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Q3 2014 Bank Earnings – Mortgage Morsels

Bank-roundupA slower-than-anticipated spring housing market couldn’t keep Canada’s banks from posting another blockbuster quarter.

Activity picked up over the summer months, translating into across-the-board gains in year-over-year income. At most banks, however, margins are still facing headwinds due to the continued “competitive and low interest rate environment,” as RBC puts it.

Of particular note were retail-focused lenders BMO and CIBC who both posted above-market mortgage growth. Unfortunately, there’s no telling how lucrative that growth was since the banks don’t detail their mortgage profitability. Both banks have invested heavily in retail mortgage origination to make up for lost broker-generated volume.

In any event, as we do every quarter, CMT has dug through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls and pulled together these mortgage tidbits. The most notable observations are in blue.


Bank of MontrealBMO

Q3 net income: $1.126 billion
(<1% Y/Y)
Earnings per share: $1.67

  • BMO’s residential mortgage book posted robust growth of 9% y/y.
  • BMO’s total Canadian residential mortgage portfolio stands at $91.7 billion, up from $89.8 billion in the previous quarter. (Source)
  • BMO’s mortgage book is the smallest of the big-five banks, representing 43% of its Canadian gross loans and acceptances. (Source)
  • 68% of the portfolio has an effective remaining amortization of 25 years or less, up from 67% in the previous quarter. (Source)
  • “… during the quarter, we purchased some mortgage insurance, which is helpful both from a capital and a liquidity perspective,” said Tom Flynn, CFO. (Source)
  • 64% of BMO’s portfolio is insured, up from 60% in the previous quarter. (Source)
  • The loan-to-value on the uninsured portfolio is 58%, down from 59% in Q2. (Source)
  • The condo mortgage portfolio stands at $13 billion (up from $12.7 billion in Q2) with 54% insured (up from 52% in Q2). (Source)
  • The loss rates for the trailing four-quarter period were less than 1 bp. The 90-day delinquency rate dropped to 27 bps, down from 29 bps in Q2. (Source)



Q3 net income: $921 million
+4.9% Y/Y
Earnings per share: $2.26

  • CIBC’s residential mortgage portfolio rose to $149 billion in Q3, up from $147 billion in Q2. (Source)
  • Condos accounted for $16.9 billion, up from $16.7 billion in the previous quarter. (Source)
  • The bank’s residential mortgage portfolio was 70% insured, unchanged from the previous quarter. (Source) 90% of that insurance was provided by CMHC in Q3, down from 93% in Q2 and 94% in Q1. (Source)
  • Of CIBC’s uninsured portfolio, the average LTV was 59%, down from 60% in Q2. (Source)
  • As for the bank’s condo developer exposure, its authorized loans were $2.8 billion, up from $2.6 billion last quarter. (Source)
  • “CIBC brand mortgage balances grew 15%, or 12% excluding the benefit from FirstLine conversions,” said Kevin Glass, Chief Financial Officer. “The conversion of the FirstLine mortgages into the CIBC brand continues to go very well. We continue to convert approximately 50% on renewal at improved margins.” (Source)
  • Branch mortgage growth was “quite strong” at 3% growth quarter-over-quarter, said Gerry McCaughey, President and CEO. “…Mobile advisors were enhancing and building that distribution channel in a couple of ways. One is just the size of. And secondly, the breadth of what they can offer.” (Source)
  • McCaughey: “We are trying to give better tools to our mobile advisors to transition them from mortgage advisors to mobile advisors and…offer more products. That’s going well. And in addition we’ve been working on our processes to make sure that our speed to decisions and speed to complete transactions is enhanced.” (Source)
  • McCaughey: “[Regarding] what we do on price, we will continue to not be aggressive on the price front and to a certain extent be a price taker in the market and try to win on distribution and service offering.” (Source)
  • David Williamson, Senior EVP, Group Head: “…When you see mortgage-pricing drop, you won’t see us initiating that move. So, that’s what I meant by we are not trying to, nor are we achieving the growth that we are seeing over the last several quarters, through price.” (Source)
  • “Regarding FirstLine, …we’re still retaining about 50% of the book and obviously the spreads on our own brand of mortgages are substantively better than the FirstLine spreads, so that continues to help us,” McCaughey added. “So branch sales are good and signs are they’ll continue that way and FirstLine retention is good and as far as pricing … no intended change.” (Source)
  • Asked about CIBC’s push to target new Canadians, including not requiring a credit history, Laura Dottori-Attanasio, Chief Risk Officer, said this: “…when we do extend credit to them in the mortgage space, we do it at a lower loan-to-value and we do monitor all of our portfolios, including that one. We actually see better performance from a credit perspective with our new Canadian portfolio…We do monitor line of credit usage and whatnot and we do have required thresholds and red flags, if you will, in place as it relates to when payments are not being made on time, etc., not just for new Canadians but for our entire portfolio.” (Source)



National Bank of Canada

Q3 net income: $441 million
(+10% Y/Y)
Earnings per share: $1.24 a share

  • Residential mortgages rose 6% QoQ to $38.6 billion as of July 31, 2014, and 8% YoY. (Source)
  • Personal Banking’s total revenues rose $24 million, mainly due to higher loan volume, “particularly mortgage loans and home equity lines of credit.” (Source)
  • Insured mortgages remained the largest asset in the book, accounting for 34% of the portfolio, down from 36% in the previous quarter. HELOCs and uninsured mortgages represent 26% and 18%, respectively. (Source)
  • The average loan-to-value for HELOCs and uninsured mortgages was approximately 58%. (Source)
  • “The largest share in the [mortgage] portfolio remains in Quebec, and mortgages in Toronto and Vancouver represented only 13% and 2%, respectively.” (Source)
  • “The mortgage platform…has actually increased our ability to cross-sell…We’ve had terrific success in cross-selling to existing clients,” said Diane Giard. (Source)
  • “[Home] purchase volume has gone up,” adds Giard. (Source)
  • Asked where the bank is gaining its market share in mortgage loan growth, Giard answered, “We do leverage our three distribution channels. And we managed very well the balance between margins and volumes. And so we are not just after gaining market share, but we do it reasonably and maintain our margins. In Quebec, it went well…We are also lending outside of Quebec. So both have actually done really well in the past quarter, and it is trending as expected.” (Source)
  • Pressed to name a player that would be at the losing end of that market share, Giard said: “There is a main player, a credit union here that’s well established, this being our main competitor. And we do play head to head against this major competitor. And again, as I said, we are not doing things foolishly and I’m not just after gaining market share. I will do it at a reasonable price; and sometimes we just let deals go…That may affect our market share…and then let them gain market share if they want to do it by buying the market…Sometimes we are ahead of them; sometimes they are ahead of us. But we are managing our margins very, very rigorously.” (Source)
  • Net interest margin remained unchanged at 2.24% in Q3. (Source)


Royal Bank of CanadaRBC

Q3 net income: $2.378 billion
(+4% Y/Y)
Earnings per share: $1.59

  • Residential mortgage balances rose 4% YoY to $189 billion in Q3, up from $179 billion and up 1.2% from $185 billion in Q2. (Source)
  • Average LTV rose to 57% in the quarter from 56% in Q1. (Source)
  • The bank said it follows “strong underwriting practices resulting in continued low loss rates and stable delinquency rates with good LTV coverage and low exposure to condo market.” (Source)
  • Net interest margin fell 1 bp QoQ and 4 bps YoY to 2.73%. (Source)
  • “Margins are expected to continue to reflect the competitive and low-interest-rate environment,” the bank said in its presentation to investors. (Source)
  • “We continue to actively monitor our loan portfolios for early warning signs of credit deterioration and perform ongoing stress testing for numerous scenarios, including increases in unemployment and interest rate and a downtrend in the real estate market,” said Mark Hughes, Chief Risk Officer. “At this time, we’re very comfortable with our stress test result. We do not see signs of deterioration and the overall credit quality of our retail portfolios remain strong.” (Source)
  • Asked about the bank’s outlook for mortgage growth and whether or not the current pace of growth is seen as sustainable, Janice Fukakusa, Chief Administrative Officer and CFO replied: “We feel good about our mortgage business, our volumes were up just over 4% from a strong Q3 last year and in fact we think everyone knows that we got off to a slower start in the spring housing window because of the weather, but we saw a strong June and July, and actually our pipeline for the fourth quarter also looks strong. As far as consumer loan growth, obviously you can see it from results notwithstanding the good growth that consumer loan growth has slowed, and our expectations are for consumer lending to moderate to mid-single digit 3% to 4% growth rate.” (Source)
  • President and CEO Dave McKay: “…The mortgage business has slowed, as expected, given the regulatory and consumer change in preferences.” (Source)



Q3 net income: $2.35 billion
(+35% Y/Y)
Earnings per share: $1.85

  • Mortgage growth was largely offset by the Tangerine Mortgage run‐off. (Source)
  • The net interest margin was up 5 basis points year-over-year, “driven primarily by higher mortgage spreads and growth in credit card balances.” (Source)
  • The total portfolio of residential retail mortgages was unchanged at $189 billion in the quarter. (Source)
  • 52% of the residential mortgage portfolio was insured in the third quarter, down slightly from 54% in Q2 and 55% in Q1. The uninsured portfolio has an average loan-to-value ratio of approximately 55%, unchanged from the previous quarter. (Source)
  • The portfolio consists of $169 billion in freehold dwellings (unchanged from Q2), and $20 billion in condos (up from $19 billion in Q2). (Source)
  • “…we continue to increase our creditor insurance penetration in Canada, notwithstanding, the slowdown in mortgage unit growth,” 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. Our disciplined and consistent underwriting standards through all our origination channels have resulted in particularly low loan losses,” added Porter. (Source)
  • Asked if he was concerned about mortgage growth on a year-over-year basis, excluding Tangerine growth, Anatol Von Hahn, Group Head, Canadian Banking, said: “The 3% growth that we’ve had in the mortgage business is in line with where the market is growing. We had hoped that the market would grow a little bit faster than what it has. As you know, it started slow and in the last couple of months, it’s picked up. But I think, looking forward, we can expect this type of growth. All three of our channels are doing very well in terms of distribution…In the slower growth mortgage market that we’ll be facing this year, most likely also next year, I think that’s a type of growth we can expect.” (Source)


TD BankTD-Bank

Q3 net income: $2.11 billion
(+37% Y/Y)
Earnings per share: $1.11

  • TD’s residential mortgage portfolio rose to $168 billion, up from $166.7 billion in the previous quarter and $159 billion in Q3 2013. (Source)
  • The bank reported “Solid personal lending volume growth of 5% YoY,” and, “Real estate secured lending growth of 3% YoY.” (Source)
  • The bank said, “Canadian real estate secured lending credit quality remains solid amidst continued resiliency in the Canadian housing market.” (Source)
  • 63% of the portfolio is insured, down from 65% in the previous two quarters. The loan-to-value of the uninsured portfolio is 61%, up from 60% in Q2. (Source)
  • 73% of the bank’s condo mortgages are insured. (Source)
  • Asked to elaborate on the bank’s forecast of a 5 bps drop in net interest margin next quarter, Tim Hockey, Group Head, said: “As we look forward to Q4 in particular…there aren’t any positive factors but they are driven by a number of things. … What’s the largest driver? There is a seasonality effect, mortgage breakage in particular, one that we think will be  call it a couple of basis points. There is also some Basel III impacts with the LCR that will hit us next quarter, and generally mixed trends.” (Source)

Note: Transcripts are provided by third-party Seeking Alpha. Their accuracy cannot be 100% assured.

Rob McLister & Steve Huebl, CMT