Banks Can Meet Their Responsibilities: Scotiabank CEO

Rick-Waugh-ScotiabankScotiabank CEO Rick Waugh reminded everyone Tuesday that banks have an inherent responsibly to lend judiciously. Regulators shouldn’t have to apply more pressure for banks to comply with this duty.

“I agree with our government,” said Waugh. “It’s up to the banks themselves—not government or regulators—to manage our risks and advise our customers appropriately,” he added.

“Likewise, it’s the responsibility of government to set fiscal and monetary policies, and the level of interest rates, according to prevailing conditions.”

Scotiabank-HQWaugh made these statements at Scotiabank’s annual meeting on Tuesday. It was a refreshing dose of common sense and accountability—in contrast to bank executives like TD CEO Ed Clark.

For some time now, Clark has been campaigning for tighter mortgage rules, such as 25-year maximum amortizations. Moreover, he has called on Ottawa to impose these rules, and to do so for all banks simultaneously—presumably because TD doesn’t want to lose market share by taking its own medicine unilaterally.

As for Waugh, he added:

  • “The current concerns about Canada’s housing market are reason for caution but not pessimism.”
  • “We keep a very close eye on our mortgage portfolios, and in Scotiabank they are in good shape.”
  • “…Canadian household balance sheets remain solid, and our housing market is supported by strong fundamentals. Supply is balanced and Canadian banks finance largely on presales and cash equity, where loan-to-value ratios show our customers have true equity.”
  • “Our customer delinquency rates are well within parameters.”
  • “We can and will manage through any potential (housing) problems.”

Waugh also told Reuters that the recent 2.99% mortgage rate battles did not “fundamentally” increase risks to the housing market. He cited credit card lending as a bigger area of concern.

Sources: BNN, Reuters

Rob McLister, CMT

  1. So banks just wanted Flaherty to do the 30 year to 25 year thing and nothing else? They getting a bit worried about too many regulations by the heavy-handed?

  2. TORONTO, April 4, 2012: TREB reported 9,690 sales through the Toronto MLS system in March 2012. Up by almost eight per cent over the same period in 2011.
    Average selling price $504,117 up by 10.5 per cent over last year.

  3. Clark’s protect us from ourselves routine is getting old. I read here that only 3% of applications wouldn’t qualify at a 25 year amortization. If that is true then who cares if TD has to turn down a few of these people? It’s a drop in the bucket for TD’s volume.
    Just tell your underwriters to do the right thing Ed. Your shareholders won’t know the difference.

  4. Hi Ron,
    In the long-term, annual average price increases of 10.5% certainly appear to be out-of-line. Averages are also deceiving because real estate sales stats are severely skewed to the high side.
    For example, the latest TREB data available (Feb. 2012), revealed that 47% of all sales were under $400,000. Only 11% of sales were over $800,000, including a sizeable number of multi-million dollar sales. With almost no sales under $200,000, you soon realize that the distribution curve is not “normal.”
    Having said that, the GTA resale market continues to suffer from a chronic shortage of listings (50% below “normal”) and continuously strong demand. Unless something dramatic happens to change those economic parameters, I’m afraid that prices are going to continue to climb.

  5. Climb at 10.50% per year for 2 years? 4 years? Despite some positive factors such as low rates, continuing in-migration and lack of inventory it is simply crazy to think that in 4 years a 900 sq ft duplex with no garage or parking space at Christie and Dupont which sold for $369K five years ago, sells for $624K today will sell for $930K in 4 years. it makes no sense and is patently unsustainable.

  6. It was a refreshing dose of common sense and accountability—in contrast to bank executives like TD CEO Ed Clark.
    I see it completely the other way. The only one being honest here is Ed Clark. With the CMHC taking on the majority of the risk (changing now, thankfully), TD has little incentive to tighten their own lending criteria, and plenty of disincentive (losing market share, losing profits).
    TD must please their shareholders, and that means being competitive with other institutions. Scotiabank is kidding themselves if they think they’re not in the same boat.
    Rick’s reasoning only works without CMHC. When banks actually take on the entire risk of their lending, rather than passing it on to a third party.

  7. Clark sure talks a big game. If the real estate market is really coming to an end, shouldn’t he do the right thing “for shareholders” and qualify every TD customer at a 25 year amortization? A true leader would take the short term pain for long term gain.
    His words are nothing more than posturing as far as I’m concerned. Thankfully, Minister Flaherty called Clark on his antics so we’ll probably see a little less gum-flapping on this issue.

  8. If Flaherty is such a laissez-faire, Kudlow-loving, free market capitalist then why is OSFI camped out in the mortgage division of every single bank proposing ways that they should ‘voluntarily’ comply with much stricter lending and audit policies?

  9. The most interesting thing about this month’s TREB stats is how strongly the detached-house segment drove the market.
    At least in Toronto proper, sales of detached homes were up strongly vs. last year, but sales of semis, townhouses and condos actually dropped. Similarly, big price gains on detached homes, moderate gains for semis, and barely any movement for townhouses and condos.

  10. A customer with 5% down, 30 year am and backing by the full faith and credit of the Canadian government is a far better risk than someone with 20% down, 25 year am and no AAA rated guarantor. That’s all you need to know. The banks *are* being prudent.

  11. I see the “TORONTO, CENTRE OF THE UNIVERSE” mentality is alive and well. You guys really need to get off the morning GO train and go see what lives past Oakville because right now your only seeing 10% of the big picture.

  12. So give us the update! I’m particularly interested in land value properties in prime Burlington, but all data is welcome.

  13. The update is there are actually 9 other provinces and 3 territories in Canada. I promise it`s true. I once drove past Oakville, then Burlington/Hamilton and surprise, I didn’t fall off the flat earth and into a hot pool of magna!

  14. Let’s back it up for a second… the BANKS are the ones that pushed the government to extend the amortization out in the firstplace. They gave assurances that there was limited risk in them doing this.
    Now that there is an outcry regarding household debt levels, TD and other banks start to push for tighter mortgage regulations? Are they perhaps doing it to deflect from the true issue… consumer credit? TD really concerned? That must be why they register collateral charges at 120% of the value of the home…
    The government is correct, the banks need to asses their own level of risk tolerance, and lend accordingly – as they have done since the day they started lending.
    That ANY financial institution would only lend based on someone else insuring the mortgage against loss is irresponsible credit adjudication. It is a clear example of private industry being prepared to drop the risk in the laps of the taxpayer, while reaping record level profits.
    In any other industry there would be a massive public outcry for abuse, corruption, etc.
    In terms of property value increases in Toronto… 10.5% increase in one year and people are up in arms about it? Try Vancouver’s 30%+ increase in 2003 – 2004, and subsequent double digit increases almost every year since.
    The market here is still strong and there is still demand for properties…. even after all those Torontonians said that Vancouver would never be able to sustain the increase from 2003 – 04.
    The fact of the matter is this: So long as the consumer is prepared to pay the price that is being asked… that is the value of the product which they are purchasing. If my house is listed at 500K and I don’t get any offers, then it is not worth 500K, if I sell it at that price or get multiple offers… then guess what… it is work 500K.
    Just look at other consumer items… how reasonable is it that a woman would pay $1000 for a purse? Doesn’t seem right does it? Well there are brands out there that sell purses for that and more. People willingly pay it, and that means that the product has the value.
    Supply and demand is not a new concept, and it is the driving force behind a free market economy like ours. Always has been, and unless we move to a communist economy – it will not change.
    Don’t forget… our free market is the reason why mortgage brokers even exist.

  15. Actually, the GTA about a third of the big picture and the Lower Mainland is another two fifths. As much as I love the whole country, we’re screwed if Toronto and Vancouver bust at the same time, no matter what happens in Chicoutimi. Alberta the great has been going sideways (East?) for a few years now.
    …And I always thought the Ivory Tower you were referring to was the RBC property on Front Street. How Toronto-centric of me.

  16. If some moron offers you $1.2mm for your $500k house, is the house worth $1.2mm? Not by any reasonable definition that a property appraiser would recognize.
    If I want to pay $500k for your house but can’t get financing, is it worth $500k? What if I could get financing yesterday but qualifications changed, or interest rates went up 1/2%? Your definition of value is an odd one if it can change from day to day absent changes in the opinions or circumstances of the buyers and sellers.
    I’m really not interested in a house’s ‘value’ today, by your definition. I know what I can get paying cash, what I’d be financed for, and what I could get if I went “all in.” What I’m interested in is what those houses will sell for going forward. Likely more? Likely less? I don’t invest in stocks on the assumption that they’re worth exactly whatever the market is pricing them at this instant, either.
    $1,000 purses are Veblen goods, a different kettle of fish.

  17. Those weightings are only respective of the cities that Teranet follows.
    Nationally speaking, GTA and GVA are just 1/4 of the real estate picture.

  18. WOW… really you don’t think that housing prices are determined by consumer demand? To deny this is to ignore the principles of a free market economy.
    Paul’s example of the purse may not be the best, but come on… you think it would be worth that in no-one paid the price for it?
    Dude… stock values are driven by the consumer of stocks.- it is why they fluctuate, they are an intangible and have different valuation parameters. If a stock is in high demand the value goes up – if not, it goes down. It’s the whole “Buy” and “Sell” factor. Stocks fluctuate to the degree they do because of speculation, and short term strategies.
    If homes in an area are carrying an average valuation and consumers are prepared to pay that average valuation, they they have that value. If consumers are not willing to buy the homes in an area for an average price point… the price point drops.
    Do other factors such as rate play a factor? Of course they do. But affordability is a derivative of a supply and demand marketplace.
    It is why so many appraisers get it wrong. I mean, how is it possible that the same appraiser can give a different valuation on a home depending on who asks for it?
    Appraisers base a VERY large reliance on recent sales in the area to determine value – it is why comparables are one of the largest factors when determining value.
    If you think that the average consumer purchases a home because of what they think they might get for it in the future… you are assuming that ALL people are buying homes for speculative reasons.
    Real estate specualtors drive home values up artificially far more than the person who buys a home for the purpose of living in a home. Don’t agree with that? You need to do more research into the pre-built condo market in Vancouver.
    As for mortgage affordability, as a mortgage broker you are obligated to ensure that your clients are well aware of both long and short term risk associated with the financing that they are obtaining.
    If you don’t do that, then you are not doing your job.

  19. Cramdown
    Are you in a race to see how many comments you can post in the least amount of time? It seems like you have a comment for everything but many lack substance. This one is a good example. Calling 5/30 insured mortgages “far better risk” than 20/25 is a nonsense. Banks would lose almost the same in either case, so how can one be “far” more risky?

  20. “I mean, how is it possible that the same appraiser can give a different valuation on a home depending on who asks for it?”
    I am an appraiser and I work for 15 different lenders including 3 of the “big 5” banks, as well as mortgage brokers.
    This statement baffles and offends me. It matters not one iota “who” orders the appraisal. They all get the same treatment – which is an estimate of value based on the best comparables available and adjusted for variations in relation to the subject property.

  21. Cramdown you are truly clueless.
    The chance of default is much higher for the insured mortgage and the expected loses are similar in each case.
    Calling the 95% LTV mortgage a “far better risk” is just nonsense.

  22. @LS
    Scotiabank is not kidding itself. Far from it. It has the benefit of a secret weapon. If you lean in and don’t tell anyone, I’ll whisper it to you.
    It’s called……………….

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