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Insights From First National’s Earnings Report

First-NationalFirst National is the biggest non-bank lender in Canada and its earnings reports are usually chock full of interesting tidbits.

Here are a few nuggets from its recent year-end report:

  • First National’s revenue grew 0.4% in 2010
  • Single family mortgage originations fell 2%

  • Commercial originations dropped 33%.
  • 2010 presented “a slower Canadian real estate market…greater competition for mortgage product during the year (primarily from ‘schedule one’ banks)….and tighter securitization spreads. ”
  • First National plans to sell more mortgages directly to institutional investors to “reduce the risk to the Company of increased credit spread tightening, and provide the Company with more cash flow…”
  • Prime-Rate-Permanently-HigherThe report reinforced what many already knew, which is that the 1/4 point that banks held back on December 9, 2008 (when the Bank of Canada lowered 3/4% and banks only cut prime by 1/2%) won’t be returned to consumers.First National says: “The Company believed this elevated spread was only a temporary measure to address the credit crisis which peaked in the fourth quarter of 2008. As time passed, it became more apparent that this spread would not change as the banks were faced with higher costs due to regulatory requirements for additional capital. For the Company, the true test on the longevity of this “new” spread was the banks’ reaction to the Bank of Canada’s announced increase of its overnight rate on June 1, 2010.” (In other words, by choosing to raise prime on June 1, 2010, banks indicated that prime would indefinitely remain 1/4 point higher than “normal.” As a result, First National says it now assumes the primebankers’ acceptance spread will remain at 1.85% [instead of the historical 1.60%] for at least the next five years.)
  • “2011 will feature the transition to IFRS, which combined with new capital regulations for federally regulated banks and trust companies, may have a significant impact on competitors of the Company and overall mortgage spreads.” (i.e.  Many lenders’ funding costs could rise somewhat, pushing mortgage rates up slightly.)
  • “The Company believes (mortgage) spreads, which tightened throughout 2010, will stabilize and will remain at these levels or widen to reflect higher costs of capital among the Company’s competitors.”  (Wider spreads imply less mortgage discounting.)


Rob McLister, CMT