If there’s one recurring mortgage theme from the Big 6 banks’ recent earnings announcements, it is “stress testing.” That’s where a bank simulates extremely adverse economic scenarios in a statistical model and then watches how its mortgages perform.

Stress testing has been a buzzword of late. Banks have been talking up their stress tests to show investors that things will remain under control if the floor drops out in the housing market.

Among other trends this quarter:

• Homeowners are increasingly renewing into fixed rate mortgages, which are more profitable for the banks
• Most banks are posting decreases in their insured mortgage portfolios (not surprising given last year’s insured mortgage rule tightening)

These and other observations can be found in the compilation that follows. It’s the
fruit of pouring through quarterly earnings reports, presentations and
conference calls. If you’re time-pressed, some of the focal points
are highlighted, with our comments in italics. 

*********

Bank
of Montreal

Q2 net income: $975 million (-5.3% Y/Y)

Earnings per share: $1.42

• BMO’s total Canadian residential mortgage portfolio stood
  at $81B. (Source)
• BMO said mortgage
  balances are up 13.7% Y/Y, with balances up 1.9% Q/Q, “reflecting (a) softer
  market.” (Source)
• 62% of the bank’s residential mortgage portfolio is insured, down from 70%
  in Q2’12. (Source)
• Average loan-to-value (LTV) on the uninsured portfolio
  is 59%. (Source)
• 64% of BMO’s portfolio has an effective remaining
  amortization of 25 years or less. (Source)
• Loss Rates for the trailing 4 quarter period
  were less than 1 basis point. (Source)
• 90-day delinquency rates have improved, dropping
  quarter-over-quarter and year-over-year. (Source)
• BMO’s condo mortgage portfolio is $11B with
  56% insured. (Source)
• “…we’ve gained share in mortgages by bringing in new customers and encouraging them to borrow smartly with shorter amortization periods, and we’ve executed on cross-sell,” said William Downe, President and CEO. (Source)
• BMO said, “Tighter mortgage rules have
  restrained activity in the housing market, while weak global demand is holding
  back exports.” It added that “Strength in
  business loan growth should partly offset a slowing in consumer loans and residential
  mortgages.” (Source)
• BMO on regulatory changes: “In 2012 new residential real estate lending rules were introduced for federally regulated lenders in Canada including restrictions on loan-to-value (LTV) for revolving HELOCs, waiver of confirmation of income, debt service ratio maximums, as well as maximum amortization of 25 years and maximum home value of $1 million for high ratio insured mortgages (LTV greater than 80%). The regulatory changes resulted in some adjustments to loan underwriting practices including reducing the maximum LTV on revolving HELOCs to 65% from 80% previously.” (Source)
• BMO on stress testing:  “Residential mortgage and home equity
  line of credit (HELOC) exposures are areas of interest in the current
  environment. BMO regularly performs stress testing on its mortgage and HELOC portfolios
  to evaluate the potential impact of tail events. These stress tests incorporate
  moderate to severe adverse scenarios. The resulting credit losses vary
  depending on the severity of the scenario and are considered to be manageable.”
  (Source)
• “With respect to stress testing our portfolios,
  in a scenario that could be adverse, when we say that we are able to manage,
  it’s a combination of things. Firstly, I think even if our losses from that
  particular segment were to go up – and I’m not talking about the Consumer
  segment in total, because strangely but logically the losses really do not come
  out of the residential mortgages or from the HELOCs; they actually are felt
  more acutely in the Personal lines of credit as well as in credit cards,”
  Surjit Rajpal, EVP and Chief Risk Officer. (Source)
• Asked about BMO’s systemic problems in the
  U.S. with product origination, and issues surrounding incompetence around
  documentation, and whether BMO sees any systemic issues in Canada, Rajpal
  said: “Not that I can see, but if it was proven that systematically valuations
  were being done erroneously by somebody, then it could become an issue, but I
  don’t think that’s the case here; and so, it’s hard to see.” (Source)

CIBC

Q2 net income: $876 million (+8% Y/Y)

Earnings per share: $2.12 a share

• Residential
  mortgages were down $1.3 billion to $143.7 billion, “primarily due to attrition
  in our FirstLine mortgage business, partially offset by new mortgage
  originations through CIBC channels.” This follows a $1.1 billion decline in Q1.
  (Source)
  (We’ll evaluate CIBC’s mortgage market share losses in an upcoming story.)
• FirstLine
  mortgages stood at $37.1 billion, down from $48.2 billion a year ago. (Source)
• “Our exit from the FirstLine mortgage broker
  business continued to progress well, with both conversion volumes and spreads
  well exceeding our stated targets. The CIBC brand mortgage portfolio grew 12%
  year-over-year, which represented the 14th consecutive quarter of outperformance
  versus the industry,” said Kevin A. Glass, Chief Financial Officer and Senior
  Executive Vice President. (Source)
• 74% of CIBC’s Canadian residential mortgage
  portfolio is insured, with over 90% of this insurance being provided by CMHC. (Source)
• The
  average loan to value of its uninsured mortgage portfolio, based on March house
  price estimates, is 54%. (Source)
• Of CIBC’s $143-billion residential mortgage portfolio,
  approximately 46% is originated in Ontario, followed by B.C. at 20% and Alberta
  at 16%. (Source)
• “The credit quality of this portfolio continues
  to be high, with a net credit loss rate of approximately 1 basis point per
  annum,” said Thomas D. Woods, Chief
  Risk Officer and Senior Executive Vice President. (Source)
• Condos account for approximately 12% of the bank’s
  total mortgage portfolio, with about 72% of those in Ontario and B.C. (Source)
• 75% of the condo
  sub-portfolio is insured, and the uninsured portfolio has an average loan to
  value of 54%. (Source)
• David Williamson,
  Senior Executive Vice President and Group Head of Retail & Business
  Banking: “…With the runoff of the FirstLine book and a move
  to our branded products, happening in mortgages…the mix is moving more to
  profitable areas. And that’s where we get this kind of tailwind we’ve got,
  which is the impact of moving out of FirstLine and having a desire to get 25%
  of that into the higher-margin branded products. As I mentioned, we’re running
  quite a bit higher retention than the 25% and that’s having quite a positive
  impact. That’s one of the things that’s helping our NIMs, and frankly,
  offsetting the headwind, which everyone has, which is a slow interest rate
  environment.” (Source)

National Bank of Canada

Q2 net income: $434 million (-22% Y/Y)

Earnings per share: $2.49 a share

• Total revenues on personal banking were up $15 million or 2%, mainly due to higher
  consumer and mortgage loan volumes. (Source)
• Residential
  mortgages rose 4% Q/Q and 13% Y/Y to $34.8 billion in Q2. (Source)
• The loan-to-value for HELOCs and uninsured mortgages was approximately 59% and 55%, respectively.
• Mortgages in Toronto and Vancouver represented only 11% and 2% of National Bank’s books, respectively. 67.9% of National’s mortgage portfolio is in Quebec. (Source)
• During the six
  months ended April 30, 2013, the Bank acquired a portfolio of residential
  mortgage loans with a higher credit risk profile for a total amount of $328
  million. (Source) “It’s one of three or four small portfolios that we purchased typically from banks that were exiting the Canadian market,” said William Bonnell – EVP, Risk Management. (Source)
•  The Bank does not have any significant direct
  position in residential and commercial mortgage-backed securities that are not
  insured by CMHC. (Source)
• “…the risk of
  economic slowdown is real and could adversely affect the profitability of the
  mortgage portfolio. In stress test analyses, the Bank considers a variety of
  scenarios to measure the impact of adverse market conditions. In such
  circumstances, our analyses show higher loan losses, which would decrease
  profitability and reduce the Bank’s regulatory capital ratios. To counteract
  the negative impact of an economic slowdown, the Bank has acted preventively by
  defining a contingency plan to guide its response in such an event.” (Source)

Royal Bank of Canada

Q2 net income: $1.94 billion (+26% Y/Y)

Earnings per share: $1.27

• Residential mortgage volume rose
  to $177 billion in Q2, up 5% Y/Y from $169 billion. Average LTV was unchanged
  at 47%. (Source)
• 42% of RBC’s residential mortgage
  portfolio was insured in the quarter, up from 40% in Q1. (Source)
• RBC repeated its
  wording from previous quarters, saying it has a “well-diversified mortgage
  portfolio across Canada” and that it continues to conduct “Ongoing stress
  testing for numerous scenarios including unemployment, interest rates, housing
  prices.” (Source)
• RBC states it has
  “Strong underwriting practices with all mortgages originated through our
  proprietary channels.” (Source)
• “We
  continue to see stable performance in our retail portfolios with provisions on
  residential mortgages of 2 basis points and 279 basis points for (credit) cards,” said
  Morten N. Friis, Chief Risk Officer. (Source)
• Peter Routledge from National Bank
  Financial asked this question: “Is there any reason to think that there is a systemic issue with
  appraisals that might rebound on the banks in the form of the CMHC refusing
  claims…How likely an outcome is that?”
  
  Gordon M. Nixon – President and
  CEO, responded:  “…Most of the banks, including ourselves, use the emili appraisals service,
  which is CMHC’s own appraisal…They would do their own due diligence with
  emili. So, I don’t think it would be the nature of the appraisal service. I
  think where operational risk evolves is the representation of the fact. So, if
  they were to go back to the loan application and find that the facts on income
  or on rental versus cost, other costs are different than what was presented during
  the adjudication process, then I think you have technically an opportunity to
  negate the claim. But I don’t think it’s just on how you use appraisal. It’s
  really the adjudication process that would create most of the operating risk,
  which is why our bank, including I’m assuming most others, are very careful
  about our facts that are being submitted and how we put those applications
  together.” 

  Morten N. Friis – Chief
  Risk Officer, added:  “…In terms of the use of emili…it is one of several tools that we use,
  depending on the property, we have full appraisal…So emili is a
  supplemental tool that we use in the appraisal process. To reiterate Dave’s
  point, the risk around refusal on the insurance all relates to the accuracy of
  the documentation that we provide. We have ongoing audits and reviews with CMHC
  and our track record with them is extremely strong. So, the point on the risk
  put-back (of claims to the bank), first of all, would be completely inconsistent with our
  historical experience with them, and as Gord was saying, I think it’s an
  extreme tail risk…They obviously as an insurer have some ability to
  dispute claims, but I think our track record on accurate documentation is
  pretty strong.” (Source)

Scotiabank

Q2 net income: $1.6 billion (+9.6% Y/Y)

Earnings per share: $1.23

• The bank’s residential mortgage portfolio
  totalled $188 billion in Q2, a 27% increase year-over year (or 7% increase
  excluding ING). Of this total,
  $169 billion is related to freehold properties and $19 billion is related to
  condominiums. (Source)
• Of Scotia’s residential mortgage portfolio,
  58% is insured, unchanged from Q1. (Source)
• The uninsured portion has an average loan-to-value
  ratio of approximately 55%. (Source)
• “The credit risk in the Canadian residential
  mortgage portfolio remains benign and delinquencies are continuing to decline,”
  said Robert H. Pitfield, Group Head and
  CRO. (Source)
• Pitfield added: “The Canadian Housing
  market generally remains balanced between supply and demand. Reasonable
  economic performance has allowed consumers to manage debt levels well. However,
  we do expect some softness in the Canadian Housing market in the short-term.” (Source)
• “Credit
  quality and performance of the residential portfolio remains strong, a disciplined
  and consistent underwriting standards have resulted in extremely low loan
  losses and again have been stressed under a series of severe tests which
  confirm the appropriateness of our risk appetite,” Pitfield continued. (Source)
• Sean McGuckin, EVP and CFO, said, “In the last
  nine months on the mortgage portfolio you’ve seen that the customers who are
  renewing their mortgages or came in on a variable basis are now taking fixed
  term mortgages, which are giving also additional better margins.” (Source)

TD Bank

Q2 net income: $1.72 billion (+1.8% Y/Y)

Earnings per share: $1.78

• TD’s residential mortgage
  portfolio was up slightly to $156 billion in Q2, up from $155 billion in
  the previous quarter and $145 billion in Q2 2012. (Source)
• TD says its real estate secured lending
  (RESL) volume increased 4% Y/Y (Source)
• The bank’s 3% Y/Y growth in personal lending reflects “a slowing housing market and continued consumer deleveraging.” (Source)
• TD adds its RESL portfolio,
  including securitized mortgages, benefits from the fact that 68% of the
  portfolio is government insured, and 73% of HELOCs are in first lien
  position (down from 75% in Q1) and a further 23% are in second to a TD
  first (up from 20%). (Source)
• When
  asked about the substantial decrease in TD’s insured portfolio and
  increase in its uninsured portfolio, Tim Hockey, Group Head, Canadian
  Banking, Auto Finance, and Credit Cards, responded: “We’ve
  been quite concerned about the overall growth rate of real estate secured
  lending for the last number of years. And so the regulatory changes that
  have actually been taking place over a number of years, quite prudently
  implemented over a long period of time, are actually having almost
  precisely the effect that we would have expected, which is a slow landing.”
  (Source)
• He added: “…Because of the
  changes around the high ratio mortgage versus conventional, all the
  mortgage originations are down year-over-year, but conventional are down
  less. So in other words, what you would ascribe to be first-time home
  buyers have actually had more of an impact, which you could say is
  probably bang-on what the regulatory changes would have expected.” (Source)
• “We’re clearly seeing that even notwithstanding a low
  interest rate environment, and obviously
  there’s been lots of conversation about
  that rate, that consumers are not backing up the truck and actually
  creating a frothy housing market as low interest rates are usually
  incenting them to do.”
• “In terms of channel originations, all channels are
  down year-over-year. In our particular case, our broker channel is down
  less, but that I would ascribe much more to service improvements and
  changes we’ve made in our own channels as opposed to an industry
  phenomenon,” Hockey continued. (Source)
  (TD’s broker channel has seemed to get more competitive this year.)
• “I would say pricing is aggressive, but not unduly so
  for a spring market. And clearly it was a cold spring, so that does have
  an effect on the activity… There’s some speculation [on], is there going to be a
  resurgence? But if you talk to Craig Alexander at TD Economics,
  he would say our
  expectation is still for having a fairly tepid spring mortgage market.” (Source)
• “Every time we do [stress tests], and we’ve
  become quite expert at doing stress tests, it continues to show that in
  Canada, given the nature of this business, given the government guarantees
  and the insurance portfolio, that we continue to make
  money in Canadian banking overall – we don’t go into the negative.”
• “…Three or four years into the (mortgage rule) changes, [the market is] moderating exactly as expected. But if we’re wrong, at whatever percentage of likelihood
  that is, then we still feel good about the stress test(s).” (Source)
• “On the
  stress tests, it’s really not the mortgage portfolio that you’re worried about…If you paint that type of scenario where you have such a
  reduction in house prices across the country, it’s really your other
  credit portfolios that would be more of a concern – the unsecured credit
  portfolios, then your commercial portfolio. So we stress that as well, and
  really to the deepest scenario that we can paint, the Canadian operations
  remain profitable. It’s not a good picture but it’s a profitable picture,”
  said Mark Chauvin, Group Head & Chief Risk
  Officer. (Source)

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

Steve Huebl & Rob McLister,
CMT

Last modified: April 26, 2014