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Q1 2016 Bank Earnings – Mortgage Morsels

Bank earnings_sqAlberta’s routed oil sector and the province’s surging unemployment rate (7.4% as of January) is, for the first time, having a noticeable impact on the Big Banks’ lending portfolios. Rising delinquency rates in personal lending have motivated banks to tighten their underwriting standards in the regions most affected by the oil crash, which also include Saskatchewan, Newfoundland and Labrador.

That said, this line from TD Bank’s Chief Risk Officer, Mark Chauvin, sums up the overall health of the Big 6 banks: “Although we are seeing definite signs of deterioration in consumer lending, delinquency, and loss rates in the impacted regions, to-date, loan losses have been largely offset by strong performance across the rest of the country.”

As we do every quarter, CMT has combed through the top Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related highlights. Notable comments appear below in blue.


Bank of MontrealBMO

Q1 net income: $1.07 billion (+7% Y/Y)
Earnings per share: $1.75

  • BMO’s total Canadian residential mortgage portfolio rose to $97.6, up from $97 billion in Q4. (Source)
  • Mortgage loans are up 5% from Q1 2015. (Source)
  • 59% of BMO’s portfolio is insured, versus 58% in the previous quarter. (Source)
  • The average loan-to-value on the uninsured portfolio is 57%, unchanged from Q4. (Source)
  • 71% of the portfolio has an effective remaining amortization of 25 years or less. (Source)
  • The condo mortgage portfolio stands at $14.1 billion (up from $14 billion in Q4) with 51% insured (unchanged). (Source)
  • Loss rates for the trailing four-quarter period were less than 1 bp and the 90-day delinquency rate is 28 bps, up from 26 bps in Q4. (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 (all unchanged from the previous quarter). (Source)

Conference Call

  • One analyst, who referenced the trend in 2008 for U.S. banks to start cutting unsecured and/or home equity lines of credit where the recession was hitting hardest, asked if the bank had started taking similar action in Alberta. Chief Risk Officer Surjit Rajpal replied: “We constantly adjust our underwriting criteria based on where we see the economic situation in every market, and Alberta is no different. So, when you say, “When will we begin,” we actually have already made changes to how we underwrite in Alberta, as we have in other markets, which are operating differently … to the extent that there are commitments that we can revoke and the financial condition has changed considerably, we can reduce the lines to such customers, for example, their personal lines of credit.” (Source)
  • In response to a question about the bank’s previous stress testing that calculated a 35-40 bps range in terms of loss rates, Rajpal said this: “More than the stress test, we get a lot more comfort from looking at the individual accounts that we review in the wholesale portfolio. And so, the guidance that I’ve given you, 35 basis points to 40 basis points, still holds and is good guidance.” (Source)



Q1 net income: $982 million (+6% Y/Y)
Earnings per share: $2.43

  • CIBC’s residential mortgage portfolio rose to $166 billion in Q1, up from $163 billion in the previous quarter. Condos comprise $19 billion of those loans, up from $18 billion. (Source)
  • Mortgage loans are up 8% from Q1 2015. (Source)
  • 61% of the bank’s residential mortgage portfolio is insured (down from 64% in Q4 and 67% a year ago). The uninsured portfolio has an average LTV of 61% (up from 59% in Q4). (Source)
  • Net interest margin in Q1 was 251 bps, down from 254 bps in Q4, but up from 248 bps this time last year. (Source)
  • The bank has $39 billion of indirect exposure to oil provinces Alberta, Saskatchewan and Newfoundland (unchanged from Q4), or $18 billion excluding insured mortgages (up from $17 billion in Q4). Alberta accounts for $31 billion (up from $30 billion), or 78%. (Source)

Conference Call

  • Laura Dottori-Attanasio, Senior Executive Vice-President and Chief Risk Officer, said this: “…Our (retail) exposure (to Alberta) was flat quarter-over-quarter at $39 billion. Excluding insured mortgages, we have $18 billion, which is up 3%, or $500 million on a quarter-over-quarter basis. January saw Alberta’s unemployment rate move from 7% to 7.4%, which surpassed the Canadian unemployment rate for the first time in almost three decades. Against this backdrop this quarter, we did begin to see delinquency increases across various retail products, particularly in credit cards and unsecured lending. So in response, we started to tighten some risk-management strategies with things like limit decreases. Overall, I’d say that our portfolios continued to perform as expected. And in the event that oil prices continue to remain at these low levels, we would expect to see continued negative migration in the corporate space and increased losses in our retail accounts.” (Source)
  • “…our mortgage growth in Alberta is less than our growth rate nationally. And when we looked at market share data, the most recent market share data, we’re losing market share in Alberta, where we’re not in other provinces,” said David Williamson, Group Head of Retail & Business Banking. (Source)




National Bank of Canada

Q1 net income: $261 million (-37% Y/Y)
Earnings per share: $0.67 a share

  • The bank’s residential mortgage and HELOC portfolio rose to $54.8 billion in Q1, up from $54 billion in Q4. (Source)
  • Mortgage loans are up about 6% from Q1 2015. (Source)
  • Personal lending is up 6%, with the bank noting, “the most significant increases [came] from mortgage loans.” (Source)
  • The portfolio is 41.7% insured (vs. 41.9% in Q4), 24.3% uninsured (up from 24.1% in Q4) and 34% HELOCs (unchanged from Q4). (Source)
  • The average loan-to-value on the HELOC and uninsured mortgage portfolio was unchanged at 59%. (Source)
  • Net interest margin in Q1 was down 3 bps QoQ “due to market conditions.” (Source)


Conference Call

  • “The Bank’s exposure in the oil region remained low, with the largest portion being residential mortgages (of which about 60% are insured) and HELOCs,” said William Bonnell, Executive Vice President, Risk Management. “The unsecured retail portfolio in the region is small, accounting for only 0.4% of the loan book.” (Source)
  • “…we did observe an increase in delinquencies in this portfolio, most notably in credit cards, as was expected given higher levels of unemployment in Alberta,” added Bonnell. “However, as our credit card balances in that province were only about C$25 million, we don’t expect a material impact on our overall portfolio.” (Source)
  • Explaining the strong 6% YoY residential mortgage portfolio growth, CEO Louis Vachon said: “…we do have a number of initiatives that are underway and one of these moves is actually getting closer to realtors with our own sales force. So we do have mortgage development managers that cater to that segment and that actually has been a winning formula for us. … We’re leveraging some functionalities and new capacity in our call centre to contact our clients, so that has actually worked well for us. And third, we see a whole lot of activities in the refinancing aspect. So a lot of our clients are taking advantage of their low loan-to-value ratio and upgrading, whether the house or paying off other debt, but we’ve seen much more activities there. So most of the business has actually been driven by our internal sales force and that should continue for the course of the year.” (Source)


Royal Bank of CanadaRBC

Q1 net income: $2.45 billion (+0% Y/Y)
Earnings per share: $1.58

  • RBC’s residential mortgage portfolio rose to $208 billion in Q1, up from $205 billion in Q4. The bank also holds $41 billion worth of HELOCs. (Source)
  • 54% of its mortgages are uninsured (down from 62% last quarter). The uninsured portfolio has a loan-to-value ratio of 55% (unchanged). (Source)
  • 16% of the bank’s portfolio is in Alberta, up from 15% in the previous quarter. (Source)
  • The bank noted an increase in delinquencies in oil-exposed provinces to 0.23%, up from 0.22% in the previous quarter. (Source)
  • RBC’s condo exposure is 9.9% of its mortgage portfolio (up from 9.8% in Q4). Exposure to condo developers is approximately $3.6 billion (down from $3.7 billion in Q4 and $3.8 billion in Q3). (Source)
  • Average credit scores are 780 on uninsured mortgages, up from 778 in Q4, and they “remain high indicating strong customer credit quality.” The bank also said Alberta’s average credit score is “consistent with the national average.” (Source)
  • Net interest margin was down 3 bps Q/Q to 2.62%, and was down 6 bps from Q1 2015 “reflecting the low interest rate environment and competitive pressures.” (Source)

Conference Call

  • “We extended our market-leading position in residential mortgages, and balances were up 7% from last year, as clients continue to take advantage of historically low interest rates,” said President and CEO David McKay. “In addition, our promotional programs drove customer activity to our channels.” (Source)
  • McKay added: “Our margins held up relatively well in recent years, but continue to be pressured by the low interest rate environment and competitive pressures, particularly given our relatively high proportion of fixed-rate mortgages and our strong and growing core deposit base.” (Source)
  • Regarding questions about the bank’s allowance for loan losses, McKay said this: “Depending on the type of loan, we typically allow 9 to 12 months for the losses to become identifiable to us. For residential mortgages, we extend this timeframe to 18 months. Currently, the major source of potential new loan losses relates to the impact of low oil prices on our wholesale loan portfolio, and possible impacts to our retail portfolios through lower employment and the wind-down of severance packages, mainly in oil-exposed regions.” (Source)
  • “We did see delinquencies move up this quarter from historical lows in our residential mortgage portfolio in Alberta and are proactively working with these clients,” McKay said. “…the debt service ratio in Alberta is stronger than the national average and we have a greater percentage of insured mortgages in that region.” (Source)
  • Speaking to stress tests the bank has conducted, Chief Risk Officer Mark Hughes said, “We also ran an enterprise-wide macro stress test, based on oil at $25 a barrel in 2016, which looked at the impact on our retail and wholesale portfolios in Alberta and the contagion effect on the rest of Canada, should this cause a Canadian recession. In what we believe to be an unlikely scenario at this point, [loss] provisions based on this macro stress test would increase to 40-50 basis points, which is within our historic average through a cycle.” (Source)
  • Hughes added: “Alberta’s unemployment rate increased from 4.6% to 7.4% over the past year and severance packages have started to wind down. The unemployment rate now exceeds the national average. We are also seeing similar trends in other oil-exposed regions, such as Saskatchewan, and Newfoundland and Labrador. As a result, provisions in these regions have increased, largely in our personal lending and cards portfolios, where the first signs of stress typically occur. Against this backdrop, we continue to actively monitor shifts in our clients’ financial patterns to ensure we maintain visibility into early signs of stress. We did see delinquencies move up this quarter from historical lows in our residential mortgage portfolio in Alberta, and are proactively working with these clients.” (Source)



Q1 net income: $1.81 billion (+5.1% Y/Y)
Earnings per share: $1.43

  • The total portfolio of residential mortgages grew slightly to $190 billion from $189 billion in the previous quarter. The portfolio was comprised of $169 billion in freehold properties (unchanged from Q4) and $21 billion in condos (unchanged from Q4). (Source)
  • 48% of the residential mortgage portfolio was insured in the first quarter, down from 49% in Q4. The uninsured portfolio has an average loan-to-value ratio of approximately 53%, unchanged from the previous quarter. (Source)
  • The bank had $30.1 billion in mortgages in Alberta, up from $30 billion in Q4. (Source)
  • Net interest margin was 235 bps, up 19 bps YoY primarily due to “a shift in business mix as well as the run-off of lower-spread Tangerine mortgages.” (Source)

Conference Call

  • Speaking about the steps the bank is taking as part of its “digital transformation,” President and CEO Brian Porter said: “Our Rapid Lab program is currently focused on several core customer journeys including mortgages, credit cards and day-to-day accounts, and allows us to on-board our customers with reduced turnaround times, increased convenience and radically simplified processes.” (Source)
  • “Our retail delinquency rates and overall retail credit quality remained stable, albeit we are seeing some regional weakness in Alberta,” said Stephen Hart, Chief Risk Officer. But he added: “For context, Alberta represents 15% of our total Canadian loan book with the bulk of our exposure being well secured, and 59% of those mortgages are insured … In terms of customer activity in the region, we have not seen any unusual or unexpected growth in either secured or unsecured revolving credit.” (Source)
  • Asked about the subdued performance of the bank’s mortgage portfolio, James O’Sullivan, Group Head Canadian Banking, replied: “What I would say on mortgages is that we’re very satisfied with our position in the market. We’re number three in the market. We have low single-digit growth in balances and we have modest margin expansion year-over-year. … We’ve been thoughtful and we’ve been deliberate about which asset classes we want to grow and at what pace. And we’re satisfied with our position in mortgages. Currently, as you know, it’s an intensely competitive business. And I would say on the variable rate side of the business, margins in particular are very, very compressed.” (Source)


TD BankTD-Bank

Q1 net income: $2.22 billion (+8% Y/Y)
Earnings per share: $1.17

  • TD’s residential mortgage portfolio jumped to $185.9 billion in Q1 from $184.5 billion in Q4. (Source)
  • The bank’s HELOC portfolio remained flat at $61.2 billion. (Source)
  • 55% of the portfolio is insured, down from 56% in the previous quarter. The loan-to-value of the uninsured portfolio is 59%, up from 56% in Q4. (Source)
  • Net interest margin was 2.80% in Q1, down from 2.84% in Q4. (Source)
  • TD reported that its net interest income was down by $6 million in Q1 from a year earlier due largely to “seasonally lower mortgage renewal revenue.” (Source)

Conference Call

  • CEO Bharat Masrani noted that “personal banking delivered record growth in mortgage originations and checking account balances.” (Source)
  • “Margin declined 4 basis points quarter-over-quarter, primarily due to the low interest rate environment, competitive pricing and some seasonal impacts such as lower mortgage renewal revenue,” said Riaz Ahmed, Group Head and Chief Financial Officer. (Source)
  • Regarding the bank’s performance in Alberta, Saskatchewan, and Newfoundland and Labrador, Mark R. Chauvin, Chief Risk Officer and Group Head, said: “Although we are seeing definite signs of deterioration in consumer lending, delinquency and loss rates in the impacted regions, to date, loan losses have been largely offset by strong performance across the rest of the country.” (Source)


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

Steve Huebl & Rob McLister, CMT