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Q1 2014 Bank Earnings – Mortgage Morsels

Bank-roundupSlowing consumer lending and margin pressure from low rates didn't kill the earnings party for Canada's banks. As they seem to do more often than not, the "Big 6" pulled off another solid quarter.

From a mortgage perspective, all major banks saw their residential mortgage portfolios continue to rise or at least hold steady.

Below we've extracted additional mortgage tidbits from the Big 6 Banks’ quarterly earnings reports, presentations and conference calls. We have to be honest though, this quarter was kind of dull from an industry insights perspective. Unless you're a mortgage data geek, you'll find the most notable stuff to be highlighted.


Bank of MontrealBMO
Q1 net income: $1.06 billion
(+2% Y/Y)
Earnings per share: $1.58

  • BMO’s total Canadian residential mortgage portfolio stands at $89.3 billion, up from $88.6 billion in the previous quarter and up from $75 billion in Q1 2013. (Source)
  • BMO's mortgage book represents 43% of its Canadian gross loans and acceptances — the smallest of the big five banks. (Source)
  • 58% of BMO's portfolio is insured. The loan-to-value on the uninsured portfolio is 59%. (Source)
  • 67% of the portfolio has an effective remaining amortization of 25 years or less. (Source)
  • The loss rates for the trailing 4-quarter period were less than 1 bp and the 90-day delinquency rates remain stable at 33 bps. (Source)
  • The condo mortgage portfolio stands at $12.5 billion with 51% insured. (Source)
  • In its economic outlook for 2014, the bank said, “Canadian consumer spending is projected to grow moderately in the face of elevated household debt, while residential construction should slow modestly. Consequently, growth in consumer credit and residential mortgages will likely continue to moderate.” (Source)
  • “Continued low inflation will likely encourage the Bank of Canada to maintain a steady interest rate policy for a fourth consecutive year.” (Source)


Q1 net income: $1.18 billion ($2.88 per share)
(+6.3% Y/Y Excluding one-time Aeroplan transaction)
Earnings per share: $2.31 a share

  • CIBC said it had “strong volume growth in CIBC Brand Mortgages and deposits” (Source), noting that balances grew 16% year-over-year (or 11% excluding the benefit from FirstLine conversions). (Source)
  • CIBC’s residential mortgage portfolio stood at $146 billion in Q1, unchanged from the previous quarter and up from $144 billion a year ago. Condos accounted for $16.6 billion. (Source)
  • The bank’s residential mortgage portfolio was 69% insured, down from 76% in Q1 2013. 94% of that insurance is provided by CMHC. (Source)
  • Of CIBC's uninsured portfolio, the average LTV was 60%. (Source)
  • As for the bank’s condo developer exposure, its authorized loans were $2.7 billion, down 10% from $3 billion last quarter. (Source)
  • The bank’s net interest margin was up 7 bps from a year ago and 2 bps since last quarter — if you don't count the effects of its Aeroplan credit card sale. (Source)
  • Asked about the pace of growth in the broader market and whether it would be wise for additional policy changes to be considered to curve the pace of mortgage expansion, J. David Williamson, Group Head of Retail & Business Banking and Senior Executive Vice-President, said: “…There's been quite a few policy changes. Interest rates remain low, but there has been that countervailing move in policy change over an extended period…So from my own — and I mean this as a personal perspective, I don't think there's additional moves necessary. And from our own bank, [CIBC's] 15% growth…could cause you to think maybe policy changes are required. But if you decomp that, there's part coming…from the FirstLine conversion, which takes us to 11%. [It is] still really robust growth, but that's really not an industry thing so much as us taking steps to accelerate our ability to sell. So we are increasing our mobile advisors. We call them mobile advisors now because now they are enabled to sell more than just mortgages. We've got technology with them rolling out so that they can offer additional products. But that was a channel that we were not up to industry standards as far as the size…and we are moving that forward. That's giving us a wind assist. So I think there's CIBC-centric reasons why we're seeing this kind of…growth in mortgages. The overall industry looks like it's moving in the right kind of way, not a short, sharp kind of adjustment, more the soft landing that people are speaking of. So I'd say at this point, we're okay and that additional policy changes can be held as we just watch how things play out.” (Source)
  • Asked about the outlook for net interest margin, specifically how the bank has benefited from its retail mortgage repositioning, Williamson said: "FirstLine mortgages…retention level…[continues] around 50%. And the margins are about double what we were getting in the broker channel. Which, just a side comment, it looks like what we'll do is take that $48 billion in balances, keep half of it, but end up with more net earnings once that process is over."
  • Williamson: "…We are competing, in a way, to be sensible in pricing…in the mortgages. We're certainly not the first to move on price decreases, but we try to be sensible on the pricing on that front." (Source)
  • Asked about the 50% conversion rate at FirstLine and the doubling of margins, and what the bank attributes to its successes, Williamson added: "…the big delta there is just that [the broker] channel is really expensive. It's good for getting volume. It's never been very good for margins. And there might have been better days at some points in the past, but it's just a thin margin channel. So by taking people into the full-branded channel, it's not so much a different price point for the client, so much as just the avoidance of some of the friction costs through the other channel. As far as how we're getting the level of conversions we're getting, [there is a] dedicated team that's there to reach out to clients when we think…they'll be evaluating their mortgage. We're using some analytics to try to figure out if they're price-sensitive and, if they are, we're calling earlier because they'd be thinking about it; if we think they're not, then we're calling later, so we're trying to be thoughtful on how we approach. And then we're getting continually better at welcoming those clients into CIBC. So an outreach from a local branch and an attempt to broaden the relationship. And that's gotten better over time as this process has rolled out. So I think we're now, I mean, all things being equal, pretty confident we should be able to run at a 50% retention level, which is better than what we had thought would be possible. The margin should keep at double because it's not a market-focused thing so much as a friction avoidance thing and expenses are down a hitch, too. So net-net, we should be able to go from $48 billion to $24 billion and have a better bottom line." (Source)
  • Williamson: "…We tried in the early days to see if we could, under the FirstLine banner, build deeper relationships with [FirstLine clients]. But…they had a mortgage that said FirstLine…So they really didn't see themselves associated with CIBC in any way…We've (since) introduced bundles for those [FirstLine] clients coming in. 'We now have a CIBC mortgage, if you have these other products, it's cheaper.' And we've also…offered, as part of that bundle, lower costs…So it's trying to entice that deeper relationship." (Source)



National Bank of Canada
Q1 net income: $384 million
(+2% Y/Y)
Earnings per share: $1.15 a share

  • Residential mortgages rose 2% to $37.1 billion as ofJanuary 31, 2014, up from $34.4 billion a year earlier. (Source)
  • Of its retail portfolio, 34% was insured mortgages (vs. 37% in Q1 2013), 20% was uninsured mortgages (vs. 17% in 2013), 26% was HELOCs (vs. 25% in 2013), and 20% (vs. 21% in 2013) was other, including both secured and unsecured. (Source)
  • The net interest margin was 2.25% in Q1 2014 versus 2.24% the preceding quarter and 2.32% in Q1 2013. (Source)


Royal Bank of CanadaRBC
Q1 net income: $2.09 billion
(+2% Y/Y)
Earnings per share: $2.38

  • Residential mortgage volume rose to $184 billion in Q1, up 1% from $183 billion in Q4, and up 5% from Q1 2013.
  • Average LTV remained at 56%. (Source)
  • 59% of RBC’s residential mortgage portfolio was uninsured in the quarter, up from 58% in Q4. (Source)
  • RBC mostly repeated its wording from previous quarters, saying it has a "well-diversified mortgage portfolio across Canada.” It says it continues to conduct “Ongoing stress testing for numerous scenarios including unemployment, interest rates and a downturn in real estate”. (Source)
  • Net interest margin increased 3 bps QoQ and was flat YoY, “reflecting favourable funding mix.” (Source)
  • “Margins are expected to continue to reflect the competitive and low interest rate environment,” the bank said. (Source)
  • “…we are seeing a slowing consumer-lending environment, which, frankly, is a good thing. Notwithstanding the deleveraging of the consumer, which has reduced demand for mortgages and loans, we still continue to expect to see mid-single-digit growth in consumer lending,” said Gordon M. Nixon, CEO and Director. (Source)


Q1 net income: $1.7 billion
(+6.5% Y/Y)
Earnings per share: $1.32

  • The total portfolio of residential retail mortgages remained at $189 billion, unchanged from the previous quarter. (Source)
  • The portfolio consists of $180 billion in freehold properties and $19 billion in condos. (Source)
  • The residential mortgage portfolio was 55% insured and 45% uninsured. The uninsured portfolio has an average loan-to-value ratio of approximately 57%, unchanged from prior quarters.  (Source)
  • “The loan to value credit score mix and delinquency rates for our condo portfolio are not materially different from that of the overall mortgage portfolio,” the bank noted.
  • “Reported (mortgage) growth (was) suppressed by ING mortgage run‐down,” the bank said in its presentation to investors. (Source)
  • “Loan growth was solid against the backdrop of a cooling housing market, moderating consumer spending and the run off of our ING mortgage portfolio,” said Brian Porter, President and CEO. (Source)
  • “The credit quality and performance of the residential portfolio remains strong and has been stressed under many severe assumptions, confirming it is well within our risk tolerance,” Porter added. (Source)
  • "The low rate environment continues to negatively pressure margins,” Porter said. (Source)
  • Anatol von Hahn, Group Head, Canadian Banking, was asked about the outlook on net interest margin and whether the bank expected any additional benefit coming from ING. He replied, “…Particularly in the mortgages there is still a little bit of room. A lot of it will depend on how the spring mortgage sale period goes forward. But I think you’ll see it stable. I don’t think you’ll see any big changes.” (Source)


TD BankTD-Bank
Q1 net income: $2.04 billion
(+15% Y/Y)
Earnings per share: $1.07

  • TD’s residential mortgage portfolio rose to $166 billion, up from $163 billion in the previous quarter and $164.7 billion in Q1 2013. (Source)
  • HELOC volume in the quarter fell to $60.3 billion from $61 billion in Q4 2013. (Source)
  • The bank repeated, “Canadian RESL credit quality remains strong amidst continued resiliency in the Canadian housing market.” (Source)
  • 65% of the portfolio is insured. The loan-to-value on the uninsured portfolio is 60%. (Source)
  • The bank gave this economic outlook: "Inflation in Canada is currently low, reflecting persistent slack in the economy alongside heightened competition at the retail level. As economic growth gradually picks up over the coming quarters, inflationary pressures are expected to build slowly. In this environment, the Bank of Canada is expected to keep short-term interest rates at current levels until mid-2015, at which time a gradual increase is likely to occur." (Source)


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

Steve Huebl & Rob McLister, CMT