CA - Canadian Western Bank (CBWBF) Q4 2023 Earnings Call Transcript
2023-12-08 13:29:02 ET
Canadian Western Bank (CBWBF)
Q4 2023 Earnings Conference Call
December 08, 2023, 10:00 AM ET
Company Participants
Chris Williams - Assistant Vice President, Investor Relations
Chris Fowler - President and Chief Executive Officer
Matt Rudd - Chief Financial Officer
Carolina Parra - Chief Risk Officer
Conference Call Participants
Doug Young - Desjardins Capital Markets
Gabriel Dechaine - National Bank Financial
Darko Mihelic - RBC Capital Markets
Sohrab Movahedi - BMO Capital Markets
Marcel McLean - TD Securities
Meny Grauman - Scotiabank
Paul Holden - CIBC
Presentation
Operator
Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's Fourth Quarter and Fiscal 2023 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I will now turn the call over to Chris Williams, Assistant Vice President, Investor Relations. Please go ahead, Chris.
Chris Williams
Good morning and welcome to our fourth quarter and fiscal 2023 financial results conference call. We'll begin this morning's presentation with the opening remarks from Chris Fowler, President and Chief Executive Officer, followed by Matt Rudd, Chief Financial Officer, and Carolina Parra, Chief Risk Officer. Also present today are Stephen Murphy, Group Head, Commercial, Personal & Wealth, and Jeff Wright, Group Head, Client Solutions & Specialty Businesses.
After our prepared remarks, they will all be available to take your questions. As noted on slide two, statements may be made on this call that are forward-looking in nature which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements.
I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
I will now turn the call over to Chris Fowler who will begin his discussion on slide four.
Chris Fowler
Thank you, Chris, and good morning, everyone. In the challenging economic backdrop of 2023, we delivered financial performance that confirmed the strength and resilience of our strategy as the best full-service bank for business owners in Canada.
Our clients continue to choose CWB for a differentiated level of service through specialized expertise, customized solutions, and faster response times. Our people take the time to understand our clients and their businesses and work as a united team to provide holistic solutions and advice.
The unrivaled experiences that our teams provide for Canadian business owners is what separates us from the competition and I'm thankful for our team members continued efforts during a challenging environment.
I'm proud that CWB placed in the top 25 of this year's Best Workplaces in Canada for the second year in a row, we were recognized as Waterstone Human Capital as having one of Canada's most admired corporate cultures for the fourth time.
This recognition reflects our team's dedication to go above and beyond for our clients in challenging environments by rapidly adapting to changing conditions. During the quarter, we executed changes to reorganize our operations to drive priority activities that take full advantage of our investments in modernized technology, digital capabilities, and further leverage our enhanced credit decisioning tools and policies.
Through these changes, we realized efficiencies in our banking center footprint, operational support functions, and administrative processes, which has resulted in a reduction in the size of our team by approximately 150 people.
We intend to reinvest most of these savings to support our differentiated client experience, the launch and growth of our new commercial digital cash management platform and enhance payments capabilities and increase our client-facing presence in Ontario, all while delivering strong, positive operating leverage.
With these changes, I'm confident in our ability to deliver strong financial performance in a potentially volatile environment, while our teams continue to deliver an unrivaled experience to business owners and their families.
As noted on slide five, while the external environment dampened financial results through the first half of the year, we successfully adapted by targeting lending opportunities to optimize returns within a prudent risk appetite and continue to enhance our client offering while prudently managing our discretionary expenses.
We've continued to [indiscernible] levels of credit losses supported by our secured lending model, prudent underwriting practices, and proactive loan management, our financial performance improved as the year progressed. We exited the year with strong earnings momentum, increased capital ratios, and a resilient balance sheet.
We're well positioned to create value for our investors in the year ahead as we continue to win relationships with business owners and their families.
Turning to slide six, our targeted approach to lending opportunities provided strong growth in our strategically targeted portfolios and geographic locations. As we've noted before, general commercial lending represents a broad section of the Canadian economy that we believe is underserved by other banks.
We had strong success across the country by targeting our loan growth in this strategically important segment. We delivered 10% general commercial loan growth in the last year, which produced strong risk-adjusted returns and supported increase in net interest margin as the year progressed.
We continue to enhance our offering through an expanded partnership with Green Financial to offer new business credit cards and we're preparing to launch a commercial digital cash management and payments platform for our commercial clients in the near future.
These enhanced capabilities support our ongoing efforts to convert our clients from single product to broader full service relationships and capitalize on the opportunity to increase our market share in the mid-market commercial segment.
Our focus on risk adjusted returns in the current environment limited origination volumes across our commercial real estate portfolios. We saw fewer new commercial mortgage opportunities this year that met our criteria, and new origination volumes were more than offset by scheduled repayments.
In a real estate project loan portfolio, we experienced a lower than usual volume of new project starts from top tier borrowers, which were more than offset by payouts associated with the timing of successful project completions.
Our disciplined risk appetite and our conservative approach over many years has developed loan portfolios with strong credit profiles. On a sequential basis, our total loans remained relatively consistent with last quarter and included 1% growth in general commercial loans offset by a reduction in our real estate project loans and commercial mortgage portfolios.
Consistent with the continued execution of our geographic diversification strategy, Ontario loans grew 10% annually driven by very strong 17% growth in the general commercial portfolio supported by our Markham and Mississauga banking centers.
In January we'll cut the ribbon to open our new banking center in Toronto's financial district. And we plan to open our Kitchener location later in the year to continue to build brand awareness in Ontario and capitalize on a significant growth opportunity in the province.
I'll now turn the call over to Matt, who'll provide greater detail on our fourth quarter financial performance.
Matt Rudd
Thanks, Chris. Good morning, everyone. I'm starting on slide nine. Compared to the prior year, branch-raised deposits decreased 1% as a 9% increase in fixed term deposits was more than offset by a 5% decline in demand and notice deposits.
In addition to the continued shift from notice and demand to fixed term deposits that we saw through the year, branch-raised demand and notice deposits also declined due to our intentional exit of select higher cost non-full service client relationships earlier this year.
Branch-raised deposits declined 1% during the quarter as an increase in term deposits was more than offset by lower demand and notice deposits. Overall branch-raised deposits represent 56% of our total funding. Over the last five years, we've grown our branch-raised deposits by about 11% on average.
That's outpaced loan growth of about 7% on average over the same period. Growth in branch-raised deposits this year was muted in a disrupted and volatile environment. For next year, we expect gradual momentum in branch-raised deposit growth as the year progresses following the full launch of our digital commercial cash management and payments platform.
Our sequential earnings performance is shown on slide 10. Common shareholders net income decreased 7% and diluted EPS decreased $0.06. That's primarily due to the non-interest expenses we incurred related to a reorganization of our operations in the current quarter that had a $0.13 negative impact in diluted EPS.
These costs have been removed from our adjusted performance metrics. Our focused performance delivered strong financial results this quarter. Pre-tax, pre-provision income increased 4% and adjusted EPS increased $0.06.
Higher net interest income increased EPS by $0.03 that was driven by a three basis point improvement in net interest margins and an increase in non-interest income benefited EPS by a further $0.03.
Higher adjusted non-interest expenses reduced EPS by $0.02. Our provision for credit losses declined this quarter and that contributed $0.04 to EPS, and a higher effective tax rate reduced EPS by $0.01.
Performance compared to the same quarter last year is shown on slide 11. Common shareholders' net income increased 14% and diluted EPS increased $0.08, primarily due to higher revenues and a lower provision for credit losses.
Compared to the same quarter last year, pre-tax, pre-provision income increased 8% and adjusted EPS increased $0.06. Higher net interest income increased EPS by $0.13, primarily due to 4% loan growth and a seven basis point improvement in net interest margin.
Lower non-interest income reduced EPS by $0.03. The lower provision for credit losses contributed $0.02 to EPS. Higher effective tax rate reduced EPS by $0.01 and the incremental shares issued under our ATM program earlier this year had an isolated impact of reducing EPS by $0.03.
Shown on slide 12, total revenue increased 3% on a sequential basis. Net interest income increased 2% driven by a three basis point improvement in net interest margin. The 13% increase in non-interest income was primarily due to higher foreign exchange revenue that reflected a strengthening US dollar in the quarter that was partially offset by lower wealth management fees due to market value declines that reduced average assets under management.
Slide 13 breaks down our NIM performance in the quarter. NIM benefited six basis points from the re-pricing of fixed rate assets at higher market interest rates, which more than offset the increase in deposit costs this quarter.
Lower impaired loan interest recoveries reduced NIM by two basis points. The remaining items impacting NIM, which primarily related to lower loan related fees, reduced NIM by one basis point.
Average liquidity levels were relatively consistent with the prior quarter and did not contribute to the sequential increase in NIM. We anticipate a relatively stable policy interest rate, fiscal 2024, with potential for policy interest rate reductions in the latter part of the year.
That's on the assumption that core inflation continues to decline to reach Bank of Canada's target level. Based on the assumption of a more stable interest rate environment, our net interest margin is expected to gradually increase over the next year from our fourth quarter NIM of 2.4%.
We expect that to reflect the continued growth in asset yields that we expect to outpace the growth and funding costs and will continue to target loan growth that optimizes our risk adjusted returns.
On slide 14 we've provided a more detailed view of our adjusted expenses. Adjusted expenses exclude the costs incurred for the reorganization initiatives this quarter, which were recognized primarily in salaries and benefits and the costs related to the accelerated amortization of AIRB assets recognized in the fourth quarter last year, which were recognized in premises and equipment costs.
Adjusted noninterest expenses increased 2% sequentially and supported positive operating leverage of 3.3% this quarter. Adjusted noninterest expenses compared to the prior quarter reflected higher capital taxes and the impact of customary seasonal increases in certain expenses partially offset by lower spending on strategic projects and our actions undertaken during the year to manage our staffing levels through natural attrition and limit our discretionary expenditures.
We also benefited from a scientific research and experimental development or SRED, investment tax credit realized in the quarter. Compared to the same quarter last year, we held the increase in adjusted NIEs to just 1%. Most of the planned reorganization activities that Chris referenced in his opening remarks have occurred to date.
Further reorganization activity is expected to be limited within fiscal 2024 and costs incurred for these activities will continue to be excluded from adjusted financial results. Reorganization activities undertaken provide us with optionality and agility and how we manage our operating expenses next year so we can invest in our organizational priorities, support our differentiated client experience and drive positive operating leverage.
Our capital ratios and the drivers of our CET1 increase are shown on slide 15. Our CET1 ratio increased 30 basis points to 9.7% this quarter, primarily reflecting retained earnings growth and a reduction in risk-weighted assets. No common shares were issued under the ATM program this quarter.
With continued confidence in our earnings power, our board declared a common share dividend yesterday of $0.34 per share, which is up $0.01 from the dividend declared last quarter and $0.02 from the dividend declared last year.
I'll now turn the call over to Carolina who'll speak further on our credit performance.
Carolina Parra
Thank you, Matt, and good morning, everyone. Beginning on slide 17, total gross impaired loans decreased 60 million or 6% from last quarter and represented 71 basis points of gross loans, four basis points lower than prior quarter and 25 basis points higher than prior year.
In line with expectations, our gross impaired loans are returning to more normal levels from a very benign condition in the prior year. Despite the increase over the last year, gross impaired loans still remain 13 basis points below pre-COVID-19 levels in the first quarter of 2020.
Gross impaired loans were lower than last quarter, driven primarily by lower new formations, and we also continue to result impaired loans without incurring significant losses. We expect the total balance of gross impaired loans to continue to fluctuate as overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends.
The level of gross impaired loans does not directly reflect the dollar value of expected write-offs given the tangible security held in support of lending exposures. Our strong credit risk management framework, including well established underwriting standards, the secured nature of our lending portfolio with conservative loan to value ratios, and a proactive approach to working with clients through difficult periods continues to be effective in minimizing realized losses on the resolution of impaired loans.
I would also note we have minimal exposure to unsecured personal lending or credit cards. This is demonstrated by our history of low write-offs as a percentage of total loans, including the past periods of volatile economy.
As Chris and Matt have noted, we have taken a targeted approach to lending with a focus on strong risk adjusted returns in the current environment, which has supported the resilience of our credit profile.
Turning to slide 18, the increase in the performing loan allowance from last quarter primarily reflects continued prudent provisioning, recognizing the uncertainty in the macroeconomic forecast, and drove a performing loan provision of credit losses of three basis points this quarter.
Our provision for credit losses on impaired loans was $7 million, equivalent to eight basis points this quarter, which remains below our five-year average of 14 basis points. Looking forward, we expect that the sustained impact of higher interest rates will result in increased borrower defaults and impaired loans next year.
Consistent with our experience in prior periods of volatile, our prudent lending approach supports our expectation that our provision for credit losses will be within our historical normal range of 18 to 23 basis points next year.
I will turn the call back to Chris Fowler for his closing remarks and outlook.
Chris Fowler
Thank you, Carolina. Turning to slide 19, as the year has progressed, our teams drove improved financial results through targeted loan growth and disciplined expense management.
Our secured lending model and disciplined underwriting continue to produce credit losses below historical averages. As we look forward in fiscal 2024, we expect the impact of elevated interest rates to continue to work through the economy.
Economic growth is expected to be weaker in the first part of the year before expanding in the latter half of the year. Against this expected economic backdrop, we've taken action to support our expectation of continued strong financial performance delivered by more streamlined operations while we continue to invest in organizational priorities and deliver a differentiated experience to Canadian business owners.
Before we open the lines for our Q&A, I'd like to thank each of our team members for their efforts during a challenging environment. Through their efforts, we've built a strong, resilient bank and we're well positioned to create value for our investors in the year ahead.
With that, operator, let's open the lines for Q&A.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Doug Young at Desjardins Capital Markets. Please go ahead.
Doug Young
Hi. Good morning. Maybe Matt just first on NIMs. I know you've kind of framed this in a certain way in the past in terms of increases and where you think about exiting the next year in terms of NIMs. I know your guidance was exiting fiscal '23, but where we did exit. Is it fair to kind of read into your discussion around NIMs and fiscal '24 that we should expect assuming no change in interest rates or anything that you could exit fiscal '24 around 2.5%? Is that a fair assumption?
Matt Rudd
Yeah, I mean, there's lots of embedded assumptions there, but if I take yours, which is the primary one, that interest rates are relatively stable. Yeah, just the organic composition of our book and how it turns through. What you should see are gradual increases through the year, maybe a little more in the early half of the year, but I think the back half will still see some benefit. And, yeah, I'll give you a similar guidance to last year in that in Q1, we'd expect to start within the 240s and if everything works according to plan, we'd be exiting the fourth quarter somewhere in the 250s, all else being equal.
Doug Young
And then if I think of just some of the items this quarter, you know, the asset liability repricing last quarter was four basis points. This quarter it's six basis points. Obviously it's moving in the right direction. You know, is that six basis points, like when I think about the evolution of the NIM, that's kind of reasonable or is there upside to that? And there was two unusual items in there around impaired loan interest recoveries and loan related fees. I guess that's relative to last year, but I'm just trying to get a sense of what those are.
Matt Rudd
Yeah, I'll unpack each of the pieces. So on the reprice of assets versus liabilities, that's six basis points a little bit higher than I might have expected when we were chatting last quarter. The reason why we outperformed there really disciplined on deposit costs. You know not overly robust asset growth in the quarter. So when we're thinking about the liability structure, we can be very choosy, very picky. We absolutely took a view to enhancing our net interest margin and really trying to get that maximum spread in the quarter. We had the optionality to do that and we did so. We didn't put up a strong of a call it headline branch-raised deposit growth number as we would have liked and we have opportunities to do so. But when it came down to driving profitability, the broker market actually performed really well, costs were reasonable, so we leveraged that and drove a bit of NIM. So that probably a little bit higher at six basis points than I'd expect kind of on a run rate, but not by much. On the impaired loan interest recoveries and that's compared to last quarter. Last quarter I'd say maybe a little bit higher than usual and this quarter we usually have some and we had virtually none this quarter. So that's likely a bit of a drag to NIM this quarter that I wouldn't necessarily expect to continue. And then on the fees, that was expected. I presume that was coming down. Last quarter we had a bit of a one-off driving incremental fees and this quarter we didn't have that, and I'd expect that to continue just flat from here on the fee line.
Doug Young
Okay. And I just second on costs, you did the restructuring costs and it seems to be consistent across the banking world, but it's not the savings aren't going to hit the bottom line. So I'm curious what actually, can you quantify what the savings is? Maybe talk a little bit more about what you're planning to invest it in. But yeah, when I think of like considering the NIM outlook like is it reasonable to think of a non-interest expense ratio that falls below what you used to target is below 50%. Is that? Can we kind of put that together for fiscal '24, fiscal '25?
Matt Rudd
Yeah, the reorganization, I mean it was just that. The intent was, the primary intent wasn't necessarily to reduce the run rate of our costs. It was to give us capacity to make the investments we wanted to make through the next year. We have two branches opening in Ontario. We have a pretty robust outlook for growth in Ontario and want to support and grow that market. So it's really investing in physical infrastructure and sales capacity in the province. We have a commercial cash management digital platform that we're launching and of course want to support that when the time is right with sales capacity and sales effort. And the piece we really want to keep our foot on the gas because this is our competitive differentiation is the client experience we're providing and we just absolutely wanted to make sure that continued to be top-notch. This was less about reducing run rate of cost and more about taking the cost platform and allocating to highest and best use. But some of that reorganization a modest percentage of that is ultimately falling to the bottom line. But if I quantify it, if you took that basket of cost overall, I probably estimated at 80% of it were reinvesting, 20% of it were letting fall to the bottom line. It allows us to drive the level of earnings. We want to drive next year on a pre-tax pre-provision basis. You've likely done the math and work backwards to it and see that's a pretty strong number we're targeting. And I'm not sure we quite get down to the sub 50% efficiency ratio we would have targeted, but we'll deliver robust positive operating leverage that gets us maybe not quite to that level, but I'd say in the ballpark.
Doug Young
Okay. And then just lastly capital, why did the RWA decline quarter-over-quarter? I mean, I know the loan balances didn't move much, but is there something in the new Basel rules or was this just mix that went through there? And then if you can also quantify, I think there's some expert credit judgment in the management or in your performing loan ACL. Can you quantify what that would be? Thank you.
Matt Rudd
Yeah, so on the first one on the RWAs, you're right. When you look at the loan growth quarter-over-quarter, you see a larger RWA decline if you assumed a kind of a similar mix in terms of what was on the book, quarter-over-quarter. But for us, the growth we targeted in Q4, you would have seen stronger growth in the portfolios that happened to attract a lower risk-weighted asset density. Now that's strategic, that's intentional. We're looking at optimizing risk adjusted returns, so you naturally target those portfolios with the lower risk weighted asset density, and that's a general commercial would be the primary source of growth. Portfolios we didn't grow that actually shrunk quarter-over-quarter. Commercial mortgages, that's higher risk-weighted asset density and especially the project lending and within their commercial real estate project development that attracts a very high risk-weighted asset percentage. Having that portfolio decline was helpful to the decrease in RWA. It kind of amplified it and inherited the reduction in loan growth. And then outside of just that composition of growth, we did take a fairly deep dive on that real estate project lending book. When we adopted the new CAR guidelines, a lot of it was classifying loans from a regulatory perspective in a different way than we had before, much more granular, more data points to look at. That transition, if we had a loan and it was in that real estate project lending portfolio, we just didn't have fully solid data to support a lower risk-weight. We erred on the side of a higher risk-weight to be conservative. And then as the year progressed, we accumulated better data and supporting information from our clients. And ultimately, we're able to reclassify some of these from that higher 150% risk-weight bucket down to the 100% because we have the data to support that classification. So that caused a bit of the RWA decline from Q3 to Q4 as well. On the second one on expert credit judgment, so last quarter, I believe someone asked me about this and I gave the view that, within our performing loan allowance, we have the expert judgment of relative to our base case, we thought the economy and therefore our credit losses had more downside potential than upside potential. This quarter, we've maintained that view. We continue to believe the economy has more downside than upside relative to a pretty benign base case. So we've maintained that judgment. That's why you've seen despite a small decline in our loan balance quarter-over-quarter, you've seen an increase in the performing loan allowance. We continue to be prudently provided on the performing loan side.
Doug Young
Appreciate the color. Thank you.
Operator
Thank you. Next question will be from Gabriel Dechaine at National Bank Financial. Please go ahead.
Gabriel Dechaine
Hey, good afternoon. Sorry if I missed this, but a quick one on loan growth. Did you give any targets or expectations for that in 2024?
Matt Rudd
Yes, we did, we're looking at sort of mid-single-digit percentage growth in loan growth.
Gabriel Dechaine
Okay. Yeah, great.
Matt Rudd
We expect similar to this year like much stronger growth in general commercial you know that's one where we're looking at fairly robust growth there. It's strategically important, big opportunity. That's where we have the differentiated experience. We'll grow strongly there. It's the commercial real estate portfolios where you'll continue to see fairly low growth and in some quarters perhaps continuing to go negative in some cases.
Gabriel Dechaine
Okay. Then on the expenses and I'm you know similar line of questioning to what Doug was asking about there. And I'm trying to interpret your comments. I know you're reinvesting and it's not like we're cutting costs and it's all going to go to the bottom line. I get that. Can I simply assume that the restructuring will allow you to make the investments that you're planning on making needing to make this year while also maintaining you know expense growth that your you know trajectory current trajectory I mean this quarter it was pretty flat but full year basis you're in the firmly in the mid-single-digit. Is that more or less what we should expect?
Matt Rudd
Yeah, that'd be my expectation for next year. Assuming that our outlook on revenue holds, I mean, that's about the level of expense growth we target. We have a lot of flexibility and some of what we're reinvesting, you know, we have optionality on when we decide to do that, if we decide to do that. So I think what you'll see from us is being pretty agile to what we see on the revenue side and making sure we drive the earnings and drive the positive operating leverage we're committing to. But, you know, the outlook that would be on the non-interest expense side, you know, mid-single digits would be about a good kind of base case starting point.
Gabriel Dechaine
Okay. And then the last line of questionings around the NIM and the outlook. One more granular question is there any I know you've seen most of it take place this year, but the securities portfolio, are there any maturities coming up and which quarters would they be heaviest? Where we could notice that in the NIM? And then on the guidance, you're saying 240s in the first half or whatever and then exit the 250s and then your overall guidance of gradually increasing is that predicated on the Bank of Canada not doing anything just holding flat what happens to that outlook if rate cuts are first half of the year as opposed to the second half of the year or at all?
Matt Rudd
Yeah, So on the first one, the securities portfolio, we still see pretty good volume of repricing occurring in the first half of the year. And still quite a differential between the coupon of the maturing and even with some of the downward movement in bond yields, there's still quite a positive discrepancy in yield between what's rolling off and what we'll bring on. So that will, in the first half of the year, that will be a key driver of that asset liability pricing differential that's positive to NIM. In the back half of the year, the momentum continues. It's less from the securities portfolio, more just from the continued repricing of the loan portfolio, slightly longer duration in that loan book. So that's going to keep that momentum going, but maybe at a slightly more modest pace than the first half of the year. On Bank of Canada, it's less of an impact than it used to be. The way we're matched on variable rate assets and liabilities, it's not a perfect match. You know, we do see some modest NIM drag just if the Bank of Canada policy rate declined. We would see a little bit of a NIM headwind, but certainly not to the extent we would have seen in years past. And then on the, it kind of depends on what the yield curve does. What we saw on the way up when interest rates were increasing is deposit costs reflecting bond yields. I mean, they shot up and basically front ran the Bank of Canada rate increases. If we see that on the way down, there's a scenario where if bond yields go down, deposit costs follow, like GIC rates follow closely. That could actually be a temporary catalyst to NIM until it eventually churns all the way through. So on the outlook for fiscal 2024, even thinking about the possibility of Bank of Canada doing some earlier than expected rate cuts. It's not something I'd circle as a big risk to NIM in 2024. As long as spreads perform and behave, we'll be okay on the NIM.
Gabriel Dechaine
Okay. Well, thanks, and thanks for rescheduling the call to accommodate the OSFI folks and yeah Merry Christmas.
Matt Rudd
Thank you, Gab.
Chris Fowler
Thanks, Gab.
Operator
Thank you. Next question will be from Darko Mihelic at RBC Capital Markets. Please go ahead.
Darko Mihelic
Thank you. I actually just have one quick question. Maybe an update on AIRB.
Matt Rudd
Yes. Well, so last year we talked about the replacement of our models which we put in place and did some rescoring on our commercial real estate portfolio last year. So we're very happy with the outcome of that. So in this year we have the full deployment of the BRRs across our footprint and put them all in place. So we're happy with the progress we're making and the improvement it's giving us in how we can work on our loan management, risk rating our portfolio effectively. And we're obviously going to be tracking where the capital story goes, how the regulators are treating AIRB versus standardized. And our focus in the scheme of this all is that we want to be able to issue a loan with the same ROE for the same risk rating as the large banks. So that's our focus. We're happy with the progress we're making.
Darko Mihelic
So just to confirm though, when I read, I'm an avid reader of your annual reports and as I go through the focus has changed. It's no longer seeking approval. It's just using the tools. Is that how I should interpret this, Chris?
Chris Fowler
That's where at this point we're making sure the tools that we have in place are delivering exactly what we want them to deliver.
Darko Mihelic
Okay. All right. Thank you.
Chris Fowler
Thank you.
Operator
Next question will be from Sohrab Movahedi at BMO Capital Markets. Please go ahead.
Sohrab Movahedi
Okay, thank you. I just wanted to talk a little bit about the restructuring initiatives. I'm just curious, Matt, Chris, can you just talk a little bit about how much experience you guys have with restructurings and what sort of disruption there could be here to some of the growth plans that you've kind of articulated for the bank next year?
Matt Rudd
Sure. Well we took as we came into fiscal '23 and kind of looked at the expense revenue profile and we zeroed in, of course, looking to maximize revenue and in the challenging environment and then thinking of what the cost had to be on that. So, during our expenses, very proactive in how we manage that. And with that, we kind of said, what's a sustainable model or how do we think about the future. And how do we deliver the bank to the clients in the way that we're looking to from a branch footprint perspective, from how we look at our operational processes and how we deliver that. So that was the framework that we had for thinking about a reorganization of how we deliver the bank. And that's what we've done is we looked at how do we make sure that we've got the right responses, the right turnaround times and the right footprint that allow us to take advantage of the opportunity in Ontario and really support our ability to drive revenue and be the agile bank we're looking to be.
Sohrab Movahedi
Does it have, like as you kind of emphasized, maybe to Darko's answer, focused on more application of the tools as opposed to seeking approval. Like does re-prioritizing those sorts of initiatives contribute to the restructuring charge?
Matt Rudd
I'd say it was an enabler of -- I wouldn't say it was a large enabler of the ability to reduce some of the headcount, but a lot of the tools we've implemented are allowing our teams to adjudicate and score credit and just doing things like evaluating risk ratings for borrowers in a more efficient manner, less manual processing there. I mean, that was a lot of the focus, was try to make it simpler and easier for our teams to facilitate credit. And we saw good gains from that. So that's maybe less in the front lines, more in that sort of middle office credit support function. It used to be in the branches. We pulled it out to regional hubs and we've now been able to reduce that to a central processing hub. And so a lot of the tools we put in place are allowing that team to operate more efficiently and so we were able to harvest some of the savings there. So that's sort of the immediate benefit. It's not reducing the extent we use the tools. It's more just an elevated way we manage credit risk with more efficient tools to do so.
Sohrab Movahedi
Okay. So it doesn't necessarily suggest that maybe I'm willing to take another basis point of PCL because I'll have lower expense ratio just kind of over the cycle. Thank you.
Matt Rudd
That's correct.
Operator
Did you have any further questions? Sohrab, did you have any further questions?
Sohrab Movahedi
Oh, no, sorry. Sorry about that. That's all for me. Thank you.
Operator
Thank you. Next question will be from Marcel McLean at TD Securities. Please go ahead.
Marcel McLean
Okay, thanks. I'm just wondering if you could help us out. You've given us the guidance on loan growth and NIM and on expenses with positive operating leverage. So probably back into it, but just on the non-interest income, I know it's been a little bit more volatile because of FX in there. Just wondering how we should be thinking about modeling that into 2024?
Matt Rudd
Yeah, you're right. We definitely saw a bit of an uptick in that kind of other category of non-interest income within the fourth quarter. If I look at it on an annual basis though, I mean, what you should see in that other non-interest income line, if you had completely stable foreign exchange between ADD and USD, about a million dollars a quarter or so of processing type fees for clients that is about the same as what you'd see on a full year basis in 2023. So, flatish there, if you saw no big FX movements through the year, it would be likely a good assumption. On the other pieces, I think you'd expect to see kind of in that mid-single-digit growth sort of year-over-year percentage through the categories. Wealth is one where there's an opportunity there. Good platform we've built, good opportunity for cross-sell and referrals. So that's one we'd maybe look to push on and target for slightly higher growth. And that's a continued focus for us. You know single-digit range is a good number likely.
Marcel McLean
Okay. Thanks for that. And then just to take this AIRB point here. I just want to confirm. So we should not expect an OSFI approval even by 2025. Is that a fair statement?
Chris Fowler
Yeah. As we work, we haven't set a timeline. What we've done is put in place the models that we're comfortable that we could run. It improves our risk management processes internally, and we're ensuring that all the steps we're taking are positive to how we can run the bank.
Marcel McLean
Okay, excellent. Then last one for me, just any concerns on credit that maybe aren't showing up in the metrics yet that you want to highlight to commercial real estate or otherwise?
Chris Fowler
I think for credit, you know, we are very focused on the macro prudential story that is unfolding and, you know, kind of looking to what the impact of higher rates will be on different parts of the book. I'll pass it over to Caroline to just give comments to add on that.
Carolina Parra
Thank you, Chris. Yeah, no, as we mentioned, you know, we are expecting some iteration in our book, and we've been signaling that as well in the past quarters. We just haven't seen it translate into office. When we see it, what is being happening really, this quarter, it's lower [indiscernible] and really good resolutions of certain lows. So as the economy continues to deteriorate, we might see some slowdown of some of those resolutions, but nothing in particular that would signal a significant impact besides what we're treading towards.
Marcel McLean
Okay, thank you very much. That's it for me. Happy holidays guys.
Chris Fowler
Thank you.
Operator
Next question will be from Meny Grauman at Scotiabank. Please go ahead.
Meny Grauman
Hi. Good morning. I wanted to ask about the PCL ratio guidance of 18 to 23 basis points in the context of what you delivered this past year and in Q4 specifically 11 basis points. Just wondering how you see the PCL ratio guidance playing out over the year in terms of this is what's being contemplated sort of a gradual increase or something more dramatic? If you could sketch that out for me that would be helpful.
Matt Rudd
Well I'll start and Carolina may have some things to add. But yeah, we're looking at that guidance on a full year basis and trying to pin it down two basis points in a quarter is a bit tricky because our impaired loan PCL, I mean, we evaluate this loan by loan, file by file, and it depends on what loans become impaired in a quarter. So it's hard to pin down. So it's, you know, I think a good annual number. Can I point to one quarter being higher than another? Is it a gradual build? To be honest, I would have expected our PCL to be higher today than it has been. I think I've been talking on these calls about a return to our normal range of 18 to 23 basis points, and I think I've now been wrong three quarters in a row. It's a good direction to be wrong, I suppose. But just when we look at the underlying trends, we look at gross impaired loans, we look at defaults and delinquencies, like everything's returning back to a normal level, not necessarily elevated, but normal. And we would have expected normal credit loss performance, but we just haven't seen that level of losses in our portfolio. Now things that are going impaired were resolving fairly quickly and without significant loss. So that's good news so far. So a lot of this, it's a little more art than science. It's on the basis of assuming what all of our other credit metrics going to normal, our losses should too. You know, we'll see how the year progresses. But I mean that's how we've done our guidance and will generally be prudent and have been prudent when we're thinking provisions for credit losses. Perhaps some upside potential in our guidance if our credit losses continue to be benign. We've guided to low to mid-single-digit earnings per share growth, but that's on the assumption of going from, as you point out, sort of seven basis points of total PCL for the year, if we just get into the low end of our range, you know, that's a 30% drag on EPS. We're absorbing that all and still delivering low to mid-single-digit EPS. If our credit losses remain benign, now we're talking about delivering a level of earnings growth that's well in excess of the peer set and this guidance. So I'm not suggesting that's our base case, but that's how it's played out so far. So we'll keep an eye on it and we'll update this as we go obviously.
Meny Grauman
Got it. And then just going back to capital, just more broadly, obviously the capital story for CWB changing very favorably. And I'm just curious if you could update us in terms of what you're targeting in terms of the CET1 ratio. Are you looking to move above 10% in 2024? How are you thinking about excess capital and where you're comfortable being right now given your outlook for loan growth and RWA growth?
Matt Rudd
Yeah, we're obviously very comfortable with our capital. We think the next year, and I just play out the guidance we've provided, if we're loan growth and mid-single-digit, if it's strategically targeted as it has been, just mathematically you end up with a CET ratio exiting the year and in that 10% range. We also have the added benefit of that securities portfolio which as a reminder 100% of that unrealized loss counts against CET1 capital. So as those bonds mature at reprice, those losses come down through the year as well. Even if you know the yield curve doesn't shift downwards so that you know that adds a bit as well. So it's, you know, coming out of the year, we're comfortably in the 10% range. That's obviously higher than we've been. Not bad to have that extra buffer right now with volatility in front of us. And if we found ourselves taking the view that we had excess capital, we've been clear on how we want to deploy that. Organic growth of the franchise, looking at strategic accretive acquisitions, and then if we don't have compelling opportunities there then I mean there are other ways we could look at returning capital to shareholders, but right now I'd say not the right time to be talking about that, but perhaps that day will come and that's how we look at it.
Meny Grauman
That's clear. Thanks so much.
Operator
Thank you. Next question will be from Paul Holden at CIBC. Please go ahead.
Paul Holden
Hi. I want to go back to the discussion on AIRB. Clear today that you're not applying with OSFI, but given your ultimate objective of being on a level playing field with a DSIPs, it does suggest you will apply for approval at some point in the future. Am I interpreting this correctly?
Chris Fowler
Well, Paul, the approach that we want to take is to make sure, number one, that we have the right internal processes to run the bank and support our risk management. And being model-enabled absolutely helps there. So we are investing in those model-enabled opportunities for us. And then we do see a change in the regulatory view of how they're thinking about the nature of AIRB versus standardized and sort of bigger influence of standardized. So our focus is just to make sure that the steps we're taking are positive to how we can run the bank and give us all the right sort of tools to allow us to maximize our efficiencies.
Paul Holden
Okay. So you won't be switching from a regulatory perspective. You'll be remaining on standardized going forward is what you're telling us. Okay.
Chris Fowler
Well, that's where we're at today. Absolutely. We are a standardized bank today and we're working on investing, making sure we have all the right process in place.
Paul Holden
Yeah. Okay. Second question is just going back to the discussion on PCLs and maybe taking the opposite end of the argument. So your PCL guidance is based on sort of the normal historical range, which given today's conditions makes sense, but the Canadian economy is not expected to perform in the normal range in 2024. And I think you've kind of alluded to that with some of your guidance. So why shouldn't the PCL number be higher than the normal range given the economic outlook?
Matt Rudd
Now one of the debate we've had and of course we run all sorts of stress tests as you could imagine, thinking anywhere from soft landings to crash landings to worse to really explore how volatile our credit losses could be. And I mean, what we find is that our security lending model and who we lend to gives us a great deal of protection to the downside. The other thing and this is thinking through next year, because next year we believe there is some volatility from the higher interest rates that push us into what would normally have been that normal range, but how we've lent the last three years if we're kind of benchmarking to pre-pandemic levels. And I've talked about this on a quarterly call in the past, I believe, but basically, you know, is that 18 to 23 basis points our historical normal range, when you get through maybe some volatility on the horizon and you're back to a more stable, steady Canadian economy, do we reset to that 18 to 23 basis points or are we now talking about a lower range. Evidence I provide that could support that hypothesis. It's just, if you look at the composition of our book three years ago to today, you've seen a pretty considerable decrease in commercial real estate lending and predominantly in that project lending portfolio. We like the portfolio we have, but we've really been upscaling it to our top tier of borrowers. And a lot of those lower tiers have turned off over the years, projects perform well as expected. But kind of pound for pound quality of the book today appears to be on an elevated level and we could be talking about perhaps a lower normal range going forward again probably too early to make that sort of a prediction but that seems to be what some of our modeling suggests. We just need to see how this next year plays out and how we exit that year before we make any definitive conclusion on that.
Paul Holden
Okay, okay. That's a fair and an interesting point. So thanks for that, Matt. I'll leave it there.
Chris Fowler
Thanks, Paul.
Operator
Thank you. With no further questions I will now turn the call over to Chris Fowler for closing remarks.
Chris Fowler
Thank you, Sylvie, and thank you all for joining us today. I'd like to take this opportunity to thank our shareholders for their continued commitment and support. We wish you and your families a happy and healthy holiday season. Thanks very much. We look forward to reporting our first quarter financial results in February. Have a great day.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.
For further details see:
Canadian Western Bank (CBWBF) Q4 2023 Earnings Call Transcript