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Q2 2014 Bank Earnings – Mortgage Morsels

Bank-roundup The unusually harsh winter took its toll on the economy in the second quarter, and mortgage activity was no exception.

A number of "Big 6" banks posted tempered mortgage growth in Q2, a period that typically encompasses the busy spring market. But this spring got off to a slow start. Weather was partly blamed, but clearly other factors were at work (including modest economic growth and drag from mortgage policy changes).

As we do every quarter, we've gone through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls and pulled together these mortgage tidbits. Admittedly, this quarter was rather dull from an industry insights perspective. The most notable observations are highlighted.


Bank of MontrealBMO

Q2 net income: $1.1 billion
(+12% Y/Y)
Earnings per share: $1.63

  • BMO’s total Canadian residential mortgage portfolio stands at $89.8 billion, up from $89.3 billion in the previous quarter. (Source)
  • BMO's mortgage book represents 43% of its Canadian gross loans and acceptances - the smallest of the big five banks. (Source)
  • 60% of BMO's portfolio is insured, up from 58% in the previous quarter. The loan-to-value on the uninsured portfolio is 59%, unchanged from Q1. (Source)
  • 67% of the portfolio has an effective remaining amortization of 25 years or less. (Source)
  • The loss rates for the trailing four-quarter period were less than 1 bp. The 90-day delinquency rate dropped to 29 bps, down from 33 bps in Q1. (Source)
  • The condo mortgage portfolio stands at $12.7 billion (up from $12.5 billion in Q1) with 52% insured (up from 51% in Q1). (Source)
  • “The consumer lending piece specifically, while it is true that things are a little bit lighter quarter on quarter, I feel that’s primarily driven by a slower mortgage market in part driven by weather. We ourselves were a little bit later starting this year in the mortgage season. That said, activities are back up to the volumes we’d expect and I think we’ll close the season quite well and expect Q3 to be stronger and that we’d finish the year quite well on the personal lending side,” said Cam Fowler, Group Head, Canadian Personal & Commercial Banking. (Source)
  • Asked if the bank expects to revert back to above-industry growth in the near term, Fowler said this: “Pipelines are strong… the home finance strategy that we’ve been undertaking for the past three years… is pretty focused on what’s best for Canadian consumers: shorter [amortizations], lower LTV, the fixed rate. The distribution system is pretty efficient at having these types of conversations with our customers and our prospects now. So I expect that we can continue to be a little bit better than the market.” (Source)
  • Asked if the aggressive rate promotions from other banks are having an impact on BMO, Fowler had this to say: “It’s possible there’s a little more competition in the home finance market this year than last, but I don’t think to a large degree. I think we are all observing a slightly later start, a slightly slower market for reasons that we’ve all talked about. If I look at where activity went to through the quarter, it’s picked up as I said to the levels that we’d expect, and if I look at the pipeline that we are, say, looking to close, I don’t think that there’s a disproportionate amount of competition hitting that would affect our outcome. So yes, there’s competition but I think we’ll bear up just fine against it and it wouldn’t affect the results.” (Source)



Q2 net income: $306 million ($887 million adjusted net income)
-64% Y/Y (+3% excluding Aeroplan transaction)
Earnings per share: $0.73 ($2.17 on adjusted basis)

  • CIBC said it had “higher than market growth in CIBC Brand Mortgages and deposits,” noting that balances grew 16% year-over-year (or 12% excluding the benefit from FirstLine conversions). (Source)
  • CIBC’s residential mortgage portfolio stood at $147 billion in Q2, up from $146 billion in Q1 and up from $143.7 billion a year ago. Condos accounted for $16.7 billion, up slightly from $16.6 billion in Q1. (Source)
  • The bank’s residential mortgage portfolio was 70% insured, up from 69% in the previous quarter. (Source) 93% of that insurance is provided by CMHC, down from 94% in Q1. (Source)
  • Of CIBC's uninsured portfolio, the average LTV was 60%. (Source)
  • As for the bank’s condo developer exposure, its authorized loans were $2.6 billion, down from $2.7 billion last quarter. (Source)
  • “On a year-over-year basis, we saw a strong balance growth in our CIBC branded mortgages as well as continued progress in deepening our client relationships. Credit quality remains strong with provisions for loan losses down 26% compared to the same period last year,” said Gerry McCaughey, President and CEO. (Source)
  • On CIBC’s residential mortgage portfolio, David Williamson, SEVP and Group Head Retail and Business Banking, said this: “…we are not aggregating mortgages, we are not buying mortgages off of third parties. So everything you are seeing in our growth, the 16% growth year-over-year or the 12% excluding FirstLine, is just from our organic in-house activities. FirstLine, we’ll talk about that as well, retention’s still at 50%, actually slightly over. Spreads are very strong right now at the branch level. FirstLine continues to perform. The whole exercise is going quite well. So then if you say, let us put FirstLine to the side, and I've already said mortgage aggregators aren’t part of what we're doing, then why the growth? So it's not just in credit and it's not through pricing, but what it is, is adding mobile advisers. We've talked about the Break Away program where we've done across-Canada sales training. Third, and it’s an important one, is process improvements: faster adjudication, faster turnaround times. And then finally, another point would be Home Power Plan where we’ve introduced that integrated mortgage and HELOC product a year or two ago. So it's those kinds of factors that are allowing us to show the growth we’re exhibiting.” (Source)
  • “Net interest margins for continuing operations continue to expand. Market share growth, even if you put aside the benefit of FirstLine, we have got number one growth in market share on mortgages…” said Williamson. (Source)



National Bank of Canada

Q2 net income: $362 million
(-13% Y/Y)
Earnings per share: $1.01 a share

  • Residential mortgages rose 3% QoQ to $37.7 billion as of April 30, 2014. That’s up 8% from a year earlier. (Source)
  • The net interest margin was 2.24% in Q2 2014 versus 2.25% the preceding quarter and 2.31% in Q2. (Source)
  • Uninsured mortgages: 18% of its retail portfolio. Insured mortgages: 36% of its retail portfolio. HELOCs: 26% of its retail portfolio. (Source)
  • The growth that we're experiencing is mainly in our mortgage book and our consumer credit book, and it's mainly outside of Quebec…," said Diane Giard, Executive Vice-President, Personal and Commercial Banking. (Source)
  • "We've added capacity in our mobile sales force." (Source)
  • "Our retention numbers have actually gone up significantly in the last two quarters." (Source)
  • "We still maintain a very good rapport with our mortgage brokers and margins have…improved on that side as well." (Source)


Royal Bank of CanadaRBC

Q2 net income: $2.20 billion
(+13% Y/Y)
Earnings per share: $1.47

  • Residential mortgage volume rose to $185 billion in Q2, up 0.2% from $184 billion in Q1, and up 4.5% from Q1 2014. (Source)
  • Average LTV rose to 57% in the quarter from 56% in Q1. (Source)
  • 60% of RBC’s residential mortgage portfolio was uninsured in the quarter, up from 59% in Q1. (Source)
  • Net interest margin increased 1 bp QoQ and 3 bps YoY, “reflecting favourable funding mix.” (Source)
  • “Our Canadian residential mortgage portfolio, which makes up 64% of our retail portfolio, continues to perform well with provisions this quarter of one basis point. This is consistent with our recent historic performance,” said Mark Hughes, CRO. (Source)
  • Hughes added: “We continue to actively watch our loan portfolios for any early warning signs of credit deterioration and perform ongoing stress testing for numerous scenarios including increases in unemployment and interest rates and a downturn in real estate prices. At this time we are very comfortable with our stress test results. We do not see signs of deterioration and the overall credit quality of our retail portfolios remains strong.” (Source)
  • Asked about another report that showed mortgage growth trending below 1% annualized and whether there were any weather-related headwinds in the quarter, Dave McKay, President, replied: “I think we've got a bit of a slower start to the mortgage season, partly weather-related as you look at that. We still foresee the mortgage growth coming in, in that kind of single, mid-single digit, a little bit lower potential area, consistent more with the year-over-year number that you’re seeing today. So, it’s holding. The slowing is not a bad thing necessarily, and we're seeing positive growth. So I think, I would queue more off of the year-over-year number than the quarter-over-quarter…”
  • McKay added: “…we're seeing very good quality borrowers come and apply through our stores and through our channels, so its high-quality borrowers. There may be some customers self-selecting out of the market at this point, given housing prices at certain markets. But overall I think you do see a little bit of a weakening quarter-over-quarter. But we’re starting to see increased activity in the market. We'll see how that translates into the final bookings at the end of the day.” (Source)



Q2 net income: $1.8 billion
(+14% Y/Y)
Earnings per share: $1.39

  • The total portfolio of residential retail mortgages dropped to $188 billion in the second quarter from $189 billion in Q1. (Source)
  • The portfolio consists of $169 billion freehold dwellings (down from $180 billion in Q2), and $19 billion in condos (unchanged from Q1). (Source)
  • 54% of the residential mortgage portfolio was insured in the second quarter, down slightly from 55% in Q1. The uninsured portfolio has an average loan-to-value ratio of approximately 55%, down from 57% in the previous quarter. (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. Our disciplined and consistent underwriting standards through all of our origination channels resulted in particularly low loan losses,” said Stephen Hart, Chief Risk Officer. (Source)
  • Net interest margin was up 3 bps on the quarter, and up 8 bps YoY, “driven primarily by higher mortgage spreads and increase in volumes in high spread credit cards.” (Source)
  • We continue to see good loan growth of 3%, despite the headwind of the Tangerine mortgage run-off…” said Sean McGuckin, Chief Financial Officer. (Source)
  • “I think we’re right in the midst of what would be the spring sale period. I think it's fair to say that we are seeing it bounce back but we won't see the mortgage market growth in the spring and forward as we’ve had in previous years. Though it will be a lot better than what we’ve seen in the first six months of the year,” said Anatol Von Hahn, Group Head, Canadian Banking. (Source)
  • Asked whether the bank’s improved NIM was due to the ING runoff, Von Hahn said it’s a combination of the credit card business, growth in the auto industry and mortgage renewals. “We've got still some of the lower margin mortgage business that is running off and coming back on in the renewal process at a higher margin. So it’s a combination. It’s not just the Tangerine portfolio runoff.” (Source)


TD BankTD-Bank

Q2 net income: $1.98 billion
(+16% Y/Y)
Earnings per share: $1.04

  • TD’s residential mortgage portfolio rose to $166.7 billion, up from $166 billion in the previous quarter and $155 billion in Q2 2013. (Source)
  • HELOC volume in the quarter fell to $60.2 billion from $60.3 billion in Q1. (Source)
  • "Loan and deposit growth was solid this quarter…with real estate secured lending up 4%." (Source)
  • The bank stated, “Canadian real estate secured lending credit quality remains strong amidst continued resiliency in the Canadian housing market.” (Source)
  • 65% of the portfolio is insured, unchanged from the previous quarter. The loan-to-value on the uninsured portfolio is 60%. (Source)
  • “…personal loan volumes continued to moderate reflecting declining mortgage refinancing activity,” the bank said. (Source)

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

Steve Huebl & Rob McLister, CMT