Q1 Bank Roundup

BankThe first quarter of 2012 brought us ultra-low mortgage rates and strong bank profits overall.

Canada’s Big 6 earned just over $7 billion in the quarter, up roughly six per cent from a year ago.

All banks met or exceeded street expectations, despite operating in an extended low-rate environment that has seen volumes drop and margins shrink.

Here’s a roundup of noteworthy mortgage morsels from the banks’ Q1 reports. We’ve highlighted some of the more notable parts.

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RBCRoyal Bank of Canada

Net income: $1.9 billion (-6% Y/Y)
Earnings per share: $1.23

  • Residential mortgage volume grew 7% Y/Y (Source)
  • “Our consumers are switching from variable rate mortgages into higher margin fixed rate mortgages,” said David I. McKay, Group Head, Canadian Banking. “That is a trend that’s really manifest itself in the last quarter as consumers (spread) a lot in long term rates.
  • “…Our variable rate book was running at a very low rate and our fixed rate book is a better margin for us. You saw some price competition over the quarter in that fixed rate book, but overall, we are very happy with our ability to win clients and make good margins.”
  • Mortgages comprised 65% of RBC’s $257 billion retail loan portfolio (Source)
  • Total value of RBC-held mortgages as at Jan. 31, 2012 was $167 billion. (Source)
  • Regarding the bank’s residential mortgage portfolio, RBC’s report said:
    • The portfolio is “well diversified” and roughly two-thirds is uninsured. (Source)
    • RBC has “Strong underwriting practices with all mortgages originated through our proprietary channels. (Source)
    • The “Broker channel may originate a higher proportion of high ratio mortgages which require insurance.” (Source)
    • RBC says it makes “No use of bulk insurance for credit risk or capital relief purposes” (Source)
  • “Our loss rates…are within our historical long term range of 1 to 3 basis points. We stress test our portfolio for (drops) in housing prices, unemployment and interest rates. These tests confirm that Canadian residential mortgage portfolio as well as the broader retail portfolios can withstand even dramatic movements in these parameters.” (Source)
  • RBC noted there may be some vulnerability in the condo mortgage market, but said RBC’s exposure is moderate with mortgages on condos representing less than 8% of its residential mortgage portfolio. (Source)
  • Morten N. Friis, RBC’s Chief Risk Officer, said: (Source)
    • “as you have more severe stresses, you can have in local markets certainly loss rates in the 50 to 100 basis points range, if you overlay very severe stress scenario.”
    • “we look at the impact on the overall bank performance of a variety of macroeconomic shocks and we look at sort of one in 20 year event, one in 50 year event, and through that process fully demonstrate our ability to withstand extremely severe shocks.”



BMOBank of Montreal

Net income: $1.11 billion (+34% Y/Y)
Earnings per share: $1.63

  • Decreased margin in P&C Canada was primarily driven by lower deposit spreads in a low interest rate environment, competitive pricing pressure and lower refinancing fees on mortgages. (Source)
  • Net residential mortgages stood at $79.6 billion in Q1, up from $74.7 billion a year earlier. (Source)
  • Of BMO’s total mortgage portfolio, 70% is insured and the average loan-to-value of this segment is about 63% after adjusting for current house prices based on Canadian house price indices. (Source)
  • “We’ve been pretty clear about our objective…We’ve been at 2% mortgage growth for quite some time now, and our expectation is we can grow that a little faster. We’re going to have to take some business from others as the market is slowing around us,” Downe added. “We plan on doing that through the activation of the investment in our sales force – our mortgage specialist sales force which continues to grow.” (Source)
  • Frank Techar, President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal reiterated that mortgage balance growth in Canada was 7% in 2011, and that BMO’s portfolio grew by about 2%. I think we have room to grow in the context of what we think the market growth is going to be in 2012, which might be a little slower than 7%, but it’s going be higher than 2. So we have the opportunity to do more business and that’s what we are shooting for.” (Source)(Editorial Note:  Could it be any clearer from BMO’s pricing that it’s looking to make up market share lost since exiting the broker channel?)

 

CIBCCIBC

Net income: $835 million (+9% Y/Y)
Earnings per share: $1.93 a share 

  • “CIBC has now put “greater emphasis on branch mortgage originations.” (Source) 
  • CIBC announced the possible sale of its mortgage broker brand. See: CIBC to Potentially Sell FirstLine.
  • McCaughey said the bank has invested in its branch-based mortgage business, including the hiring of more mortgage advisers. “The results of these investments are paying off as evidenced by our growth rates over the past year. CIBC branded mortgages have grown at a rate of 10% over the past year compared to the industry average of 7%.” (Source) 
  • Further on the potential FirstLine sale, McCaughey said this: (Source) 
    • “we are going to be targeting businesses and client activities that, as much as possible, occupy both sides of the balance sheet. 
    • “wholesale (mortgage) funding…is of diminishing value in any event but a faster diminishing value in the world of Basel III. 
    • “there is an expectation of a slowing in loan growth at the consumer level. We believe that that makes it even more important that one target the higher value-add (customer) relationships 
  • As of January 31, 2012, 79% of the bank’s domestic residential mortgage portfolio was insured. (Source) 
  • Regarding its 7-basis point drop in NIM, David Williamson, SEVP, CIBC, and Group Head, Retail and Business Banking, said: “…thelargest driver was the impact of net cost to the bank when a customer breaks their mortgage early. For a good portion of the quarter, the prepayment fees collected from customers were actually lower than the actual breakage cost to the bank. This was largely due to the interest rate environment and should be a factor for the industry as a whole. The second issue … is, again an industry one. That’s the low interest rate environment and the impact on deposits.” (Source) 
  • “…Our overall mortgage book is about C$140 billion odd – C$143 billion to C$145 billion. So, it’s coming off at a rate, let’s say a third, just roughly (a fee) rate. There is a lot of repricing and refreshing of that book over time as in any given year is C$42 billion – C$40 billion to C$50 billion of mortgages that are being renewed,” Williamson added.
  • In commentary issued Friday, banking analyst Darko Mihelic said:
    • “CIBC’s competitors will benefit from CIBC killing its broker channel.”
    • Mihelic, in turn, cut CIBC’s earnings estimates, saying “We no longer view the business model as ‘low risk’.”
    • “We fail to see how CIBC will keep up with peers that are becoming increasingly aggressive.”
  • David Williamson ended CIBC’s conference call by saying: “FirstLine is really a single product, a mortgage, irrespective of our efforts. I don’t believe any of our peers have been able to get deeper relationshsips pretty much in any way off of the broker mortgage channel.”(Editorial Note:  To Williamson’s point, we’d ask: “What ‘efforts’?” CIBC has made minimal visible efforts to increase cross-selling at FirstLine. Sorry, but merely asking brokers to push CIBC’s subpar creditor insurance is not a bona fide effort to improve cross-sales. Moreover, Williamson’s last comment about peers not having success with cross-selling ignores Scotiabank’s successful branch-signing process for brokered-mortgages. As we’ve written before (see: CIBC’s FirstLine Gamble), CIBC simply dropped the ball in terms of maximizing customer “relationships” from its broker channel. It cannot blame brokers for management’s failings in this department.)

 

TD-BankTD Bank

Net income: $1.48 billion (-5.1% Y/Y)
Earnings per share: $1.55

  • Continued strong organic loan growth, particularly in residential mortgages and commercial lending. (Source)
  • Residential mortgages stood at $144 billion (gross loans) in Q1, up from $129 billion a year earlier. (Source)
  • Tim Hockey, President and CEO, TD Canada Trust said, “…We have the largest (HELOC) portfolio…”
  • “…We are seeing a little bit of (HELOC) market share loss…but on the other hand we are getting it back on the mortgage side.” (Source)
  • “…We often sell our HELOC…as a much more flexible option for…a mortgage
  • “There is very aggressive (HELOC) pricing elsewhere in the marketplace.”
  • Regarding consumers’ preference for fixed or variable rates, Hockey said TD’s portfolio is currently evenly split, “but very clearly like the industry, we’ve seen (a) shift to fixed and I think that number is more like 70-30 now depending on the product. (Source)(Editorial Note:  TD could sell so many more HELOCs if it offered them through the broker channel. Brokers today simply route HELOC customers to other banks. It’s TD’s loss and it makes no sense whatsoever from an overall profitability standpoint.)

 

ScotiabankScotiabank

Net income: $1.44 billion (+15% Y/Y)
Earnings per share: $1.20

  • Scotia saw a substantial growth in assets, due primarily to growth of $9 billion (or 7%) in residential mortgages. (Source)
  • Scotia saw lower net interest margins due to higher volume growth in relatively lower yield variable rate mortgages and the impact of a lower spread on fixed rate deposits due to market competition. (Source)
  • The Bank’s Q1 residential mortgage portfolio totalled $144.6 billion, up from $142.1 billion in Q4 and a 6.8% Y/Y increase from $135.4 billion. (Source)
  • Of that, 56% is insured and 44% is uninsured. (Source)
  • “We believe that solid economic fundamentals will enable the Canadian market to remain healthy and adjust without the bubble-bust scenario that we’ve seen in the United States,” said Robert H. Pitfield, Group Head and Chief Risk Officer. (Source)
  • “…if the Canadian consumer preference continues to shift to more fixed rate mortgage product, as we’ve seen recently, that will reduce the downward pressure on the margin that we’ve seen in the last two, three quarters. So looking forward, we think we may be near the bottom of the margin compression,” said Sean McGuckin, EVP and CFO. (Source)
  • “We have about C$13 billion in condos…about C$5 billion of that would be…in Toronto and about C$2.5 billion in Vancouver…About 80% of that would be rated A or B in terms of credit quality. About half; 46% would be insured. The delinquency would be about (1.25), so as good as or better than the overall portfolio…it’s a very good solid portfolio,” Pitfield said.  (Source)


National-Bank-Mortgage-OrigNational Bank of Canada

Net income: $332 million (+3% Y/Y)
Earnings per share: $1.99 a share

  • This was National Bank’s highest ever first quarter profit. (Source)
  • “…The good growth we’ve had is not coming from lower underwriting standards”—Louis Vachon, President and CEO (Source)
  • “…We have increased the number of Mortgage Development Officer doing business with real estate agents. So [our 13% growth in mortgage and personal lending] came from that, but it also came from the broker side of the business.” (Source)
  • “…About 30% of [National Bank] mortgages…come from the brokerage channel.”
  • “…The portfolio is about two-thirds fixed and one-third variable and we have been seeing lately more people going more to fixed.”
  • Monthly volume of residential mortgages:  $29.3 million in Q1 2012 vs. $25.9 million in Q1 2011. (Source)
  • Traditional residential mortgages totalled $29.3 billion as at January 31, 2012, up 3% since Q3. (Source)
  • “We’ve been a little bit more receptive to mortgage brokers than compared to some of our competitors who have, frankly, been a little bit more ambivalent about doing business with mortgage brokers,” Vachon told CanadianBusiness.com following its earnings release. (Source)
  • Rejean Levesque, executive vice-president of personal and commercial banking, told the publication that while growth was “pretty strong” in mortgages, he expects it will slow to the mid-to-single digits in the second and third quarters. (Source)
  • Levesque also said that, “excluding Quebec, as much as 45 per cent of mortgages come from the brokerage business and that National Bank is doing a better job of tapping into that market.”(Source)
  • Regarding CMHC’s decision to ration bulk insurance, “I think it will have an impact on the whole street in terms of the use of CMHC-insured mortgages for covered bonds,” said Levesque.
  • Levesque added:
    • “I think the objective is that that we fund most of the (loan) growth going forward…through, frankly, funding from deposits.”
    • “We are now close to 65-70% (of broker clients that are) being referred to the branch network. So we are trying to pick the brokers that will be able to give me mortgages that I can relocate within the branch and we are following very closely to cross-sell those customers.”
    • “…Usually within the first year the (propensity) to buy is much higher than the rest of the life of the loan. So we’re working more closely even with the broker but also with the other MDMs to cross-sell within the branch.”
  • Darko Mihelic, an analyst at Cormark Securities, said to Levesque: “Typically mortgage brokers wouldn’t bring you business unless you were fairly aggressive in pricing or something else with respect to paying them.”
  • Levesque responded by saying “it’s certainly not pricing” that’s led National Bank to be successful with brokers.(Editorial note: It would be impossible for us to disagree more with that last statement. National Bank’s pricing and broker status program were among the best in the market last year. That’s the primary reason its broker volume exploded. We love the broker team at National Bank, but with all due respect, if Levesque believes he can maintain broker volume momentum with merely average pricing—like prime + 0.75% for its HELOC while competitors are at prime + 0.50%—he may be in for an unpleasant surprise.)

Steve Huebl & Robert McLister, CMT

  1. Thanks so much for your efforts!
    In CIBCs report
    “As of January 31, 2012, 79% (October 31, 2011: 77%) of our domestic residential mortgage portfolio was insured and 21% (October 31, 2011: 23%) was uninsured. The LTV of our total domestic residential mortgage portfolio was 49%(1) and that of our uninsured domestic residential mortgage portfolio was 48%(1).”
    Made me wish they split out insured by the consumer vs. insured by CIBC themselves. Based on the identical LTV of the two pools, CIBC must be serious buyers of mortgage insurance and will be hit harder than say RBC by the rationing of CMHC’s insurance.
    Also this was interesting:
    “Generally, loans on which repayment of principal or payment of interest is contractually 90 days in arrears are automatically considered impaired unless they are fully secured and in the process of collection. Notwithstanding management’s assessment of collectability, such loans are considered impaired if payments are 180 days in arrears.
    Exceptions are as follows:

    Loans guaranteed or insured by the Canadian
    government (federal or provincial) or a Canadian government agency are classified as impaired only when payments are contractually 365 days in arrears.”
    They get to keep insured bad loans on their books at full value a full year? Which begs the question, long does it take CHMC to pay out?
    Are they allowed to bank the missing payments as income like banks can in the states?

  2. They’re avoiding mark-to-market assets and in TD’s case as of Q4, vaporizing $2 billion in impaired loans into space.
    Foreclosures are being hidden within bankruptcy proposals that banks submit to the credit bureau as debt to be collected. That’s why CBA’s mortgage arrears data is low and OBA’s consumer bankruptcy proposals are up. It’s just a statistical cat and mouse game to avoid disclosing figures to investors and the general public.

  3. I’ve been following your commentary on the Firstline fiasco since February. My compliments for bringing this extraordinary management screwup to the surface.
    Your website’s analysis has been spot on. CIBC management has been flat out negligent with its shareholders in my view. How do you take the top asset in the broker industry, a brand that earned CIBC over $100 million in profit each year, and destroy its value overnight?
    Then CIBC tries to sell it, after it’s worth nothing???
    The board needs to fire McCaughey and Williamson without a second thought. These guys are utterly incompetent in my opinion. CIBC’s market share will plunge like its stock price and no amount of “deeper client relationships” is going to save them.
    By the way, if I hear CIBC use the word “relationship” one more time I’m going to puke. Williamson tries to make it sound like he’s found the holy grail. What bank doesn’t strive for deeper client relationships??
    If you want a great investment strategy buy this Canadian bank ETF:
    http://finance.yahoo.com/q?s=ZEB.TO
    At the same time short CIBC:
    http://finance.yahoo.com/q?s=cm.to&ql=1
    Do it in equal dollar amounts. I think you’ll be very happy with the result one year from now.

  4. Does it really matter? Banks recoup that lost interest when they foreclose or get paid on an insurance claim.

  5. National Bank’s “love” for brokers is sooo phony! Last September and October, it was offering 3.29% (5y) through brokers while offering 2.79% through its branches. I would rather buy the rate and work for free than sending a deal to them! Like all other big banks, they keep the broker business until they have hired all the manpower they need. I only deal with non-bank lenders as I think the will be the only ones dealing with brokers 10 years from now.

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