Q4 2022 VS. Q3 2022 Common shareholders’ net income and diluted earnings per common share decreased 16% and 18%, respectively, as higher revenues and a lower provision for credit losses was more than offset by an increase in non-interest expenses, including the impact of accelerated amortization of previously capitalized AIRB assets. Adjusted common shareholders’ net income and adjusted earnings per common share decreased 1% and 2%, respectively. Pre -tax, pre-provision income remained unchanged compared to prior quarter. Total revenue increased 3%, primarily due to a 27% increase in non- interest income driven by higher foreign exchange revenue recorded within ‘other’ non -interest income and higher credit related fees, partially offset by lower wealth management fees. Net interest income was consistent with last quarter as the benefit of 2% sequential loan growth was offset by a ten basis point decline in net interest margin. The decline in net interest margin reflects that growth in asset yields has lagged the growth in deposit costs driven by the higher market interest rate environment. Our fixed term deposit portfolio has repriced faster to reflect higher market interest rates than our fixed term loans, which have a longer average duration. Loan yields have also been slower to reflect the changes in market interest rates due to high competition for new lending. Net interest margin was also negatively impacted by higher average liquidity compared to the previous quarter and a change in our lending mix to comparatively lower-yielding borrowers and portfolios. Our provision for credit losses on total loans as a percentage of average loans was two basis points below last quarter due to lower impaired loan provisions, partially offset by a higher performing loan provision due to a further deterioration in the forward-looking macroeconomic outlook. Lower impaired loan provisions reflected the reversal of provisions related to previously impaired loans that were resolved with lower than expected realized losses, combined with a decline in new impaired loan formations. Gross impaired loan balances represented 0.46% of gross loans, down from 0.53% last quarter. Non-interest expenses increased 17%, including additional costs related to the accelerated amortization of previously capitalized AIRB assets, as discussed in the comparison to the same quarter last year. Adjusted non-interest expenses increased 6%, primarily due to continued investments in our strategic priorities, including our AIRB tools and processes and the harmonization of our wealth management brands with the launch of CWB Wealth. We also incurred a full quarter impact of the compensation adjustments provided to our entry and mid-level team members in the prior quarter along with customary seasonal increases in advertising, community investment and employee training costs. ADJUSTED ROE AND ROA The fourth quarter return on common shareholders’ equity (ROE) of 8.6% was down 360 basis point compared to last year and 180 basis points compared to last quarter. Adjusted ROE of 10.5% was down 200 basis points from last year, which reflected a decrease in our adjusted common shareholder s’ net income primarily driven by an increase in the provision for credit losses on performing loans, and higher average common shareholders’ equity. Sequentially, adjusted ROE was down 20 basis points reflecting the decrease in our adjusted common shareholders’ net income and higher common shareholders’ equity.
The fourth quarter return on assets (ROA) of 0.66% was 31 basis points below the same quarter last year and 15 basis points lower on a sequential basis, reflecting lower common shareholders’ net income and higher average assets.
EFFICIENCY RATIO
The fourth quarter efficiency ratio was 52.6% compared to 52.9% last year and 51.3% last quarter.
ACCOUNTING POLICIES AND ESTIMATES CRITICAL ACCOUNTING ESTIMATES
CWB’s significant accounting policies are outlined in Note 1 of the audited consolidated financial statements for the year ended October 31, 2022, with related financial note disclosures by major caption. The policies discussed below are considered particularly important, as they require management to make significant estimates or judgments, some of which may relate to matters that are inherently uncertain.
ALLOWANCE FOR CREDIT LOSSES An allowance for credit losses is maintained to absorb ECL for both performing assets and impaired assets based on management’s estimate at the balance sheet date and forward-looking information. Under IFRS 9, the allowance for credit losses related to performing and impaired assets is estimated using an ECL approach that represents the discounted probability-weighted estimate of cash shortfalls expected to result from defaults over the relevant time horizon. To do this, the ECL approach incorporates a number of underlying assumptions which involve a high degree of management judgment and can have a significant impact on financial results. Significant key drivers impacting the estimation of ECL, which are interrelated, include:
• Internal risk ratings attributable to a borrower or instrument reflecting changes in credit quality; • Estimated realizable amount of future cash flows on Stage 3 loans; • Thresholds used to determine when a borrower has experienced a significant increase in credit risk; and, • Forward-looking information, specifically related to variables to which the ECL models are calibrated.
The inputs and models used to estimate ECL may not always capture all emerging market conditions and as such, qualitative adjustments based on expert credit judgments that consider reasonable and supportable information may be incorporated. These expert credit judgments account for the variability in the results provided by the models and consider the lagging impacts of typical credit cycles, where loan defaults occur in periods subsequent to the onset of a decline in macroeconomic conditions. Changes in circumstances may cause future assessments of credit risk to be significantly different than current assessments and may require an increase or decrease in the allowance for credit losses. Additional information on the process and methodology for determining the allowance for credit losses can be found in the discussions of Credit Quality section of our MD&A and in Note 6 of the audited consolidated financial statements for the year ended October 31, 2022.
CWB Financial Group 2022 Annual Report | 41
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