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Q4 2015 Bank Earnings – Mortgage Morsels

Bank earnings_sq

Just when you thought profits at the Big Banks couldn’t soar any higher, they do. And then some.

The Big 6 Banks earned a whopping $35 billion combined in 2015. Much of that is thanks to strong performance from residential mortgages, despite the slowdown in Alberta and Saskatchewan. Wider spreads on variable rate products also helped boost net interest margin for several of the banks.

There was ample discussion about the expected impact from slowing economies in the prairie provinces. The consensus from banks is that they haven’t seen a substantial increase in defaults so far, but that it will take more time for the full effects to flow through to their balance sheets.

As we do every quarter, CMT has dug through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related highlights. The more interesting observations appear in blue.


Bank of MontrealBMO

Q4 net income: $1.21 billion
(+13% Y/Y)
Earnings per share: $1.83
2015 net income: $4.4 billion

  • BMO’s total Canadian residential mortgage portfolio rose to $97 billion in Q4, up from $95.4 billion in the previous quarter. (Source)
  • Mortgage loans are up 4% from Q4 2014. (Source)
  • 58% of BMO’s portfolio is insured, down from 59.5% in the previous quarter. (Source)
  • The loan-to-value on the uninsured portfolio is 57%, down from 58% in Q3. (Source)
  • 29% of the portfolio has an effective remaining amortization over 25 years. (Source)
  • The condo mortgage portfolio stands at $14 billion (up from $13.8 billion in Q3) with 51% insured (down from 52.1% in Q3). (Source)
  • Loss rates for the trailing four-quarter period were 1 bp and the 90-day delinquency rate is 26 bps (both unchanged). (Source)
  • BMO’s mortgage portfolio is distributed geographically as follows: 41% in Ontario; 18% in B.C.; 16% in Alberta and 15% in Quebec, 6% in Atlantic Canada and 4% in all other parts. (Source)

Annual Report

  • The bank’s forecast for the upcoming year notes, “Growth in residential mortgages is expected to slow modestly to around 5% in 2016.” (Source)

Conference Call

  • “On Alberta consumers, we have noticed a modest increase in delinquencies on non-real estate products but have not seen an increase in losses. This non-real estate portfolio is small at 1% of total loans,” said Surjit Rajpal, Chief Risk Officer. “On the Alberta real estate portfolio itself, 60% is insured, and of the uninsured, the loan-to-value is strong at 56%. As you would expect, we actively monitor our portfolios impacted by oil and gas and remain comfortable that even under adverse scenario, the losses will remain manageable.” (Source)
  • Asked why the bank isn’t seeing more signs of trouble in household credit given the weak economic figures and weakness in Alberta house prices, Rajpal responded: “That’s a really good question…And, really, there’s no one single answer that can satisfy why it is not worse than it currently is. There are lots of factors. There’s a lot of money and, this is my personal view, there’s a lot of money that comes from overseas looking for a safe haven, and that comes to North America. That could be a factor. The supply of land in the cities is somewhat limited and so single-family homes continue to not fall as rapidly as one would imagine based on affordability. Also, the employment numbers are pretty good…I think some of it is that the effects of oil and gas haven’t filtered through the overall economy, even the Alberta economy. Some of it is a question of timing.” (Source)


Q4 net income: $778 million
-2.8% Y/Y
Earnings per share: $1.93
2015 net income: $3.59 billion

  • CIBC’s residential mortgage portfolio rose to $163 billion in Q4, up from $159 billion in the previous quarter. Condos comprise $18 billion, or 11%, of those loans. (Source)
  • Mortgage loans are up 7% from Q4 2014. (Source)
  • 64% of the bank’s residential mortgage portfolio is insured (down from 65% in Q3 and 67% in Q2). The uninsured portfolio has an average LTV of 59% (down from 60%). (Source)
  • Net interest margin in Q4 was 2.57%, up from 2.56% in Q3 and 2.54% in Q4 2014 (Source), “mainly due to wider spreads on variable rate lending products.” (Source)
  • The bank has $39 billion of indirect exposure to oil provinces Alberta, Saskatchewan and Newfoundland (up from $38 billion in Q3), or $17 billion excluding insured mortgages (unchanged from Q3). Alberta accounts for $30 billion, or 78%. (Source)

Annual Report

  • Highlighting its 2015 progress, the bank said it “delivered on our stated objective of retaining 25% of the FirstLine mortgage portfolio, two years sooner than originally planned. This means thousands of clients who held a mortgage only with FirstLine have now moved to our CIBC brand where we can deepen our relationship with them going forward.” (Source)
  • The bank grew its Mobile Sales Advisors by 30% in the year. (Source)
  • Close to 50% of our clients now engage with CIBC digitally, and growing.” (Source)

Conference Call

  • Asked what’s driving mortgage growth for the bank, Kevin Glass, Chief Financial Officer, said, “On FirstLine, we’re still retaining about 50% of the balances, double the target we set out at the very beginning of that effort to come out of that brokerage channel…(but mortgage growth is being driven by) two drivers: one is expanding the sales channel and mobile advisors and the productivity thereof; and two is just tightening our processes, making us quicker, faster and tighter when we respond to clients.” (Source)
  • Referring to a report that said CIBC is a market leader in providing mortgages to foreign investors in Vancouver, and the fact one competitor responded by dropping its LTV limit to a minimum of 20% down, analyst Peter Rutledge asked CIBC execs how they respond to such competitive threats. Victor Dodig, CIBC President and CEO, said, “No anticipated change in that particular respect. We are strong in that region. And I’d like to believe that the team we’ve got there, and I know that may sound a bit generic, but it is a team that’s very strong, been established there for quite some time, very connected within the community. We’ve got consistent support throughout the bank with risk and so forth regarding the limits that we have established that allowed us to be competitive.” (Source)
  • Asked about credit mitigation techniques taken for foreign buyers who put down 20% or more on a home, Laura Dottori, Chief Risk Officer, replied: “…we absolutely qualify all of our borrowers. And if we are making loans where we’re taking security, particularly in the mortgage space, of course, the security we’re taking is in this country. And just to elaborate a bit, as it relates to non-resident Canadian(s), [that] percentage of our portfolio…is really small. It’s under 1%.” (Source)



National Bank of Canada

Q4 net income: $347 million
(+5% Y/Y)
Earnings per share: $0.95 a share
2015 net income: $1.62 billion

  • The bank’s residential mortgage and HELOC portfolio rose to $54 billion in Q4, up from $53.2 billion in Q3. (Source)
  • The portfolio is 41.9% insured (vs. 42.8% in Q3), 24.1% uninsured (up from 23.2% in Q3) and 34% HELOCs (unchanged from Q3). (Source)
  • The average loan-to-value on the HELOC and uninsured mortgage portfolio was unchanged at 59%. (Source)
  • Quebec represented 63% of the mortgage book in Q4, unchanged from Q3. Ontario was 22% and Alberta represented 6%. (Source)
  • Net interest margin in Q3 was 2.20 in Q4, up from 2.18% in Q3 and down from 2.21% a year earlier. (Source)

 Annual Report

  • “Mortgage activity remained strong and we experienced significant growth in mobile users and transactions…” (Source)
  • “Average loan and deposit volumes experienced sound growth compared to 2014, rising 7% and 4%, respectively, driven essentially by residential mortgages and home equity lines of credit.” (Source)

Conference Call

  • Asked why the bank’s loan margins are expanding, Jean Dagenais, Senior Vice President, Finance, said: “...You’ll notice that prime-BA [spreads] have increased to 193 [basis points]. So this is one of the reasons for it…It went from 175 bps last year to 193 bps. So when we add in the lower interest rates from the Bank of Canada, the banks did not reduce their prime totally,…we kept a portion of it to offset the loss in margin on deposits. So that’s why loan [margin] is improving, while deposit [margins] are reducing.

Royal Bank of CanadaRBC

Q4 net income: $2.59 billion
(+11% Y/Y)
Earnings per share: $1.74
2015 net income: $10.03 billion

  • RBC’s residential mortgage portfolio rose to $205 billion in Q4, up from $201 billion in Q3. Volume growth is up 6.9% from a year ago. (Source)
  • 62% of its mortgages are uninsured (up from 61% last quarter). The uninsured portfolio has a loan-to-value ratio of 55% (unchanged). (Source)
  • 15% of the bank’s portfolio is in Alberta, down from 16% in the previous quarter. (Source)
  • RBC’s condo exposure is 9.8% of its mortgage portfolio (unchanged from Q3). Exposure to condo developers is approximately $3.7 billion (down from $3.8 billion in Q3). (Source)
  • Gross impaired loans decreased $55 million from the previous quarter due to “lower impaired loans in commercial lending and residential mortgages.” (Source)
  • Average FICO scores of 778 on uninsured mortgages “remain high indicating strong customer credit quality.” (Source)
  • Net interest margin was down 1 bp QoQ to 2.65%, and was down 6 bps from Q4 2014 “mainly due to the low interest rate environment and competitive pressures.” (Source)

Annual Report

  • 75% of RBC’s mortgages have an amortization of 25 years or less, while 23% have 26-30 years left and 2% still have 30-35 years remaining, down from 5% in 2014. (Source)

Conference Call

  • “While the overall market grew, we were able to capture disproportionate share of the growth due to success of our employee pricing campaign,” said David McKay, President and CEO. “In addition, we also saw clients switch out of secured lines of credit and into mortgage products to take advantage of better rates, which also contributed to our mortgage growth.” (Source)
  • “…recent market and economic headwinds continue to underpin a more cautious outlook. Should oil prices remain depressed and the unemployment rate rise, we could expect credit provisions to reach more normalized levels in the 30- to 35-basis-point range,” McKay added. (Source)
  • “…if you look at the interest rate environment of absolute lower rates, but very high prime-BA spreads, that plays against the construct of our balance sheet more than any other bank on the street, given the very high core deposit base that we have and the relatively high proportion of fixed rate mortgages that we have,” McKay said. “So that creates a more difficult revenue environment.” (Source)


Q4 net income: $1.84 billion
(+28% Y/Y)
Earnings per share: $1.45
2015 net income: $7.3 billion

  • The total portfolio of residential retail mortgages rose to $190 billion from $189 billion in the previous quarter. The portfolio was comprised of $169 billion in freehold properties (unchanged from Q3) and $21 billion in condos (unchanged from Q3). (Source)
  • Adjusting for the Tangerine mortgage run-off, loan volumes rose 5% from Q4 last year. (Source)
  • 49% of the residential mortgage portfolio was insured in the fourth quarter, up from 48% in Q3. The uninsured portfolio has an average loan-to-value ratio of approximately 53%, unchanged from the previous quarter. (Source)
  • The bank had $30 billion in mortgages in Alberta in the quarter, up from $29.7 billion. (Source)
  • Net interest margin was 2.26% in the quarter, up 11 bps YoY due in part to “Run-off of lower spread Tangerine mortgages.” (Source)
  • The bank says its priorities for 2016 are to “improve customer experience, enhance business mix, expand Tangerine, grow and diversify Wealth Management and reduce structural costs.” (Source)
  • The bank reduced its staff by 1,140 positions since the end of July.

Annual Report

  • Mortgages accounted for $309 billion, or 65% of the bank’s total loans and acceptances outstanding in 2015. (Source)
  • 35.6% of Scotia’s mortgages have an amortization of less than 20 years (up from 34.6% in 2014), while 35.6% have 20-24 years left (up from 34% in 2014); 3% still have 30-34 years remaining, down from 6.2% in 2014. (Source)
  • 48.9% of the bank’s mortgages have been originated in Ontario, followed by B.C. with 16.2%. (Source)

Conference Call

  • “Canadian Banking had a very strong year, we expect that momentum to continue in 2016, particularly in mortgages, automotive, payments and commercial banking,” said President and CEO Brian Porter. (Source)
  • “I would say what…you should expect to see is low single-digit growth in mortgage balances and perhaps some very modest margin expansion in that business,” said James O’Sullivan, Group Head, Canadian Banking. (Source)
  • “(Unemployment in Alberta and Saskatchewan has) now moved up to the Canadian average and quite frankly we expect it to rise above the Canadian average. That obviously does have (an) affect and we are seeing similarly the delinquencies in our Alberta portfolio retail-wide have moved up from where they were (but are) still at remarkably low levels,” said Stephen Hard, Chief Risk Officer. (Source)

TD BankTD-Bank

Q4 net income: $1.84 billion
(+5.3% Y/Y)
Earnings per share: $0.96
2015 net income: $8.02 billion

  • TD’s residential mortgage portfolio jumped to $184.5 billion in Q4 from $180.2 billion in Q3. (Source)
  • The bank’s HELOC portfolio rose to $61.2 billion from $60.9 billion in the previous quarter. (Source)
  • 56% of the portfolio is insured, down from 58% in the previous quarter. The loan-to-value of the uninsured portfolio is 56%, down from 59% in Q3. (Source)
  • Net interest margin was 1.98% in Q4, up from 1.97% in Q3. (Source)

Annual Report

  • Residential mortgages represented 38% of the bank’s portfolio in 2015, down from 40% in 2014. (Source)
  • 34.7% of TD’s mortgages have an amortization over 25 years; 3% still have 30-35 years remaining, down from 9.5% in 2014. (Source)

Conference Call

  • I would say mortgage margins—in particular in Q4—were more under pressure than you normally would have seen,” said Tim Hockey, Group Head, Canadian Banking, Auto Finance and Wealth Management. (Source)

Note: Transcripts are provided by third parties (Seeking Alpha and Yahoo Finance). Their accuracy cannot be 100% assured.

Steve Huebl & Rob McLister, CMT