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Q2 2015 Bank Earnings – Mortgage Morsels

Bank earnings_sqCanada’s Big 6 Banks earned a whopping $8.04 billion in the second quarter, up from just $6.3 billion a year ago.

They got a boost, in part, from improving margins on variable-rate mortgages. That was largely due to the banks pocketing 10 basis points from the Bank of Canada’s 1/4 point rate cut in January. It helped Scotiabank, for example, post an impressive 12-bps rise in net interest margin (NIM) last quarter.

The question on many analysts’ minds, however, was housing and interest rate risk. On that note, RBC said its stress tests confirmed that an enormous 400-bps rate increase would still be “within (the bank’s) risk appetite.” That’s at least somewhat reassuring, given that such a hike would make debt servicing near impossible for a small minority of borrowers.

Like every quarter, CMT has dug through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls, and compiled the following mortgage tidbits. The most notable observations are in red.


Bank of MontrealBMO

Q2 net income: $999 million
(-7% Y/Y)
Earnings per share: $1.49

  • BMO’s total Canadian residential mortgage portfolio rose to $93.4 billion in Q2, up slightly from $93.1 billion in the previous quarter. (Source)
  • 61.3% of BMO’s portfolio is insured, down from 62% in the previous quarter. (Source)
  • 69% of the portfolio has an effective remaining amortization of 25 years or less. (Source)
  • The loan-to-value on the uninsured portfolio is 58%, unchanged from Q1. (Source)
  • The condo mortgage portfolio stands at $13.4 billion (up slightly from $13.3 billion in Q1) with 52.8% insured (down from 53% in Q1). (Source)
  • Loss rates for the trailing four-quarter period were less than 1 bps, and the 90-day delinquency rate is 27 bps. (Source)
  • 16% of the bank’s mortgage portfolio is in Alberta. (Source)
  • “We did make some nice gains in 2014 on the mortgage side. That has flattened a little bit in Q1 and Q2. The nature of our performance in the mortgage market is one where we really invest in this time of year, in the spring campaign and it drives much of what we do for the next few quarters. Q3 and early Q4 are our main booking quarters. I would say that in terms of competition in activity in the market and our pipeline, I am pleased things look healthy and in line with last year,” said Cam Fowler, Group Head, Canadian Personal & Commercial Banking. (Source)
  • Asked if the bank has changed how it approached this spring’s mortgage market in terms of aggressiveness, compared to 2014, Fowler replied, “No. Nothing has changed.” (Source)



Q2 net income: $911 million
+3% Y/Y
Earnings per share: $2.25

  • CIBC’s residential mortgage portfolio rose to $155 billion in Q2, up from $153 billion in the previous quarter. (Source)
  • 67% of the bank’s residential mortgage portfolio is insured, with 33% uninsured with an LTV of 61%. (Source)
  • Condo mortgages made up 18% of the total portfolio, up from 17% in the previous two quarters. (Source)
  • 69% of the bank’s condo portfolio is insured, with 33% uninsured with an LTV of 62%). (Source)
  • Condo developer loans were $1 billion, or 1.4% of the bank’s business and government portfolio, spread across 87 projects (up from 86 in Q1). (Source)
  • The bank has $38 billion of indirect exposure to oil provinces Alberta, Saskatchewan and Newfoundland, or $16 billion excluding insured mortgages. Alberta accounts for $30 billion, or 78%. (Source)
  • “Mortgage growth of 5% was helped by above market growth in CIBC brand mortgages of 15% partially offset by the run-off of the first line broker business.” (Source)
  • 87% of the bank’s insurance in the quarter was provided by CMHC, unchanged from the previous quarter. (Source)
  • “…We’ve got a 15% growth in mortgages balances outstanding in the CIBC brand…Some time ago we’d set a target of retaining 25% of the FirstLine book…and there’s still $16 billion of FirstLine mortgages available for potential conversion. If we include the run-off of the FirstLine book, we still this quarter have grown our overall mortgage book by 5%.” David Williamson – Senior EVP and Group Head, Retail and Business Banking. (Source)
  • Regarding the bank’s FirstLine run-off, during the conference call it was asked if the bank continues to target 25% of the remaining mortgages, or 50% as initially planned, and what the success rate has been in converting First Line mortgages to core CIBC-branded mortgages. David Williamson, Senior EVP and Group Head, Retail and Business Banking, gave this reply: “FirstLine…was a $50-billion book and you’ve got it right, the reason (for winding it down was) we couldn’t get to deeper relationships there, and how we are trying to grow is through deeper relationships. So conversion was to get them in to CIBC and then build that relationship. So at the beginning we weren’t great at that. We weren’t smooth on the handoff into our core operations, but we adjusted fairly rapidly on that front and now we are quite pleased with welcoming those FirstLine clients into the CIBC family and building a deeper relationship. So that has gone well after a slower start in the first couple of quarters…[and] Yes we’ve hit $12.5 billion that’s now been convertedWe are now running at about 50% retention rate, have been for some time, in fact we are over that this quarter. So, the new target would be roughly about 20 billion that we’ll come across once this whole book is wound down…[There is] still a couple of year period of time for that to occur. But that would probably be the new reasonable target based on performance to date.” (Source)



National Bank of Canada

Q2 net income: $404 million
(+12% Y/Y)
Earnings per share: $1.13 a share

  • The bank’s residential mortgage and HELOC portfolio rose to $51.4 billion in Q2, up from $50.7 billion in the previous quarter. (Source)
  • The portfolio is 42.9% insured (vs. 43% in Q1), 22.6% uninsured (down from 22.8% in Q1) and 34.5% HELOCs (vs. 34.2% in Q1). (Source)
  • Quebec and Ontario represented 65% and 22% of the mortgage book, respectively, in Q1, with 5% in Alberta, all unchanged. (Source)


Royal Bank of CanadaRBC

Q2 net income: $2.5 billion
(+14% Y/Y)
Earnings per share: $1.68

  • RBC’s residential mortgage portfolio rose to $196 billion in Q2, up from $194 billion in Q1. Volume growth is up 5.5% from a year ago and up 0.8% from Q1. (Source)
  • 60% of its mortgages are uninsured while 40% are insured, unchanged from the previous quarter. (Source)
  • 15% of the bank’s portfolio is in Alberta, down from 19% in the previous quarter. (Source)
  • RBC’s condo exposure is 9.7% of its mortgage portfolio (up from 9.6%). (Source)
  • Gross impaired loans in the bank’s retail portfolio was flat, and when asked specifically if the bank was seeing anything “problematic” in Alberta following the recent drop in oil prices, Mark Hughes, Chief Risk Officer, replied, “We are still not seeing anything like that.” (Source)
  • Asked how the bank’s continued positive outlook on housing might change if mortgage rates went up 100 basis points, Dave McKay, President and CEO, gave this reply: “Certainly, we do expect rates to go up at some point; it was a low environment for quite some time…We’ve seen supply and demand balance each other quite well so far in a disciplined fashion. And we watch that equation very carefully…We’ll watch our supply and we’ll watch sales-to-listing ratios in the resale marketplace very carefully around how that impacts house prices…We stress our portfolio against higher rates to ensure serviceability. As you know, when we adjudicate even…an existing mortgage, we adjudicate at a five-year mortgage rate irrespective of which terms that client ultimately chooses. So, we’ve already built roughly 200 basis points plus buffer into all adjudications on our side. So, we manage it very prudently…” (Source)
  • Pressed more specifically about what kind of stress level the bank uses, Hughes said this: “We obviously use multiple different stress tests but I would say the one that we focus on the most would be 400 basis points. And…I think it really would be [a matter of] the pace of that increase, as to how fast the government would really bring that on. And then, I guess that I would also offer that 73% to 75% of our residential mortgage portfolio is fixed. So again it really relates with the pace and how fast that would affect the portfolio over time.”
  • An analyst asked if a 400-basis-point stress was “absorbable” for Royal Bank and Hughes replied, “It’s certainly within our risk appetite.” (Source)
  • McKay: “..We believe that the Canadian housing market generally continues to be supported by strong trends in employment household income and population growth…The debt service ratio is at a record low…” (Source)
  • McKay: “(We’ve) seen some margin expansion in variable rate mortgages which could drive positive NIMs that our competitors are less exposed to or less ratio of fixed to variable on their balance sheet.” (Source)



Q2 net income: $1.73 billion
(+1% Y/Y)
Earnings per share: $1.35

  • The total portfolio of residential retail mortgages dropped slightly to $188 billion from $189 billion in the previous quarter. The portfolio was comprised of $168 billion in freehold properties (down from $169 billion in Q1) and $20 billion in condos (unchanged). (Source)
  • 50% of the residential mortgage portfolio was insured in the first quarter, down from 52% in Q1. The uninsured portfolio has an average loan-to-value ratio of approximately 53%, down from 55% in the previous quarter. (Source)
  • The bank had $29.5 billion in mortgages in Alberta in the quarter. (Source)
  • Net interest margin rose 12 basis points year-over-year primarily due to shifts in product pricing and asset mix, as well as changes in rate following the Bank of Canada’s January interest rate cut. (Source)
  • Asked about the bank’s success in cross sales, Anatol von Hahn, Group Head, Canadian Banking, said cross sales to existing customers has now exceeded 30%. “…We haven’t done as much cross selling to customers in the mortgage portfolio,” but that’s changing, he said. (Source)
  • On the bank’s mortgage margins, Sean McGuckin, CFO, said this: “…some of the mortgages as they get refinanced are being priced slightly more favourable than we’ve seen in the past (where we’ve had deeper discounts), so we’re not seeing the same level of discounts we’ve seen in the past, and also there was some uptick on the prime BA spread for our prime-based mortgages as prime dropped by about 15 basis points less than the overall funding rate on the book. So as we look forward, the evolving asset mix to higher margin business within our risk appetite should drive higher asset spreads, which will help offset some downward pressure on margins on the deposit side in this lower-rate environment. But overall we look quite favourably on our margin outlook.” (Source)
  • Asked for spread comparisons on mortgages today versus three years ago, Anatol von Hahn, Group Head, Canadian Banking, said, “… two years ago we had a large number of customers that took two-year mortgages that were quite competitively priced. We’re seeing an uptick in those rollovers that are higher to the tune of low two digits to high single digits increase in…the renewal rate…One of the things that’s now happening is that customer behaviour is starting to change and we’re seeing more fixed-rate longer-term mortgages, and that makes it very attractive from a margin point of view. We’ll see more of that in Q3 we believe.” (Source)
  • On the heels of the bank’s big pick-up in margin, Scotia was asked why it didn’t re-launch the mortgage sale it had two years ago, which was quite effective. Anatol von Hahn, Group Head, Canadian Banking, said, “…If you go back to the priorities that we have it’s about deepening relationships, but…at the same time…we’re bringing in new customers to Scotiabank…through a number of different initiatives. One of them is through mortgages…If you look at the mortgage market itself, we’re very well positioned because we have three different distribution channels and they are doing very, very well. In fact, branches, brokers and our own salesforce do well. We don’t differentiate on price. We compete on price, but we differentiate on service and that has proven to be a very successful formula for us and will continue to do so.” (Source)


TD BankTD-Bank

Q2 net income: $1.86 billion
(+6% Y/Y)
Earnings per share: $0.97

  • TD’s residential mortgage portfolio rose slightly to $175.5 billion, up from $175.3 billion in Q1. (Source)
  • The bank’s HELOC portfolio rose to $60.3 billion in the quarter, up from 59.7 billion. (Source)
  • Gross impaired loans in the residential mortgage portfolio stood at 0.25%, down from 0.26% in Q1. (Source)
  • 60% of the portfolio is insured, down from 61% in the previous quarter and 62% in Q4. The loan-to-value of the uninsured portfolio is 60%, unchanged from Q1. (Source)
  • TD’s net interest margin has fallen from a high of 2.33% in the third quarter of 2011 to a low of 2.15% in the first quarter of this year. (Source)
  • “Total loan growth was 5% year-over-year with Real Estate secured lending volume up 4%.” (Source)

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

Steve Huebl & Rob McLister, CMT