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Q3 2013 Bank Reports – Mortgage Morsels

Big-6-BanksDespite expectations for a more subdued quarter, Canada’s Big 6 Banks pulled off another impressive earnings season. And while many were expecting a slowdown in the housing market, most banks’ mortgage portfolios showed resilience.

The tidbits that follow come from the
Big 6 Banks’ quarterly earnings reports, presentations and conference
calls. There’s some good stuff in there (CIBC’s discussion of how it deals with price-sensitive mortgage customers is particularly interesting.)

If you’re time-pressed, the focal points are highlighted



Bank of Montreal
Q3 net income: $1.14 billion (+17% Y/Y)
Earnings per share: $1.53

  • BMO’s total
    Canadian residential mortgage portfolio stood at $85.5 billion, up from $81
    billion in Q2. (Source)
  • 59% of the
    bank’s residential mortgage portfolio is insured, down from 62% in Q2 and
    65% in Q3’12. (Source)
  • Average
    loan-to-value (LTV) on the uninsured portfolio is 59%, unchanged from Q2. (Source)
  • Loss Rates
    for the trailing 4-quarter period were less than 1 basis point. (Source)
  • “As expected, there were decreases in certain
    loan portfolios and in our personal loan balances, due in part to the
    effects of our continued practice of selling most mortgage originations in
    the secondary market
    and active loan portfolio management.” (Source)
  • “We’re doing the right things to generate
    sustainable revenue growth, with a focus on adding high quality earning
    assets, including secured mortgages and auto loans,” said Bill Downe, president and CEO of BMO. (Source)
  • Asked about
    the 4.5% quarterly increase in residential mortgage balance and whether that
    may be due to customers acting ahead of a perceived move in mortgage rates,
    Frank Techar, President and CEO, Personal
    and Commercial Banking Canada, BMO, said this:  

“…I think a couple of things. One is seasonality definitely plays a
role. So, I know our growth over the last few quarters has been strong. Part of
that’s because of the time of the year. I do think there’s been a little bit of
bring-forward with respect to the perception that rates are going up.
So, there
might have been a little bit of a flush of activity as a result of that. It’s
very hard to put your finger on, though. It’s more anecdotal than anything. My expectation
is that, overall market growth moving forward is likely to slow a bit. I think, in particular, if rates do move up a bit more, we’re going to see a little bit
more slowing. From my perspective, we’ve been able to grow faster than the
as it is now and our objective is to grow faster under that scenario as
well. But I would say there is a bit of a bias for a slowdown, no doubt in
particular staring at the possibility of rates going up.” (Source)

  • 66% of BMO’s portfolio has an effective remaining amortization of 25 years or less, up from 64% in Q2. (Source)
  • BMO’s condo mortgage portfolio is $11.8B (up from $11B in Q2) with 53% insured (down from 56% in Q2). (Source)
  • “Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages,” said the bank’s quarterly report. (Source)
  • BMO notes: “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)


Q3 net
million (+8% Y/Y)
Earnings per share: $2.16 a share

  • CIBC’s residential mortgage portfolio stood at $144
    billion in Q3, up from $143.7 billion in the previous quarter. (Source) Of that, approximately 46% is in Ontario, 20% is in British
    Columbia, and 16% is in Alberta. (Source)
  • “The credit quality of this portfolio continues
    to be high, with a net credit loss rate of about 1 basis point per annum,” said
    Laura Dottori-Attanasio, Chief Risk Officer and Senior
    Executive Vice-President. (Source)
  • The bank’s residential
    mortgage portfolio was 72% insured, of that 90% was provided by CMHC. Of the
    uninsured portfolio, the average LTV was 54%. (Source)
  • Condos
    account for approximately 12% (or $16.6 billion) worth of the bank’s total
    mortgage portfolio, and 74% of that is insured. Another 2% (or $2.9 billion) is related to condo developers, with 32%
    drawn and 68% undrawn. (Source)
  • The
    bank noted, “Residential mortgages
    were down $693 million, primarily due to attrition in our FirstLine mortgage
    broker business
    , largely offset by new mortgage originations through CIBC
    channels.” (Source)
  • CIBC
    noted, “Other revenue was down $50 million mainly due to lower Treasury
    allocations and lower revenue in our exited FirstLine
    mortgage broker business.” (Source)
  • “Our exit from
    the FirstLine mortgage broker business continued to progress well, with both
    conversion volumes and spreads well exceeding our targets,” said Kevin Glass, Chief Financial
    Officer and Senior Executive Vice President. (Source)
  • Glass added: “The CIBC brand mortgage portfolio
    grew 13% year-over-year, which represented the 15th consecutive quarter of
    outperformance versus the industry.” (Source)
  • “Our
    core net interest margin, or NIM, was 263 basis points for the quarter,” Glass continued. “This
    was down 1 basis point from the prior quarter, but up 6 basis points from the
    prior year. NIMs have been helped by the improvement in our business mix,
    driven by growth in higher-margin CIBC-branded products, and this was offset by
    lower margins in our deposit portfolio. We expect the level of NIM to remain
    relatively stable, with improvements in business mix helping to offset the
    ongoing negative impact of lower interest rates that have been felt throughout the industry.” (Source)
  • Regarding
    CIBC’s mortgage business, David Williamson, Group Head of Retail & Business
    Banking and Senior Executive Vice President, said this: “Our mortgage business is running quite
    well. We don’t lead on price. You’ll see that in the markets. We haven’t been
    doing that, and we don’t intend to.
    But our mortgage growth is up 13%
    year-over-year. So we haven’t broken out how much of that is a tailwind from
    FirstLine. But even if you adjust out FirstLine, I’d say we are still running
    at market-leading growth in our brand, and we’re doing it through our brand.
    We’re not buying broker-originated mortgages, which maybe supports the growth
    in certain industry players.
    This is through our own channels. So probably
    worth talking about how that’s occurring if it’s not price. There are 3 things
    that we’re doing. One is investing in our branch network… We’re also investing
    in our mobile adviser channel. We were underrepresented in that space and we’re
    adjusting that, and that’s giving us some lift in the year-over-year stats… One
    of our priorities is (to) improve our sales and service capabilities. And I
    think we’ve spoken about our breakaway initiative, which has been rolled out
    across our branches, at least most of the branches at this point, and some
    nationwide intake programs and so forth. And we’re seeing a very significant
    lift in sales activities through both those intake programs and breakaway. And
    then thirdly, we introduced Home Power Plan, the integrated HELOC and mortgage
    product. Now it came out the same time as regulatory constraints on HELOC at
    65%, but it’s still been a very well-received program.”
  • Williamson:  “If I speak a bit just
    about FirstLine, that’s gone particularly well, and that has supported the
    growth, so campaign-to-date retentions at about 45%. This quarter, we’re
    retaining about 50% of what’s coming off
    , and that’s relative to the target
    retention that we’ve set at the beginning of this initiative, 25%. So our
    retention levels are well exceeding, like, doubling the initial target, and
    we’re still maintaining margins. So again, probably good to speak about how
    that’s happening. We’ve set up a retention team that’s focused on just that,
    . We introduced … somewhat advanced analytics that look at the price
    sensitivity of clients
    based on the data we have available to us, and that’s
    informed things such as when we call clients. So if you’re identified as a
    price-sensitive client, our retention team calls you earlier, prior to your
    renewal date. And if you’re less price-sensitive, our thinking is you’re
    probably not thinking about it, so we’ll call you later
    . And then on top of
    that, we’re focused on getting these clients embedded into a deeper
    relationship with CIBC. So those retention teams have offers and lead programs
    that are facilitating that. So in aggregate, this quarter, the FirstLine runoff
    has been, for the first time, eclipsed by growth in the CIBC-branded mortgage
    space. So recently, the NIM expansion has been offsetting reduced volume. And
    this quarter, we now have NIM expansion plus volume growth in mortgages… The
    mortgage space has been one that we’ve made a pretty fundamental shift in, in
    the last little while.” (Source)

(Ed. Note:  If the above is any indication, and you’re a CIBC mortgage customer, you probably don’t want to be getting your renewal reminder call right before maturity. If you do, take a hard look at the rate you’re being offered.)


National Bank of Canada
Q3 net income: $419 million (+11% Y/Y)NBC
Earnings per share: $2.39 a share

  • Residential mortgages rose 7% Q/Q and 10% Y/Y to $35.9 billion in Q3. (Source)
  • Personal Banking’s total
    revenues rose $12 million, “mainly due to higher loan volumes, especially
    consumer and mortgage loans, partly offset by a narrowing of net interest
    margins.” (Source)
  • “…Loan-to-value for HELOCs and uninsured mortgages was approximately 58% and 55%, respectively.” (Source)
  • “What we’ve experienced in the last quarter is, the volume that we’ve experienced in mortgages have actually not been to what we had last year,” said Helene Baril – Senior Director, IR. (Source)
  • “During the nine months
    ended July 31, 2013, the Bank acquired a portfolio of residential mortgage
    loans with a higher credit risk profile for a total amount of $328 million.” (Source)
  • In discussing credit risk, the bank noted: “…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
Q3 net income: $2.3 billion (+3% Y/Y)
Earnings per share: $1.52

  • Residential mortgage volume
    rose to $179 billion in Q3, up 2% from $177 billion in Q2, and up 5% from
    $172 billion in Q3 2012. Average LTV was unchanged at 47%. (Source)
  • 42% of
    RBC’s residential mortgage portfolio was insured in the quarter, down from
    43% in Q2. (Source)
  • “Net interest margin continues to be impacted by a low rate
    environment and competitive pressures.” (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)
  • “(Loss) provisions for our residential mortgage portfolio
    were consistent with our historical performance at 1 basis point,” said Morten
    N. Friis, Chief Risk Officer. (Source)
  • From David McKay, Group Head, Personal and
    Commercial Banking: “We’ve been very disciplined about the volumes that we’re generating.
    As you know we don’t participate in the broker mortgage business nor do we, as
    many banks do buy wholesale mortgages from third-party originators at very low
    margins and spread
    . So our growth has been through proprietary channels that
    generate very strong margins for us and has been consistent margins. So I think
    those are some of the generic drivers of where we are.” (Source)
  • Gordon M. Nixon – President and CEO: “…Certainly there is some volatility in the (mortgage) commitment pipeline and…we make forward rate commitments for up to 120 days as a market
    practice. We hedged a number of those commitments protecting margins, so we
    hedge forward at a known cost and we price accordingly. So we’ve got experience
    in managing in a volatile interest rate environment where swaps are moving
    around…” (Source)


Q3 net income: $1.77 billion (-14% Y/Y)
Earnings per share: $1.39

  • The bank’s residential
    mortgage portfolio totalled $189 billion in Q3, flat on the quarter and up
    24% Y/Y (or 6% excluding ING). (Source)
  • We have…become the leader in…mortgage product,” said CEO Rick Waugh.
  • “…Market share in residential mortgages for Scotiabank has increased nearly 5% to
    22.6% from 17.9%.” (Source)
  • 90% ($170 billion) of Scotia’s portfolio is
    related to freehold properties and 10% ($19 billion) is in condominiums. (Source)
  • Of Scotia’s residential
    mortgage portfolio, 56% is insured, down from 58% in Q2. (Source)
  • The average
    loan-to-value (LTV) ratio of the uninsured portfolio is 56%, down from 57% in
    Q3 2012. (Source)
  • Net interest income was
    up 14% from the previous year, aided in part by asset growth, “particularly in
    Canadian mortgages”. (Source)
  • “While we
    continue to believe that the Canadian Housing market generally remains stable,
    there may be some softness in Canadian Housing market prices in the short-term.
    Credit quality and performance of the residential portfolio remains strong,”
    noted Robert Pitfield, Group Head and CRO. (Source)
  • “Our
    disciplined and consistent underwriting standards through all of our
    origination channels have resulted in extremely low loan losses, and again have
    been stressed under many severe assumptions, which confirm the appropriateness
    of our risk appetite,” Pitfield added. (Source)
  • “Asset
    growth in automotive finance and residential mortgages was strong in Q3 and we
    see that continuing in Q4,” said Brian Porter, Group Head,
    International Banking. (Source)
  • “Earnings were driven by the successful
    acquisition of ING DIRECT and by growth in auto loans and mortgages,” said
    Rick Waugh, CEO of Scotiabank. (Source)
  • “Net interest income was driven by asset growth in
    Canadian mortgages, diversified loan growth internationally, and a stable
    margin,” noted Sean McGuckin, EVP and CFO. (Source)
  • The credit risk in
    the Canadian residential mortgage portfolio remains benign
    and customers
    continue to manage their finances as expected. The loss estimated of the
    real portfolio impacted by the Alberta flooding is not significant,” said Pitfield. (Source)
  • Jeffery C. Heath – EVP and Group Treasurer: “… but without knowing the size of the cap and how it will be
    allocated in the future, long-term impact is really hard to gauge at this
    point. My view in the near term is that the impact is not material. NHA MBS is
    pure funding – it’s relatively modest in our case, I mean, overall scheme of
    things, and roughly comparable to the cost of covered bonds as another
    alternative. (Source)
  • Christopher J. Hodgson – Group Head, Global Wealth: “On
    the creditor’s (life insurance) side, a number of years ago, we were significantly below the
    industry average in terms of (cross-)selling against our mortgage book. Over the last
    few years, we’ve increased our penetration through the retail branch channel to
    industry average. So, we’re now at a rate of about 77%, which is in and around the industry. We expect to continue to see that grow over the course of the next
    few years, even though the mortgage volumes are slowing down…The other thing I’d say on that front is
    when we bought the Maple book of business a number of years ago, we had very
    low cross penetration in that in terms of creditor insurance, and we’ve grown
    that now from 12% about four or five years ago to about 45%. So, we see
    significant continued growth through that broker channel
    . (Source)



TD Bank
Q3 net income: $1.53 billion (-11% Y/Y)
Earnings per share: $1.58

  • TD’s
    residential mortgage portfolio was up slightly to $159 billion in Q3, up
    from $155 billion in the previous quarter and $149 billion in Q3 2012. (Source)
  • TD says its real estate secured lending (RESL) volume increased 4% Y/Y. (Source)
  • “…We are bottoming out here in terms of rate
    in the United States and I think we are getting closer and
    closer to bottoming out in Canada
    as well,” said Ed Clark, President and CEO.
  • Canadian P&C Gross
    Impaired Loans decreased $43 million (2 bps) to $437 million due to “resolutions
    in the residential mortgage portfolio”. (Source)
  • HELOC volume fell to $62
    billion in Q3, down from $63 billion in both Q2 and Q3 2012. (Source)

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

Steve Huebl
& Rob McLister, CMT