the net income.

What we'd like to do is take right to the bottom line.

This is how much cash the bank retained after its provision for cash taxes.

And, of course, we have very little in terms of provision for cash taxes and that we have tax losses -- tax loss carryforwards that we're using up.

So a wonderful trend that we hear that VersaBank are proud of, but we are a little bit on the green banker side and are looking for much more.

All right.

Looking to Slide 20.

That just illustrates that with respect to leverageable capital, we have loads and loads of capacity.

We're almost running at 3x, what most of the industry is.

That means to you, as investors or potential investors, that certain markets, we could put on perhaps $2 billion worth of assets without diluting our shareholders' ID just issuing more shares.

That's a tremendous amount of capacity that we're planning to use with some of the new projects that I'm about to start.

All right.

So this is the fun stuff.

We're into what we've been working on.

And some of these, of course, I mentioned in the quarterly, that hopefully, you had a chance to read.

So I'll talk about the ones that aren't -- the one that is not highlighted because I think that's probably what we should end on.

So first, I talked about raising U.S. dollar deposits.

Well, this is a breakthrough in the small FI industry.

And the CDIC has announced that it will ensure U.S. dollar deposits as of April 30 this year.

So up until April 30, I believe, U.S. dollar deposits have really been an exclusive area for the large banks, and that Canadians are saving up their U.S. dollars for perhaps a trip to Florida that I might be looking out the window today.

I've likely been storing those U.S. dollar deposits with large Canadian banks, and that these small banks would not have had CDIC deposit insurance on them.

But as of April 30, good Canadians can store their U.S. dollars with us or with any of the other small FIs, but system software are able to accept U.S. dollars.

And we're looking forward to that because it's a brand-new channel for us, to take on U.S. dollars.

We have the systems set up, and we're receiving U.S. dollars.

As you know, our deposits flow through our partners.

So hopefully, our partners are able to accept.

I'm sure some will be by that time.

And we look forward to receiving your savings, and saving them safely and securely in our bank.

And I'm sure you'll be happy to know that CDIC is providing their usual deposit insurance on it as well.

So that's an exciting one for us.

And as I said in our quarterly, we have opportunities now and then to provide U.S. dollar loans, and there's nothing like having U.S. dollar deposits as a natural economic hedge.

The other thing CDIC has said they'd do in their press release and on their website is ensure longer-term deposits.

And this is really good news for us, too.

And up until April 30, it's always been 5-year GICs, 5-year deposit.

And we often have opportunities to make much longer-term loans.

In fact, some are quite lucrative ones, particularly, stay in the hot water and heater industry.

They're usually leased out for 10 years.

And we have a bit of a struggle without using derivatives going out 10 years.

We don't particularly like derivatives.

So now there's the opportunity to raise longer-term deposits and a match longer-term assets that have usually a little better yields on them.

Getting on to the prepaid cards and secured cards.

I've talked about that.

We have a partner we've lined up.

We are approving principle with MasterCard, and our guys have worked feverishly on bringing that product to market through one of our partners.

So hopefully, next quarter or soon after, we'll have some good news that we have a card out there for good Canadians looking to deal through our partners.

We are on a hunt for a suitable acquisitions.

There's quite a few we've had a look at.

We've got plenty of capital to buy complementary corporations or other financial institutions that would fit our model.

Up until now, they've been priced a little high, sort of the downside of a highly liquid feverish market.

Its price expectations seem to be going up there.

But we're still on the hunt.

And hopefully, we'll find some complementary ones that we can tuck-in to our bank and grow more rapidly than we have been organically.

Although, the organic side might pick up, too, with the highlighted one.

And DRT Cyber.

Well, as you folks know that have been listening for a while, we decided to sort of squirrel away our school software development that we have been working on, in some cases, 3 years to enhance our bank, particularly in the area of cybersecurity.

As most of you know, we came out with -- I think it's the first digital safety deposit box to replace the traditional field boxes that banks have in the basement.

DRT Cyber has that product for our bank and for other banks that wish to use it, might use it.

And it seem to be a whole lot of interest here in Canada.

But we have to provide that technology to our partner in Europe that has been using it to a certain degree.

Other areas that we work on for our bank is cybersecurity with respective penetration testing and surveillance of our systems to ensure that no one is probing, no one is getting in, all those kind of good things we have on the goal in DRT Cyber.

There's other software projects that we're working on.

I'll probably just leave or mention it for the time being that we might be able to bring -- at least in beta testing, next quarter, we'll be able to tell you what we've got there, some of the prevailing markets rather rapidly.

Again, this is all software that our bank is the first customer, first use.

But I see the applicability of the entire industry and to other corporations and even governments that have the same issues as banks do with respect to keeping their data safe from most prying eyes that seems to be trying to get in and have a look at the very least of people's personal data.

So that's on the unshaded project.

The one that I highlighted in yellow is the new Direct-Connect app because this is a sort of a breakthrough for us.

This allows us to go directly to the mortgage market.

So this is CMHC mortgages, conventional mortgages and even mortgages that would be considered in the [LK] category are available to be booked through this app.

And as you've seen from press releases, our usual (inaudible), the same good use over the years, when we come out with a new product, we hope that we can test it all out with a large player.

So we got a really good test of how our system works and get some really good feedback as to what it needs to do in order to please our partners.

And thank you to the Cortel Group for agreeing to be our beta tester on this project.

And there may be another diverse type of partner in this area, too, that we get a good wide spectrum view of how our app work.

But the ultimate goal, of course, is for our bank to go directly into the retail deposit as a retail mortgage market.

And this is a big chunk of balance sheet capacity that we haven't used up until now that is available for a bank with standard risk weighting to use.

A few may see us, I'm sure the analysts on the phone and service risk-weighted conventional, say, 35 and others.

So lots and lots of capacity.

We've got high hopes for this one.

And as we've done in the past, partnered with the big guys.

And I believe a certain solvency practice, biggest -- the big solvency firms.

As we did early on to create the deposit broker business back in the early '90s, when this was unknown in the banking industry, we also have been dialing in for a while.

We know we partnered with a large independent brokerage firm or a financial planning firm, I would want to take that to [raise] financial.

We worked with them, they were the largest [firms] at that time, created the software and then after that, provided it to the smaller firms.

And then just that, of course, a large bank for brokerage firms to create a deposit broker industry.

So this is us doing it again, shining on.

The genie's come out, and we are all set to go.

So Paul, I'll turn it over to you for questions.

(Operator Instructions)

We have a first question and it is from Stephen Boland.

First question, you mentioned the U.S. deposit products, what would be the offset in terms of loans?

So you obviously don't want to have a currency mismatch.

So what kind of loans or what opportunity do you have to do U.S.-denominated loans?

We're looking at U.S. dollar receivables in the e-commerce area, Steve.

So is that some of your -- so that would be in the e-commerce segment that -- is there -- like your partners, do they do a lot of those types of loans?

Or is it -- like, are they located in the U.S. or Canadian -- like, Canadian located loans but in U.S. dollars?

Well, without giving secrets away for our partners, some are located in United States, some are located in Canada, doing business in the States.

There seems to be quite a market.

And of course, it would be naturally hedged by the U.S. dollar receivables.

But we were not averse to bridging any currency gap with forward contracts.

Okay.

That makes sense.

And then just a second question, as you mentioned in the press release about the growth in the e-commerce segment was new partners as well as more business from existing partners.

Could you just maybe go into that a little bit, like how many new partners there are?

Is it just -- is it one that's come in and provided a lot more volume?

Can you just give a little more description, Dave?

Yes, a handful of new partners and quite small.

So generally speaking, our existing partners that are larger have been giving us a bit more business.

And the handful of the new guys gave us a little bit.

All added up.

With respect to growth in that area going forward, we are talking to some fairly large new partners with the enhanced product, of course, in U.S. dollars.

And we may be improving some of our services that we have on to our partners and a lot -- some of them are taking advantage of our daily purchase program.

Others aren't perhaps more would like that with -- maybe other things we can do for them, i.e., bring on a secured credit card, that sort of thing.

(Operator Instructions)

We have a new question now from [Paul Campbell].

I just have a question, David.

Overall, on the ROE, everything looks to be going in the right direction, costs under control, NIMs pretty stable at a good level.

Obviously, credit quality is very good, and asset growth is continuing.

But ROE is not really moving into those double-digit levels after tax.

Do you have a sense of when that might kick in as a trend?

Well, Paul, there's, of course, 2 things that are impacting ROE.

One is what Warren Buffett some time ago called the Anchor of Equity.

And the odd thing about filing away core cash earnings, which goes directly into our regulatory capital, it creates a bigger denominator.

And that actually depresses ROE, all things being equal.

So what has happened is we have -- we've accumulated a significant amount of surplus capital for what's required to fund our present book.

So if we were to do kind of a calculation that some banks used to in the past, they call it return on employee's capital, and then we'd be up there with the other guys.

But we have kept back this capital for the opportunities that I had spoken about.

Perhaps acquisitions will improve some client confidence you want.

And we've kept it back for the other factor that have impacted ROE, and that's scale.

What our plan is to sit on that surplus capital.

And then, hopefully, find something to buy with it and deploy it into these new asset categories as rapidly as we can.

So you'll see employed capital becomes capital, and the scale deliver a lot more top line earnings.

That's the plan.

If I didn't have all those opportunities, then I couldn't think in advance and new to do, which never happens.

But theoretically, you crank the dividend up and bring it back down.

(Operator Instructions)

Now I have a question from Peter Leacock.

Actually, my question was essentially covered by your answer to Paul, which was to do with, have you given some thought of the excess capital to buy back shares or maybe increase the dividend, given that you're -- the stock is trading at quite a discount to book value?

But I think you've sort of adequately outlined why you want to preserve that capital for other opportunities.

Yes, Peter.

And you're up early in the morning.

Are you calling me from Vancouver?

I'm a little further south today in Mexico.

Good for you, good for you.

Yes, that's always a sort of issue banks have is you're accumulating surplus capital.

And for an odd reason, our stocks trading less than book not quite -- well, I guess I'm a -- I have a little more insight into why that might be now and that our IR -- new IR firm, (inaudible), has completed a perceptual survey of that.

So hopefully, we can rectify the misconceptions in the marketplace that were outlined in this perceptual survey.

But if we didn't have a spot just to use the capital, then yes, indeed, a share buyback is, of course, a good idea.

It's 75% of book value.

Of course, you do.

But with these new projects, particularly the Direct-Connect that gives us the access to nonbrokered CMHC's conventionals and the other [LK-type] mortgages without the usual brokerage commissions.

And probably not quite as price-sensitive to those that goes through the very heated broker market.

It looks to us that, that's a good avenue for those capital, low-risk meets our risk appetite and large volumes.

From the reception that we received from the hopeful partners, it looks like another one of those products we built.

You build it, they will come sort of thing.

It's something the market has been waiting for.

That's what I'm getting from the people I've spoken to today.

A breath of fresh air.

So you can do this mortgage directly with a streamlined app, call center to deal with the paperwork and all that sort of stuff.

It provides convenience at the point-of-sale of a home purchase versus convenience at the point-of-sale of a motorcycle.

Basically, we took our model and we said, okay, let's get to the biggest market there is in retail purchases.

Okay, not RVs, not motorcycles, not hot tubs, it's homes.

And we've taken that strategy to the home market.

And I expect there'll be those that emulate us, and they probably (inaudible) launch as usual.

But we got first-mover advantage again, and we've got a big partner and, hopefully, have another partner, a different type of home sales area.

And we're looking for big things in this product.

Okay.

Thanks for the explanation, David.

Very welcome, Peter.

And good luck in the South there, make sure you get the sunscreen on.

When you guys coming from Vancouver down places without sun -- without cloud cover, a bit of risk.

You're right about that.

It's been a great wet winter on the West Coast?

Yes.

I missed it last time.

It was indeed.

There are no further questions registered at this time, I will return the meeting back to Mr. Taylor.

Well, thank you, everybody, for dialing in.

These are exciting times for VersaBank, of course.

We do this quite a few years to create the digital bank that you see today, and it took quite a few years for the marketplace really to evolve to the point to digital bank like ours can take advantage of new consumer sentiments and desire for speed and convenience.

We're all set to go.

And these new markets, new channels I've spoken about keep us at VersaBank keen and excited.

And hopefully, next quarter, we can talk about on the progress we've made on those fronts.

So thank you again for joining in.

Signing off from the Winter Wonderland in London, Ontario.

Thank you.

The conference has now ended.

Please disconnect your lines at this time, and we thank you for your participation.