Margin pressure, modest loan growth, tighter underwriting and low defaults.

Those were recurring themes during the second quarter for most big banks.

Net interest margin deteriorated at four of the Big 6, while sequential loan growth rose for all of the majors…except CIBC.

As is the case every quarter, we’ve painstakingly scanned Q2 bank reports and conference calls for anything notable and mortgage-related. Focal points are highlighted and our comments are in italics.

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Bank of Montreal

Net income: $1.03 billion (+27% Y/Y)

Earnings per share:$1.51

Net interest margin:  -12 bps*

• BMO’s Canadian residential mortgage portfolio stands at $70.5 billion. (Source)
• BMO’s average mortgage balances grew 1% from Q1. (Source)
• Shrinking net interest margins were “driven by competitive pressures and lower deposit spreads” (Source)
• Of BMO’s total mortgage portfolio, 70% is insured (Source)
• 65% is the average loan-to-value (LTV) of BMO’s insured mortgage portfolio (Source)
• “…Higher mortgage volumes offset declining margins, while expenses were kept in check.” Margins shrank, “thanks in part to ultra-low 2.99% mortgage deals that drew recent criticism from Canada’s Finance Minister.”—MarketWatch (Source)
• “Housing market activity has softened in most regions and mortgage growth is showing tentative signs of slowing.” (Source)
• “In response to a slowdown in personal loan growth and elevated consumer leverage, we shifted focus ahead of the market to drive the business. Our intention was to deliver tangible customer benefits by offering more suitable products in a low interest rate environment. This was best illustrated by our five-year fixed rate mortgage, a product that provides borrowers with a faster path to increase home equity and certainty of monthly payments,” said William Downe, President and CEO, BMO Financial Group. (Source)
• “The success of this approach is profound and has built a new business pipeline. Based on recent data approximately 70% of BMO’s current mortgage originations have a 25-year or less amortization period compared to 40% last June, which we believe to be industry-leading. For BMO, the result has been high credit quality with attractive interest margins.” (Source)
• “…relative to our five-year fixed rate mortgage … there might be a question about how that has affected our margins, and in this quarter, Q2, we’ve seen less than one basis point as a result of the activity around that mortgage offer. And relative to the spreads in our overall mortgage book that (2.99%) offer has carried spreads less than 10 basis points lower than our overall book,” said Frank Techar – President and CEO, Personal and Commercial Banking Canada. (Source)
• “On the mortgage front, we haven’t seen the growth yet, but all I can tell you is that if you look at March and April, we’re starting to see the momentum pick up as a result of offers we’ve had in the marketplace…”—Frank Techar (Source)
  (It better. If BMO doesn’t post meaningful and profitable gains in market share, Techar may be on the hot seat. So far, BMO’s exit from the broker market hasn’t exactly been a raging success.)
• “On the commercial side…We are approaching that segment very cautiously.”—Frank Techar (Source)

CIBC

Net income: $811 million (+6% Y/Y) 

Earnings per share:$1.90

Net interest margin: -13 bps

• CIBC’s Canadian residential mortgage portfolio is $145.3 billion. 39% of this amount are broker and PC Financial mortgages.
• “Residential mortgages were up $584 million due to mortgage originations, partially offset by principal repayments, and liquidations.” (Source)
• CIBC’s market share fell to 13.3%, from 13.7% in Q2. (Source) (Its overall share should drop further as it eliminates brokered mortgages.)
• Condos account for approximately 12% of CIBC’s total mortgage exposure (Source)
• “The credit quality of (CIBC’s) portfolio continues to be high with a net credit loss rate of approximately 1 basis point per annum.” (Source)
• Regarding FirstLine mortgages, CIBC’s quarterly report noted: “We continue to explore strategic options, including apotential sale of our broker mortgage brand calledFirstLine. This strategic direction is consistent with Retailand Business Banking’s client-centric strategy, which has now put greater emphasis on branch mortgage originations.” (Source)
• “Retail and Business Banking is expected to face slightly slower growth in demand for mortgages, while consumer credit demand could continue to see limited growth.” (Source)
• “78% of our domestic residential mortgage portfolio was insured and 22% was uninsured. Of this insurance, 93% is provided by the Government of Canada and 7% by two private Canadian insurers, both rated AA (low) by DBRS.” (Source)
• “Based on latest available industry house price estimates from Teranet (February 29, 2012) the LTV of our total domestic residential mortgage portfolio was 49.5% and that of our uninsured domestic residential mortgage portfolio was 49.4%. No material losses are expected in the mortgage portfolio.” (Source)
• “As we discussed last quarter, our focus is on increasing share in our CIBC branded channels, where we can form deeper relationships with our clients, earn higher NIMs, and elevate levels of client satisfaction,” said Gerald McCaughey, President and CEO of CIBC. (The question is: Do those “higher NIMs” come off the customer’s back?)
• “CIBC branch originated mortgage growth continues to outpace the market, growing at 10% from last year.” (Source)
• “While we continue to explore strategic options, including the sale of our FirstLine broker mortgage business, we have recently started to offer CIBC branded mortgages to FirstLine mortgage customers coming up for renewal. While this activity is still in its early days, initial results have been positive.” (Source)
• “…We’ve just started that renewal process. We reach out (to FirstLine customers) on advance of the actual renewal…it is going well. The propensity to renew into the CIBC brand seems to be quite high. So at this point it looks like we should be confident in the 50% (client retention) target that I outlined last quarter.”—David Williamson (Source) (From what we’re hearing from brokers—and seeing with our own clients—CIBC is pulling out all stops to push FirstLine clients over to CIBC at renewal. CIBC’s retention department seems to be making full use of its significant pricing discretion.)
• “…We did see enough uptick in spreads as a result of [doing a higher ratio of CIBC branded mortgages], that (it) completely negated the impact of lower interest rate environments on net interest margins.”—David Williamson (Source)
• Approximately 46% of CIBC’s mortgages are in Ontario followed by B.C. at 20%, and Alberta at 17%. (Source)

National Bank of Canada

Net income: $553 million (+69% Y/Y)

Earnings per share:$3.22

Net interest margin: -17 bps

• Volume of residential mortgages totalled $30.0 billion in Q2 2012 vs. $26.5 billion in Q2 2011, an increase of 13%. (Source)
• Mortgages and personal loans rose 13% (Source)
• Net interest margins fell 17 bps Y/Y, the most of the Big 6.
• “The overall mortgage portfolio reflects loan-to-value on the uninsured portion of roughly 55% and low to mid-50s under HELOC book.”—EVP, Patricia Curadeau-Grou (Source)
• “The deployment of our new mortgage and HELOC technology platform is scheduled for pilot in the fall and full deployment in early 2013.”—CEO, Louis Vachon (Source)
• “In Ontario we have seen good volume growth. A lot of that (45%) is coming from brokers. Clearly over the next few quarters we are going to look at net margins in that (broker) business…We are going to look to hopefully increase the branch and the mobile sales force contribution in Ontario and decline the (broker channel) – but we are not pulling out of the mortgage brokers market. But on a relative basis we would like to reduce it a little bit.”—CEO, Louis Vachon (Source)
• 49% of growth is coming from branches, 30% is coming from NBC’s mobile sales force and 21% is coming from mortgage brokers. (Source)
• “Well the first rule of the B20 we were expecting also OSFI to reduce the loan to value on the HELOCs from the 80% to 65% and then there has been further discussion amongst the banks and the regulators whereby that 65% (LTV guideline) may not be on the individual basis, but maybe on a portfolio basis. So we are still waiting to see what the final feedback from the regulator.”—EVP, Patricia Curadeau-Grou (Source)
• “We are still negotiating with the regulators and there is no certainty that (a rule requiring re-underwriting renewing mortgage customers) will be implemented.”—EVP, Patricia Curadeau-Grou (Source)
• NBC’s HELOCs average 51% LTV (Source)

RoyalBank of Canada

Net income: $1.56 billion (-7% Y/Y)

Earnings per share:$1.01

Net interest margin: -7 bps

• Residential mortgage growth: 7% Y/Y (Source)
• Residential mortgage portfolio: $169 billion (up from $167 billion in Q1) (Source)
• Average uninsured mortgage LTV: 47% (Source)
• Of RBC’s residential mortgage portfolio, 39% is insured and 61% is uninsured. (Source)
• Regarding proposed OFSI guidelines that would require mandatory amortization and a maximum loan-to-value limit of 65% for HELOCs, among other things, RBC said, “We are responding to these and other developments and are working to minimize any potential business or economic impact.” (Source)
• “(Loss) provisions on residential mortgages at 1 basis point are consistent with our historic performance and we continue to actively monitor the strength of this portfolio,” said Morten Friis, CRO. “The residential mortgage book in my view gets a disproportionate amount of attention. The level of impairment there is relatively flat. The loss loan provision at one basis point is as good as you can expect it to get.” (Source)
• “…there are a couple of hotspots that are well documented in the market that we’re watching closely, everyone looks at the Vancouver, Mainland Vancouver market and a little bit of the Toronto market for some hot activity on the ground…Obviously, we tailor our lending practices to those hot spots and we watch them very, very carefully, but you can’t really generalize across the country,” said David McKay – Group Head, Canadian Banking. (Source)
• “With the housing market discussion, while there is general concern over the pace and scale of condo development, I want to emphasize that RBC’s total exposure to high rise condo construction is spread across a significant number of projects and remains manageable at just under C$1 billion of outstanding loans representing less than 3% of our commercial loan book,” Friis added. (Source)
• “We have tightened our appraisal process and we make sure that we’re getting an accurate rate, because you’re absolutely right when you think you have an 80% loan to value ratio, you want to make sure you have an 80% loan to value ratio. So we have revealed our appraisal practices and processes and have tightened in certain areas. Whether that’s increasing more drive by appraisals, our follow appraisals on properties is all part of the options that we have and looking at how we manage the valuation of the properties we’re taking at collateral,” said Gordon Nixon, President and CEO. (Source)
• “When you look at our volumes and our approval rates and the quality of customers that are coming in, I would say that the average quality of our applicants has been increasing in a mortgage portfolio. That’s some of the stress testing that we’ve done around that too,” Nixon added. (Source)
• RBC says it has “Strong underwriting practices with all mortgages originated through our proprietary channels” (Source)

Scotia Bank

Net income: $1.46 billion (-10% Y/Y)

Earnings per share:$1.15

Net interest margin: -2 bps

• The Bank’s Q2 residential mortgage portfolio totalled $149 billion, up from $144.6 billion in Q1. Of that, $136 billion related to freehold properties and $13 billion related to condominiums. (Source)
• Residential mortgages grew $10 billion or 7% Y/Y (Source)
• Of the Canadian residential mortgage portfolio, 56% is insured, and the uninsured portion has an average loan-to-value ratio of 56% (Source)
• “We believe that the solid economic fundamentals will enable the Canadian market to remain healthy and adjust without the bubble bust scenario that occurred in the United States,” said Robert Pitfield, Group Head and Chief Risk Officer. (Source)
• “…We expect to see continued healthy asset growth primarily in fixed-rate residential mortgages and in consumer auto.”—Anatol von Hahn – Group Head, Canadian Banking

TD Bank

Net income: $1.69 billion (21% Y/Y)

Earnings per share:$1.78

Net interest margin: +10 bps

• Residential mortgages rose to $146 billion in Q2 from $132 billion a year earlier. (Source)
• Real estate secured lending volume increased 7% Y/Y (Source)
• 70% of the mortgage portfolio is insured with an average LTV of 51% (Source)
• 14% of TD’s mortgage portfolio is in condos (Source)
• “Traditionally, the margin on a mortgage, whether it’d be HELOC, fixed, or a fixed mortgage is about, call it 85, 90 basis points. We’re running a little bit higher than that I would say. But it is drifting down … because of primarily a mix shift.”—Tim Hockey, Group Head, Canadian Banking and TD Auto Finance; President and CEO, TD Canada Trust. (Source)
• “We have seen quite a shift from the variable interest rate mortgages to fixed as people are taking advantage of low rates to lock in for longer-term. But the general margin erosion is onesies and twoseis at best in that whole portfolio.”—Tim Hockey
• TD says it is “Continuing to closely monitor and adjust underwriting standards where appropriate.”
• Of TD’s $65 billion in HELOCs, 75% are in first lien position; a further 20% are in second to a TD first. (Source)

Note: Transcripts are provided by third parties like Morningstar. Their accuracy cannot be 100% assured.

* Net interest margins reflect the Y/Y change for each of the banks’ Canadian operations, as provided by Cormark Securities Inc.

Rob McLister & Steve Huebl, CMT

Last modified: October 9, 2014