CWB.PR.B Canadian Western Bank

EDMONTON, AB, Dec. 8, 2023 /CNW/ - CWB Financial Group (TSX: CWB) (CWB) today announced financial performance for the year ended October 31, 2023. Annual diluted earnings per share of $3.38 was relatively consistent with the prior year and adjusted earnings per common share⁽¹⁾ of $3.58 declined 1%.

Fourth quarter diluted earnings per share of $0.80 was down six cents sequentially and reflected the impact of costs incurred to execute reorganization initiatives to realize efficiencies in our banking centre footprint, operational support functions, and administrative processes. Fourth quarter adjusted earnings per common share of $0.94, increased six cents from last quarter and one year ago, as we benefited from an increase in net interest margin⁽¹⁾ and prudent expense management.

Our Board of Directors declared a cash dividend of $0.34 per common share, which is up one cent, or 3%, from the dividend declared last quarter and two cents, or 6%, from one year ago.

Financial Performance

Compared to last quarter, common shareholders' net income decreased, as 3% revenue growth and a five basis point decline in the provision for credit losses as a percentage of average loans⁽¹⁾, was more than offset by higher non-interest expenses, primarily due to costs incurred related to a reorganization of our operations late in the quarter. Adjusted common shareholders' net income⁽¹⁾ and pre-tax, pre-provision income increased 8% and 4%, respectively.  

Revenue growth reflected a 2% increase in net interest income and a 13% increase in non-interest income, primarily due to higher foreign exchange revenue. Net interest income growth was driven by a three basis point improvement in net interest margin. Higher net interest margin reflected the benefit of increased yields on fixed term assets from higher market interest rates, which had a larger impact than the increase in deposit costs.

Non-interest expenses increased 13% and included $17 million of costs incurred to execute reorganization initiatives to realize efficiencies in our banking centre footprint, operational support functions, and administrative processes. Adjusted non-interest expenses⁽¹⁾ increased 2% and we delivered positive operating leverage⁽¹⁾ of 3.3% this quarter.

The provision for credit losses on total loans of 11 basis points was five basis points lower than last quarter. The performing loan provision for credit losses of three basis points declined by three basis points compared to last quarter and reflected continued uncertainty in the economic environment. The impaired loan provision of eight basis points declined two basis points from last quarter and remained below our five-year historical average.

Compared to the same quarter last year, higher common shareholders' net income reflected higher revenues and a three basis point decrease in the provision for credit losses. Pre-tax, pre-provision income increased 8%.

Higher total revenue reflected a 7% increase in net interest income, partially offset by an 11% decrease in non-interest income, as foreign exchange revenue was significantly elevated in the same quarter last year. Higher net interest income was primarily due to 4% loan growth and a seven basis point improvement in net interest margin. The increase in net interest margin was driven by focusing loan growth on our strategically targeted general commercial loan portfolio, which produced strong risk-adjusted returns.

Adjusted non-interest expenses were up 1% from the same quarter last year as the impact of salary increments enacted in the prior year and higher capital taxes, were partially offset by lower spending on strategic projects and our continued actions undertaken during the year to carefully manage our staffing levels and limit discretionary expenditures. Non-interest expenses also benefited from a scientific research and experimental development (SR&ED) investment tax credit realized in the current quarter.

Our provision for credit losses on total loans as a percentage of average loans was three basis points lower compared to the same quarter last year due to a decrease in the performing loan provision, partially offset by a higher impaired loan provision. The performing loan provision was elevated in the same quarter last year due to a more significant deterioration in the forward-looking macroeconomic outlook at that time.

Compared to last year, the increase in common shareholders' net income was primarily driven by higher revenues and a lower provision for credit losses, partially offset by higher non-interest expenses. Pre-tax, pre-provision income increased 1%.

Total annual revenue of $1.1 billion increased 3%, reflecting a 4% increase in net interest income, partially offset by a 4% decline in non-interest income. Net interest income increased 4% due to the benefit of 4% annual loan growth, partially offset by a seven basis point decrease in net interest margin. The decline in net interest margin reflected the impact of lower loan related fees, including payout penalties, and a proportional shift in our funding mix towards fixed term branch-raised and insured broker deposits. Lower non-interest income reflected a decrease in foreign exchange revenue recorded within 'other' non-interest income, partially offset by higher credit related fees.  

Total adjusted non-interest expenses were up 6% due to a higher average staffing complement, the impact of annual salary increments, the investment in our digital capabilities and higher capital taxes. Higher non-interest expenses were partially offset by lower spending on strategic projects and our continued actions undertaken during the year to contain expense growth, and the beneficial impact associated with a larger SR&ED investment tax credit realized in the year.

Our total annual provision for credit losses represented seven basis points as a percentage of average loans, compared to 14 basis points last year. We recognized a three basis point provision related to performing loans, relatively consistent with the four basis point performing loan provision recorded in the prior year, and reflective of continued uncertainty in the economic environment. The provision for credit losses on impaired loans of four basis points was six basis points lower than last year, primarily due to an increase in recoveries of impaired loan write-offs upon final resolution.

Fiscal 2024 Outlook

Despite persistent levels of inflation and an elevated interest rate environment, growth of the Canadian economy remained moderately positive in fiscal 2023. As the impact of elevated interest rates continues to work through the economy, economic growth in fiscal 2024 is expected to be weak in the first part of the year before expanding in the latter half of the year. We anticipate a relatively stable policy interest rate in fiscal 2024, with the potential for policy interest rate reductions in the latter part of the year on the assumption that core inflation continues to decline to reach the Bank of Canada's target level.

Against this expected economic backdrop, our teams remain focused on winning full-service clients within our risk-adjusted pricing criteria. We expect to deliver mid single-digit annual percentage loan growth, if prudent and within our disciplined risk appetite, with a strategic focus on portfolios that support further full-service client opportunities. We expect strong loan growth in Ontario will drive further geographic diversification of our loans as we continue to expand our physical presence with the opening of our Toronto financial district and Kitchener banking centres in fiscal 2024.

We expect to launch our new digital and cash management platform next year and will commence with a phased migration of existing commercial clients onto the new platform. We expect gradual momentum in branch-raised deposit growth as the year progresses, with mid single-digit percentage growth of branch-raised deposits on an annual basis.

Based on the assumption of a more stable interest rate environment, our net interest margin is expected to gradually increase over the next year and reflect the benefits of the growth in fixed term asset yields continuing to outpace growth in funding costs, and loan growth that is targeted to optimize risk-adjusted returns.

We will continue to carefully manage discretionary costs while prioritizing investments in key roles and capabilities to support our differentiated strategy to be the best bank for business owners in Canada. The reorganization initiatives undertaken in late fiscal 2023 provide us with additional operational efficiency to continue to advance our strategy, while ensuring we maintain an appropriate level of expenses relative to our expected revenues. We executed most of the planned organizational redesign activities in the fourth quarter of fiscal 2023 and expect limited further activity within fiscal 2024. We will carefully monitor and manage our expenditures and expect to deliver positive operating leverage next year.

We expect that the sustained impact of higher interest rates will result in increased borrower defaults and impaired loans as the year progresses. Consistent with our experience in prior periods of economic volatility, 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.

Based on the assumptions described above and presuming no significant adverse shifts in the macroeconomic environment, we expect annual percentage growth of adjusted earnings per common share in the low to mid single-digit range.

About CWB Financial Group

CWB Financial Group (CWB) is the only full-service bank in Canada with a strategic focus to meet the unique financial needs of businesses and their owners. We provide our nationwide clients with full-service business and personal banking, specialized financing, comprehensive wealth management offerings, and trust services. Clients choose CWB for a differentiated level of service through specialized expertise, customized solutions, and faster response times relative to the competition. Our people take the time to understand our clients and their business, and work as a united team to provide holistic solutions and advice.

As a public company on the Toronto Stock Exchange (TSX), CWB trades under the symbols "CWB" (common shares), "CWB.PR.B" (Series 5 preferred shares) and "CWB.PR.D" (Series 9 preferred shares). We are firmly committed to the responsible creation of value for all our stakeholders and our approach to sustainability will support our continued success. Learn more at www.cwb.com.

Selected Financial Highlights

This financial summary, dated December 7, 2023, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed financial statements for the period ended October 31, 2023, included in this document, as well as the audited consolidated financial statements and Management's Discussion and Analysis (MD&A) for the year ended October 31, 2023, contained in our 2023 Annual Report, available on SEDAR at www.sedarplus.ca and CWB's website at www.cwb.com.

The condensed financial statements have been prepared in accordance with IFRS Accounting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are presented in Canadian dollars.

Forward-looking Statements

From time to time, we make written and verbal forward-looking statements. Statements of this type are included in our Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as media releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about our objectives and strategies, targeted and expected financial results and the outlook for CWB's businesses or for the Canadian economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact", "goal", "focus", "potential", "proposed" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could".

By their very nature, forward-looking statements involve numerous assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations, and conclusions will not prove to be accurate, that our assumptions may not be correct, and that our strategic goals will not be achieved.

A variety of factors, many of which are beyond our control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada including housing and commercial real estate market conditions and household and business indebtedness, the volatility and level of liquidity in financial markets, fluctuations in interest rates and currency values, the volatility and level of various commodity prices, changes in monetary policy, changes in economic and political conditions, material changes to trade agreements, transition to the Advanced Internal Ratings Based (AIRB) approach for regulatory capital purposes, legislative and regulatory developments, changes in supervisory expectations or requirements for capital, interest rate and liquidity management, legal developments, the level of competition, the occurrence of natural catastrophes, outbreaks of disease or illness that affect local, national or international economies, changes in accounting standards and policies, information technology and cyber risk, the accuracy and completeness of information we receive about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, the impact of bank failures or other adverse developments at other banks that drive negative investor and depositor sentiment regarding the stability and liquidity of banks, and our ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.

Additional information about these factors can be found in the Risk Management section of our 2023 Annual MD&A. These and other factors should be considered carefully, and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. Any forward-looking statements contained in this document represent our views as of the date hereof. Unless required by securities law, we do not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by us or on our behalf. The forward-looking statements contained in this document are presented for the purpose of assisting readers in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

Assumptions about the performance of the Canadian economy over the forecast horizon and how it will affect our business are material factors considered when setting organizational objectives and targets. In determining expectations for economic growth, we consider our own forecasts, economic data and forecasts provided by the Canadian government and its agencies, as well as certain private sector forecasts. These forecasts are subject to inherent risks and uncertainties that may be general or specific. Where relevant, material economic assumptions underlying forward-looking statements are disclosed within the Fiscal 2024 Outlook and Allowance for Credit Losses sections of our MD&A.

Non-GAAP Measures

We use a number of financial measures and ratios to assess our performance against strategic initiatives and operational benchmarks. Some of these financial measures and ratios do not have standardized meanings prescribed by Generally Accepted Accounting Principles (GAAP) and may not be comparable to similar measures presented by other financial institutions. Non-GAAP financial measures and ratios provide readers with an enhanced understanding of how we view our financial performance. These measures and ratios may also provide the ability to analyze trends related to profitability and the effectiveness of our operations and strategies and are disclosed in compliance with National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure.

To calculate non-GAAP financial measures, we exclude certain items from our financial results prepared in accordance with IFRS. Adjustments relate to items which we believe are not indicative of underlying operating performance. Our non-GAAP financial measures include:

• Adjusted non-interest expenses – total non-interest expenses, excluding pre-tax costs associated with a reorganization of our operations, amortization of acquisition-related intangible assets, acquisition and integration costs and accelerated amortization of previously capitalized AIRB assets. Non-recurring reorganization costs were incurred to execute reorganization initiatives to realize efficiencies in our banking centre footprint, operational support functions, and administrative processes. Acquisition and integration costs include direct and incremental costs incurred as part of the execution and integration of business acquisitions. Accelerated amortization of AIRB assets is a result of a reduction in estimated useful lives of certain previously capitalized AIRB assets.
• Adjusted common shareholders' net income – total common shareholders' net income, excluding the costs associated with organizational redesign initiatives, accelerated amortization of acquisition-related intangible assets, acquisition and integration costs and amortization of previously capitalized AIRB assets, net of tax.
• Pre-tax, pre-provision income – total revenue less adjusted non-interest expenses.

The following table provides a reconciliation of our non-GAAP financial measures to our reported financial results.

Non-GAAP ratios are calculated using the non-GAAP financial measures defined above. Our non-GAAP ratios include:

• Adjusted earnings per common share – diluted earnings per common share calculated with adjusted common shareholders' net income.
• Adjusted return on common shareholders' equity – annualized adjusted common shareholders' net income divided by average common shareholders' equity, which is total shareholders' equity excluding preferred shares and limited recourse capital notes.
• Efficiency ratio – adjusted non-interest expenses divided by total revenue.
• Operating leverage – growth rate of total revenue less growth rate of adjusted non-interest expenses.

Supplementary financial measures are measures that do not have definitions prescribed by GAAP, but do not meet the definition of a non-GAAP financial measure or ratio. Our supplementary financial measures include:

• Return on assets – annualized common shareholders' net income divided by average total assets.
• Net interest margin – annualized net interest income divided by average total assets.
• Return on common shareholders' equity – annualized common shareholders' net income divided by average common shareholders' equity.
• Write-offs as a percentage of average loans – annualized write-offs divided by average total loans.
• Book value per common share – total common shareholders' equity divided by total common shares outstanding.
• Branch-raised deposits – total deposits excluding broker term and capital market deposits.
• Provision for credit losses on total loans as a percentage of average loans – annualized provision for credit losses on loans, committed but undrawn credit exposures and letters of credit divided by average total loans. Provisions for credit losses related to debt securities measured at fair value through other comprehensive income (FVOCI) and other financial assets are excluded.
• Provision for credit losses on impaired loans as a percentage of average loans – annualized provision for credit losses on impaired loans divided by average total loans.
• Provision for credit losses on performing loans as a percentage of average loans – annualized provision for credit losses on performing loans (Stage 1 and 2) divided by average total loans.
• Average balances – average daily balances.

Q4 2023 vs. Q3 2023

Common shareholders' net income of $77 million and diluted earnings per common share of $0.80 both decreased 7%, primarily due to non-interest expenses incurred related to a reorganization of our operations late in the quarter. Adjusted common shareholders' net income of $91 million and adjusted earnings per common share $0.94 increased 8% and 7%, respectively, as we benefited from higher revenues, lower provision for credit losses and prudent management of our expenses this quarter. Pre-tax, pre-provision income of $143 million was up 4%. 

Total revenue of $292 million grew 3%, which reflected a 2% increase in net interest income and a 13% increase in non-interest income. Net interest income of $256 million was driven by a three basis point improvement in net interest margin. Higher net interest margin reflected the benefit of increased yields on fixed term assets from higher market interest rates, which had a larger impact than the increase in deposit costs this quarter. Non-interest income growth reflected higher foreign exchange revenue recorded within 'other' non-interest income, partially offset by lower wealth management fees due to market value declines that reduced average assets under management.  

The provision for credit losses on total loans of 11 basis points was five basis points lower than last quarter. The performing loan provision for credit losses of three basis points declined by three basis points compared to last quarter and reflected continued uncertainty in the economic environment. The impaired loan provision of eight basis points declined two basis points from last quarter and remained below our historical five-year average.

Non-interest expenses of $168 million were up 13% and included $17 million of costs incurred to execute reorganization initiatives to realize efficiencies in our banking centre footprint, operational support functions, and administrative processes. Adjusted non-interest expenses increased 2% and reflected higher capital taxes, and the impact of customary seasonal increases in certain expenses, including advertising and community investment costs, partially offset by actions undertaken during the year to carefully manage our staffing levels and limit discretionary expenditures to deliver positive operating leverage. We also benefitted from a scientific research and experimental development (SR&ED) investment tax credit realized in the quarter.

Q4 2023 vs. Q4 2022

Common shareholders' net income and diluted earnings per common share increased 14% and 11%, respectively, primarily due to higher revenues and a lower provision for credit losses compared to the same quarter last year. Adjusted common shareholders' net income and adjusted earnings per common share increased 10% and 7%, respectively. Pre-tax, pre-provision income increased 8%.

Total revenue increased 4%, primarily due to a 7% increase in net interest income, partially offset by an 11% decrease in non-interest income, as foreign exchange revenue was significantly elevated in the same quarter last year. Net interest income increased 7%, primarily due to 4% loan growth and a seven basis point improvement in net interest margin. The increase in net interest margin was driven by focusing loan growth in our strategically targeted general commercial loan portfolio, which produced strong risk-adjusted returns.

Our provision for credit losses on total loans as a percentage of average loans was three basis points lower compared to the same quarter last year due to a decrease in the performing loan provision, partially offset by a higher impaired loan provision. The performing loan provision was elevated in the same quarter last year due to a more significant deterioration in the forward-looking macroeconomic outlook at that time.

Adjusted non-interest expenses were up 1% from the same quarter last year as the impact of salary increments enacted in the prior year and higher capital taxes, were partially offset by lower spending on strategic projects and our continued actions undertaken during the year to carefully manage our staffing levels and limit discretionary expenditures. Non-interest expenses also benefited from an SR&ED investment tax credit realized in the current quarter.

2023 vs. 2022

Common shareholders' net income of $324 million and adjusted common shareholders' net income of $344 million increased 5% and 4%, respectively, as higher revenue and a lower provision for credit losses more than offset higher non-interest expenses. Diluted earnings per common share of $3.38 and adjusted earnings per common share of $3.58 were down one and four cents, respectively, primarily driven by higher average common shares. Pre-tax, pre-provision income increased 1%.

Total annual revenue of $1.1 billion increased 3%, which reflected a 4% increase in net interest income, partially offset by a 4% decline in non-interest income. Net interest income of $981 million increased due to the benefit of 4% annual loan growth, partially offset by a seven basis point decrease in net interest margin. The decline in net interest margin reflected the impact of lower loan related fees, including payout penalties and a proportional shift in our funding mix towards fixed term branch-raised and insured broker deposits. Lower non-interest income reflects a decrease in foreign exchange revenue, partially offset by higher credit-related fees.  

Our total annual provision for credit losses represented seven basis points as a percentage of average loans, compared to 14 basis points last year. We recognized a three basis point provision related to performing loans, relatively consistent with the four basis point performing loan provision recorded in the prior year, and reflective of continued uncertainty in the economic environment. The provision for credit losses on impaired loans of four basis points was six basis points lower than last year, primarily due to the reversal of a previously recognized impaired loan write-off recorded in the first quarter of this year.

Total adjusted non-interest expenses of $585 million were up 6%, due to a higher average staffing complement, the impact of annual salary increments, the investment in our digital capabilities and higher capital taxes. Higher non-interest expenses were partially offset by lower spending on strategic projects and our continued actions undertaken during the year to contain expense growth, and the beneficial impact associated with a larger SR&ED investment tax credit realized this year.

ROE and ROA

The fourth quarter ROE of 9.0% declined 80 basis points on a sequential basis and reflected lower common shareholders' net income, driven by higher non-interest expenses due to costs associated with the reorganization of our operations in the quarter and higher common shareholders' equity. Compared to the same quarter last year, ROE increased 40 basis points and reflected higher common shareholders' net income, partially offset by higher average common shareholders' equity. Adjusted ROE of 10.6% was up 60 basis points from last quarter and 10 basis points from the same quarter last year, as higher adjusted common shareholders' net income was partially offset by higher average common shareholders' equity.

Full year ROE of 9.8% and adjusted ROE of 10.4% decreased 30 basis points and 40 basis points, respectively, as higher common shareholders' net income was more than offset by higher common shareholders' equity.

The fourth quarter return on assets (ROA) of 0.72% was six basis points lower on a sequential quarter basis and reflected lower common shareholders' net income, driven by higher non-interest expenses due to costs associated with the reorganization of our operations in the quarter and higher average assets. Compared to the same quarter last year, ROA increased six basis points as higher common shareholders' net income more than offset higher average assets. Full year ROA of 0.77% decreased two basis points as higher common shareholders' net income was more than offset by higher average assets.

Efficiency Ratio

The fourth quarter efficiency ratio improved to 51.0% compared to 51.6% last quarter and 52.6% last year driven by the combination of an expanding net interest margin and prudent expense management. On an annual basis, our efficiency ratio increased to 52.6% compared to 51.5% as non-interest expense growth outpaced revenue growth primarily due to a decrease in net interest margin.

Loans

Total loans, excluding the allowance for credit losses, of $37.2 billion remained relatively consistent with last quarter and increased 4% ($1.3 billion) from last year.

Q4 2023 vs. Q3 2023 

Fourth quarter sequential loan growth reflected our continued focus on optimizing risk-adjusted returns in the current economic environment. Growth by portfolio in the quarter was led by our strategically targeted general commercial portfolio, which increased 1%. Our commercial mortgage and real estate project loan portfolios declined 2% and 5%, respectively, as new lending opportunities that met our risk-adjusted return expectations were more than offset by repayments. Oil and gas production loans increased by $32 million, primarily due to participation in syndicated facilities that remain within our risk appetite. Our exposures to oil and gas service and production businesses each represented approximately 2% of total loans.

Q4 2023 vs. Q4 2022

Very strong growth of 10% in our general commercial portfolio reflected our continued focus to increase full-service client relationships across our national footprint. Our commercial mortgage portfolio declined 5% with new origination volumes more than offset by scheduled repayments, as fewer new lending opportunities met our risk-adjusted return expectations. Our equipment financing and leasing portfolio increased 3%, dampened by continued market competition and elevated payouts in the year. The 2% increase in personal loans and mortgages reflected growth in uninsured mortgages which benefited from new origination volumes with prudent loan-to-value ratios and strong average beacon scores. Real estate project loans decreased 3%, as a lower than usual volume of new project starts from top-tier borrowers were more than offset by payouts associated with the timing of project completions. Oil and gas loans were up $153 million primarily due to participation in syndicated facilitates that remain within our risk appetite.

Geographic diversification

Q4 2023 vs. Q3 2023

BC loans declined 2%, primarily driven by lower commercial mortgage, real estate project and general commercial loans, due to elevated payouts in the quarter. All other provinces remained relatively consistent compared to the prior quarter as strategically targeted general commercial loan growth was offset by declines across other lending portfolios, primarily commercial mortgage and real estate project loans.

Q4 2023 vs. Q4 2022

Ontario growth of 10% was driven by very strong 17% growth in the general commercial portfolio, supported by our Markham and Mississauga banking centres. Growth in BC of 2% reflected strong general commercial and real estate project loan growth, partially offset by a decline in commercial mortgages. Alberta loans declined 1% as modest growth in general commercial loans was more than offset by lower commercial mortgages and real estate project loans. Quebec loans increased by 13% driven by strong growth in the general commercial and equipment financing portfolios. 

Credit Quality

Credit quality continued to be supported by the secured nature of our lending portfolio, disciplined underwriting practices and proactive loan management. Borrower credit performance has historically remained strong throughout periods of economic volatility, and provisions for credit losses on impaired loans are well below our five-year historical average.  

Gross impaired loans

The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected write-offs given tangible security held in support of lending exposures. The dollar amount of gross impaired loans totaled $266 million, compared to $282 million last quarter and $167 million one year ago.

Gross impaired loan balances represented 0.71% of gross loans, up from 0.46% last year and down from 0.75% last quarter. 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 proactive approach to working with clients through difficult periods continues to be an effective approach to minimize realized losses on the resolution of impaired loans. This is demonstrated by our history of low write-offs as a percentage of total loans, including through past periods of economic volatility.

Allowance for credit losses

At October 31, 2023, the total allowance for credit losses (Stages 1, 2 and 3) was $175 million, compared to $179 million last quarter and $167 million one year ago.

Performing loan allowance

The performing loan allowance is estimated based on 12-month expected credit losses (ECL) for loans in Stage 1, while loans in Stage 2 require the recognition of lifetime ECL. The proportion of performing loans in Stage 2 at the end of the fourth quarter was 13%, consistent with the last quarter and down from 20% last year. The decrease in Stage 2 loans compared to last year primarily reflects a more pessimistic macroeconomic forecast in the prior year relative to the periods those loans were originated.   

The performing loan allowance of $132 million increased 2% ($3 million) from the prior quarter and 10% ($12 million) from the prior year. The increase from last quarter primarily reflects slight shifts in the macroeconomic outlook, while the increase from last year reflects continued weakening in the economic outlook over the past year.

Key economic variables incorporated into our ECL models are inherently prone to volatility on a forward-looking basis. Hindsight cannot be used, so while evolving macroeconomic assumptions may result in future forecasts that differ from those used in the ECL estimation as at October 31, 2023, those changes will be reflected in future periods.

In estimating the performing loan allowance, where required we supplement our modeled ECL to reflect expert credit judgments. These expert credit judgements incorporate the estimated impact of factors that are not fully captured through our modeled ECL.

Impaired loan allowance 

The allowance for impaired loans (Stage 3) was $43 million, compared to $50 million last quarter and $47 million last year. To determine allowances for impaired loans, we establish estimates through detailed analysis of both the overall quality and ultimate marketability of the security held against each impaired loan on a case-by-case basis. 

Provision for credit losses

The fourth quarter provision for credit losses on total loans as a percentage of average loans represented 11 basis points, compared to 16 basis points last quarter and 14 basis points last year. On an annual basis, the provision for credit losses on total loans represented seven basis points of average loans, down from 14 basis points last year and well below our normal historical range of 18 to 23 basis points.

A $7 million provision for credit losses on impaired loans was recorded this quarter, compared to $10 million last quarter, and a nominal provision last year. On a full year basis, the provision for credit losses on impaired loans was $15 million compared to $32 million last year and represented four basis points as a percentage of average loans, compared to ten basis points in the prior year. The lower provision for credit losses on impaired loans in the current year was primarily due to an increase in recoveries of impaired loan write-offs upon final resolution. The current quarter impaired loan provision for credit losses represented eight basis points as a percentage of average loans and remains below our five-year historical average.

The fourth quarter provision for credit losses on performing loans was a charge of $3 million, compared to $5 million last quarter and $12 million last year. For further details on the estimation of the performing loan allowance which drove the provision for credit losses on performing loans, see the Performing loan allowance section.

Deposits and Funding

Total deposits of $33.3 billion were down 1% ($0.3 billion) from last quarter and up 1% ($0.3 billion) compared to last year. Branch-raised deposits decreased 1% ($0.2 billion) from last quarter and 1% ($0.1 billion) compared to last year.

Q4 2023 vs. Q3 2023

Branch-raised deposits declined 1% during the quarter as an increase in term deposits was more than offset by lower demand and notice deposits. Lower branch-raised demand and notice deposits reflected a reduction in account balances as clients continue to deploy excess savings rather than incur debt to manage cash flow in the elevated interest rate environment. For clients that retained excess savings, we noted a continued preference for term deposits in the current interest rate environment.

Capital market deposits decreased 13% from last quarter due to a senior deposit note maturity, which was replaced with broker term deposits due to lower relative cost. Capital market deposits now represent 10% of total deposits, compared to 12% last quarter.

Broker-sourced term deposits increased 4% from last quarter and represent 28% of total deposits, up from 26% last quarter. While our preference is to raise relationship-based branch-raised deposits, the broker deposit market continues to be a deep and efficient source to raise insured retail deposits and has proven to be a reliable and effective way to access funding and liquidity over a wide geographic base. At times, broker-sourced deposits also reflect a lower relative cost compared to other funding options. We raise only fixed term broker deposits with terms to maturity between one and five years.

Q4 2023 vs. Q4 2022

Total deposits were up 1% annually, as higher broker deposits were partially offset by lower capital market and branch-raised deposit balances. 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 through the year, branch-raised demand and notice deposits also declined on an annual basis due to our intentional exit of select higher cost non-full-service client relationships early in the year, which we replaced with insured, fixed term broker deposits.

Capital market deposits decreased 24% from last year as senior deposit note maturities were replaced with broker term deposits due to a lower relative cost compared to a new senior deposit note issuance.

Capital Management

OSFI requires Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. We currently report regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, which requires us to carry significantly more capital for certain of our credit exposures compared to requirements under the AIRB methodology. For this reason, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks and other financial institutions that utilize the AIRB methodology. Our required minimum regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% CET1, 8.5% Tier 1 and 10.5% Total capital.

Subordinated debentures

On December 22, 2022, we issued $150 million of Series H Non-Viability Contingent Capital (NVCC) subordinated debentures with a fixed annual interest rate of 5.937% until December 22, 2027. Further information is provided in Note 14 of the audited consolidated financial statements for the year ended October 31, 2023.

Regulatory Capital and Capital Adequacy Ratios

Changes in Capital Ratios

The CET1 capital ratio of 9.7% increased 30 basis points from last quarter and 90 basis points from last year. Compared to last quarter, a higher CET1 capital ratio primarily reflected retained earnings growth and a decrease in risk-weighted assets. The increase from the prior year reflected the impact of retained earnings growth, a reduction in accumulated other comprehensive loss related to an increase in unrealized gains on debt securities measured at FVOCI, the adoption of the Capital Adequacy Requirements (CAR) 2023 guidelines and common shares issued under our at-the-market (ATM) program in the first quarter of the year, partially offset by risk-weighted asset growth.

The Tier 1 capital ratio of 11.5% increased 30 basis points from last quarter and 90 basis points from last year, primarily due to the proportional impact of the same factors noted above.

The Total 1 capital ratio of 13.5% increased 40 basis points from last quarter and 140 basis points from last year, driven the proportional impact of the same factors noted above. Compared to last year, our Total capital ratio also reflected the issuance of $150 million Series H NVCC subordinated debentures in the first quarter of 2023.

ATM Program

No common shares were issued under the ATM program in the quarter.

On June 1, 2022, we re-established an ATM program to allow the periodic issuance up to a total of $150 million of common shares, at our discretion and if needed, at the prevailing market price, under a prospectus supplement to the CWB short-term base shelf prospectus, which expires on July 1, 2024. Under the existing ATM program, we have issued 4,501,766 common shares for gross proceeds of $111 million, or net proceeds of $109 million after commissions and other issuance costs. The ATM program was re-established following the termination of the previous ATM program established on May 31, 2021, due to the sale of most of the $150 million common shares approved under the previous program.

Dividends and LRCN Distributions

Common shareholders received a quarterly cash dividend of $0.33 per common share on September 14, 2023. On December 7, 2023, our Board of Directors declared a cash dividend of $0.34 per common share, payable on January 4, 2024 to shareholders of record on December 21, 2023. This quarterly dividend is up one cent, or 3%, from the dividend declared last quarter and up two cents, or 6%, from one year ago.

Consistent with the dividends paid to preferred shareholders on October 24, 2023, the Board of Directors also declared cash dividends of $0.2688125 per Series 5 and $0.375 per Series 9 preferred shares, all payable on January 31, 2024 to shareholders of record on January 24, 2024.

On October 31, 2023, Series 1 NVCC Limited Recourse Capital Notes (LRCN) note holders received a semi-annual coupon payment of $30, per $1,000 principal amount of notes outstanding, reflecting a total payment of $5 million, recorded in common shareholders' net income on an after-tax basis and consistent with the prior year. On July 31, 2023, Series 2 NVCC LRCN note holders received a semi-annual coupon payment of $25 per $1,000 principal amount of notes outstanding, reflecting a total payment of $4 million.

Further information related to our capital position is provided in Note 15 of the audited consolidated financial statements for the year ended October 31, 2023.