Phil Thomas: I can start by saying our recovery rates are quite strong in that portfolio and that’s why you don’t see higher gross impaired loans coming off the secured portfolio. In terms of holding me to a certain number, I can’t give you that number.
Mike Rizvanovic: Okay. Does 10% sound unreasonable? I mean, the commission alone would probably be close to half of that.
Phil Thomas: It doesn’t sound unreasonable.
Mike Rizvanovic: Okay, fair enough. And then, just in light of the Finance Minister’s recent public comments about the renewal cycle, I wanted to also ask about the hardship rule and should we now maybe assume that it will be applied more loosely when people do need it? Is it going to — it’s kind of divisive. I hear people say that it’s very difficult to get the hardship rule applied to your situation and others say it’s probably not so hard. Do you have any thoughts on that and how that might change in light of the Finance Minister’s comments?
Phil Thomas: No, I don’t have any thoughts on that. I’m not going to comment on that right now.
Mike Rizvanovic: Okay. And maybe just a quick one for — maybe for Raj just on the dividend payout ratio. You’re a little bit north of 60%. I’m wondering has anything changed for you. Are you comfortable holding to that level that’s comfortably above your targeted 40% to 50% range? If you’re going to be in that high 60%s range for an extended period of time, potentially does that raise any issues for you at all?
Raj Viswanathan: No, Mike. It’s Raj. I think we do expect to be outside of the range, like you’ve seen in ’23 and ’24 as well. And they’re quite comfortable with that. The payout ratio, we want to get back to 40% to 50%, but we know it’ll take a couple of years because we’re going to go through the strategic refresh and how we want to thoughtfully reallocate capital. And to us, that’s fine because the 40% to 50% range to keep it there and hopefully achieve it in the next two to three years gives us confidence that the earnings power is going to come back for this company and therefore the ratio will fall within the range. And it’s also a confidence that we’re investing wisely and will continue to invest wisely. Looking forward to continue to reduce that payout ratio to achieve, like I said, the 40% to 50%.
So for one, we won’t change it. We want to achieve that. It will take us a couple of years and we’re quite comfortable operating outside that range until we get there.
Mike Rizvanovic: Okay. Thank you for the color.
Operator: Thank you. Our following question is from Nigel D’Souza from Veritas Investment Research. Please go ahead.
Nigel D’Souza: Good morning. Thank you for taking my question. I wanted to touch on the residential mortgage book and on the decline in the balances you’ve seen in that portfolio in Canada. Could you comment on how much of that was driven by an increase in discharges, perhaps from individuals who on the adjustable side are experiencing payment increases and electing to sell the property instead of going delinquent versus lower originations over the last, let’s say, year-and-a-half to the rising rate? Any color there would be helpful.
Raj Viswanathan: Sure, Nigel. It’s Raj. I’ll talk to that. It is not about discharges and realizing on security and so on. Like Phil pointed out, the portfolio has been actually performing quite well. People are paying down. So, it’s not about delinquencies. It’s more about our deliberate actions in response to slowing mortgage growth. I think that’s across the industry over here, so we’re not unique. But we are taking deliberate action to improve the profitability as we ration out capital as — across the portfolio — across the bank, not necessarily to the mortgage portfolio. So, the 4% decline in the mortgage balances is not something that we are concerned about at this time. It’s the approach that we want to take to ensure that we are thoughtfully allocating capital for the highest return that we can achieve from our — for our investors from the loan book that we put out there.
And it’s about growing both sides of the balance sheet. We want to be sure that we have a multi-product relationship. It starts with the mortgage, which is a very important product for us. But the actions that we have taken, I think Scott referred to it, that we have net interest margin expansion in the mortgage book. Some of it driven by the actions we have taken, some of it driven by repricing. But it’s not about quality of the book or any sort of delinquency that drove the decline, Nigel.
Nigel D’Souza: That’s helpful. And just following up on the provisions on the mortgage book, I think there was a comment on taking into account collateral values. And just trying to understand why collateral values would be at play given your healthy LTV ratios. It’s only, from my understanding, 2021, 2022 vintages that would be at risk of having a loan-to-value closer to 100%. So, is that what you’re expecting in terms of what you’re modeling in? And why would those individuals be susceptible to default if they’re not adjustable given that the renewal is still a couple years off?
Raj Viswanathan: Sorry. Just to be clear, Nigel, the comment I made in my prepared remarks was related to business banking and the real estate — commercial real estate portfolio, not the mortgage portfolio.
Nigel D’Souza: Okay, that’s very helpful. Last question, just the 2024 outlook on EPS growth, does that assume PCL is at the midpoint of your guidance, so 50 basis points for 2024?
Raj Viswanathan: Yeah, that’s about the assumption. I think Phil talked about 45 basis points to 55 basis points. I think 50 basis points is a reasonable assumption to the EPS growth numbers I spoke about, Nigel.
Nigel D’Souza: Yeah, that’s it for me. Thanks.
Raj Viswanathan: Thank you.
Operator: Thank you. Our following question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud: Thanks. Maybe for Raj or Scott, I think you guys mentioned a more modest first half of 2024, an acceleration in the second half. Can you talk about what assumptions goes into that outlook? Like, is the recovery in the second half to hinge solely on lower interest rates? And what happens if rates remain elevated?
Raj Viswanathan: Thanks, Lemar. It’s Raj. I think there’s two factors. I’ll speak about the first half and how it relates to Q4. We want to be clear that Q4 really is like $1.50 quarter, right, if you take out the ACL build. So building off that, we think you should see growth in Q1, Q2. One of the items is, the Other segment is expected to be slightly better than the $487 million that you saw this quarter, because there’s a couple of one-off items relating to certain investments we had and lack of securities gains. So that should help with the first half. The second half is not hinging too much on interest rate declines. I think we have whatever the market has three rate cuts towards the latter end of 2024, which doesn’t have a meaningful impact to the results.
