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Third Quarter Mortgage Tidbits

Big-6-Banks Third quarter earnings season is over for the Big 6 banks. As always, we’ve poured through their piles of releases, shareholder presentations and earnings call transcripts to find interesting mortgage-related nuggets.

Here’s a summary…



Net income: $793 million (+18%) 

Earnings per share: $1.27 (vs. $1.13 in Q3 2010) 

  • Frank Techar, President and CEO of Commercial Banking Canada, acknowledged that the bank saw pressure on margins from both competition and low rates. He hinted that mortgage spreads (margins) could shrink in the 4th quarter. (Source)
  • In BMO’s economic outlook, the bank noted that, “Home sales should remain healthy in response to low borrowing costs, supporting residential mortgage demand.” (Source)
  • BMO’s residential mortgage balances increased by $1.5 billion. (Source)
  • BMO’s average loan-to-value is “in the mid 60%” range (Source)
  • Mortgage market share remained flat Y/Y and Q/Q. (Source)


Net income: $808 million (+26%)

Earnings per share: $1.91 (vs. $1.55 in Q3 2010)

  • Residential mortgages were up $7.7 billion. (Source)
  • “…the biggest driver of the decline in spreads for us is mortgage spread, where prices do remain very competitive and we feel that more than some of our peers given the relative size of our mortgage portfolio. So, looking forward, I’d say the current view is that we’re looking at – it would appear right now a prolonged period of lower interest rates which does put pressure on deposit margins,” said David Williamson, a senior VP at CIBC. (Source)

National Bank of Canada

Net income: $312 million (+ 15%)

Earnings per share: $1.84 (vs. $1.56 in Q3 2010)

  • Personal and commercial loan volumes experienced sustained growth, rising 11% and 10%, respectively, with the strongest increases coming from consumer loans and mortgage loans. (Source)
  • Traditional residential mortgages were up by 9% as of July 31, 2011 (since October 31, 2010). (Source)
  • “Consumer loans, mainly home equity lines of credit, and traditional mortgage loans, rose 11% as the residential market remained strong.” (Source)


Net loss: $92 million*

Earnings per share: $1.04 (vs. 92 cents in Q3 2010)**

* Note: Includes one-time write-downs related to RBC’s U.S. operations. ** EPS shown excludes those one-time charges. Otherwise, RBC had an 11 cent per share net loss.  

  • Residential mortgage volume in Q3 grew 6% Y/Y. (Source)
  • “Mortgage delinquencies are expected to remain low given the improving labour market, despite elevated household debt levels. We expect future interest rate increases to be delayed until the middle of 2012 given the recent uncertainty on global economic growth, putting further pressure on deposit spreads and overall net interest margins,” the bank said in its report to shareholders. (Source)
  • “The Canadian housing market continues to fare well and we are not seeing any cause for concern. We are comfortable with our portfolio, which is well diversified across Canada,” said President and CEO Gordon Nixon. “We uphold the highest underwriting standards and stress test our portfolios periodically under a number of scenarios encompassing both interest rate rises and housing price declines.” (Source)
  • “The portfolio can withstand dramatic shifts in these market parameters as the large portion of our mortgage portfolio is made up of fixed-rate product with an average loan to value on uninsured portions of just over 50%,” Nixon added. (Source)
  • “…we increased marketing spend this past quarter on HELOCs to capitalize on a price disparity in the market and we’re seeing great success with this campaign,” said Nixon. (Source)
  • On a quarter-over-quarter basis, net interest margins were down 4 basis points as competition impacted pricing on mortgages and deposit products. (Source)
  • In explaining the variable rate mortgage slide in recent weeks, David McKay, Group Head of Canadian Banking, said, “there was a dislocation between the price of the fixed rate book versus the variable rate book which was encouraging…consumers to really move into a much, much lower variable rate book, which had very, very thin margins. At the same time, we’re seeing a slight volatility in funding costs in the swap market. So, given the dislocation between fixed and variable the very, very thin margins, we felt we needed to move prices up in our variable rate book.” (Source)
  • McKay added, “I think the fixed rate business is well priced and earning a fair return. I think there was an anomaly with the intense competition in the variable rate mortgage business, consumer preference being, I think, artificially driven there because of the price differential to fixed, we had to get it back and to have more even keel. So, I think those were (summative). Along with the funding volatility that we’re seeing, we needed to make sure that this product earns a fair return for shareholders. So, we moved rates up.” (Source)

Scotia Bank

Net income: $461 million (+18%)

Earnings per share: $1.11 (vs. $0.98 in Q3 2010)

  • Revenues increased from volume growth in residential mortgages, higher small business deposits and stronger commercial banking, partially offset by ongoing competitive pricing pressures,” said President and CEO Rick Waugh. (Source)
  • Net interest income was up 8% from a year ago, driven by “organic asset growth, primarily in residential mortgages in Canadian Banking and retail and commercial lending in International.” (Source)
  • The largest increase in assets was seen in residential mortgages, which were up $3 billion (2%). (Source)
  • While earnings were still up 4% Y/Y in Canadian Banking, there was a margin decrease from competitive pressures, growth in variable rate mortgages and higher funding costs. (Source)
  • Q3 mortgage balances: $139.2 billion vs. $136.7 billion in Q2. Q3/2010: $130.1 billion. (Source)
  • Mortgage market share: Q3 2011: 20.30%, down from 20.47% in Q2 2011 and 20.40% in Q3 2010. (Source)
  • …asset growth was largely offset by a modest decline in net interest margin, which was impacted primarily by the growth of lower yield mortgages and continued competitive pricing pressures. (Source)
  • “…the mortgage market has begun to slow and price competition has been intense, but volume growth remains positive and we see that continuing. We may also be starting to see increased pricing discipline in the market,” said Anatol von Hahn, Group Head of Canadian Banking. (Source)

TD Bank

Net income: $1.45-billion (+23%)

Earnings per share: $1.58 (vs. $1.29 in Q3 2010)

  • “Loan growth was within expectations for the quarter and strong volume growth is expected to continue through fiscal 2011 driven by residential mortgage refinance activity and commercial lending,” TD said in its report to shareholders. (Source)
  • TD saw “good quality loan growth across portfolios, notably in Canadian Residential Mortgages” (Source)
  • TD had a balance of $70.6 billion in Canadian residential mortgages in Q3 2011 vs. $65.4 billion in the previous quarter. Home Equity Line of Credit volume in Q3 2011 was $59.4 billion, up from $59.2 billion. (Source)
  • 75% of HELOCs are in first lien position; a further 20% are in second to a TD first (Source)

Steve Huebl, CMT