Click here to join our mailing list to receive the latest news and updates as they happen. Unsubscribe any time.

Q2 2013 Bank Earnings – Mortgage Morsels

Big-BanksIf 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




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.”
  • “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)




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.
    (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

    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.” (




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.”



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.”
  • 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
    , 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,