Canada’s largest public non-bank lenders have wrapped up their first quarters. Among other trends, two big themes this quarter were the tightening of mortgage spreads and a refocus on improving customer retention.
To get colour on those and more, we combed through the transcripts of three non-bank giants, First National, Home Capital and Street Capital. Here are the highlights…
Street now has over $25 billion in mortgages under administration.
$1.52 billion worth of mortgages was sold during the quarter compared to $1.62 billion the year before.
CEO Ed Gettings said that Street’s first objective is to advance its Schedule 1 bank application through to completion. It has been strengthening its capital position as part of that process. “We expect to be in a position to operate as a Schedule 1 bank in 2017,” Getting said.
“Our second objective is to continue to grow mortgages under administration and hold steady our market share in the mortgage broker channel,” he added. “Our share dipped in Q1 to 7.6% as our underwriters adjusted to some of the changes we put in place during the quarter in preparation to become a Schedule 1 bank.”
Gettings said Street is currently ranked 6th in market share in the mortgage broker channel. “We are targeting to regain the number three or number four position in this channel.”
Looking ahead to 2017, Getting said Street is looking to generate “solid earnings growth” as loans underwritten over the past three years come up for renewal. “We sold 62% more mortgages in 2012 compared to 2011 and that is why we are so confident that 2017 will be a solid year for renewals.”
The gain on sale percentage (as a percentage of mortgages sold) was 177 basis points in the quarter, lower than the 192 basis points last year. “The decline was due to tighter spreads in Q1 of this year compared to the unusually high levels of last year,” said CFO Marissa Lauder. “We expect on a full-year basis that the gain on sale percentage will normalize in the range of 178 basis points to 182 basis points.” (178-182 bps would translate to $1,780-$1,820 gross revenue on a $100,000 mortgage.)
Renewals accounted for 21.7% of loan sales in the current quarter versus 18.5% in Q1 2015.
“…assuming the company launches the bank in late 2016, we are estimating that the bank activities could add approximately 2% to 5% to revenue in 2017 and 10% and 20% in 2018 when compared to 2015 revenue,” Lauder said.
Street Capital President Lazaro DaRocha provided this update on the company’s bank application progress: “…OSFI observations had required some adjustment to our underwriting process to align with new industry-wide changes. As at the end of February, we had completed all of the required changes. We now expect that OSFI will be conducting a follow-up onsite review to validate these changes in this summer. This timing supports our expectation of receiving approval in 2016. We fully expect to receive approval to operate as a Schedule 1 bank in fiscal 2016. However we have not built any meaningful contribution of profitability into our expectations until 2017.”
“…We’ve seen our Alberta volume, which was about two years ago probably in the range of 22% to 25% of total originations, has dropped down to roughly about 15% of total originations,” said DaRocha. “And that has happened through a combination of things. One, the market in itself out there (is) slowing down, but two, we proactively tightened up there, probably…a year and a half to two years ago.”
Total originations in the quarter were $1.78 billion, an increase of almost 29% from the last year’s $1.38 billion.
Net non-performing loans as a percentage of gross loans was 0.34%, compared to 0.25% of the end of Q1 2015.
“I am going to state categorically, Home Trust has no exposure to Urban Corporation,” said outgoing CEO Gerald Soloway. “We continue to observe strong credit profile and stable loan-to-value ratios across the portfolio, which continues to support low delinquency, a low non-performing rate and ultimately the key low net write-offs. In fact, net write-offs were $1.6 million in the quarter representing 0.04% of gross loans…”
On the topic of new technologies, current President and incoming CEO Martin Reid talked about Home Capital’s new broker portal, Loft. “Brokers can get time-stamped documents, real-time updates on the status of deals and the attributes of those deals. We’ve completed [the] pilot…We’ll continue to roll out Loft and should have it substantially rolled out by the end of the summer to all of our broker partners.”
Asked what makes the program different from others already on the market, Pino Decina, EVP, Residential Mortgage Lending, said this: “(It’s) literally end-to-end, so throughout the entire origination process of a mortgage, a broker can see exactly, as Martin mentioned, what the status is of their new application, of their pending mortgage, outstanding commitments all the way through the funding, so that sort of makes ours different from anything else in the marketplace.”
Martin also commented on Spire, a broker loyalty program that launched on April 1. “This is designed to reward brokers who bring us business but it’s much more than that; it rewards brokers who bring us the right kind of business.”
“…in 2015, an area of weakness that we identified was in retention of customers looking for early renewal,” said Reid. “This was part of why, despite growth in originations, our portfolio shrinks. We’ve added resources to our retention team with the focus on retaining these customers with increased originations and retaining more of our existing clients, we should start to see the overall portfolio growing quite nicely.”
Regarding the additional resources being dedicated to Home’s retention team, Decina said: “…the resources that we’ve allocated … are going to be more experienced underwriters or originators. So individuals that…do call in, looking for either mortgage statements or discharge request of their mortgages, obviously we know they are shopping somewhere else or they are looking to refinance somewhere else. They will be able to walk through with some sort of [idea] what they are looking for, find other opportunities, other products and ways to keep them here at Home. So that’s a first strategy. The second is actually built within our Spire partnership program. And really as we onboard brokers onto the program, it’s not only about what they are giving us on a monthly basis and new origination, there is a component built within Spire which rewards brokers for keeping clients here long term.”
Decina confirmed a portion of the increased expenses is going towards broker commissions.
Asked about the price increases in the GTA and Vancouver, and whether Home is seeing any of its traditional clientele being priced out of the market, Soloway responded: “People are still affording reluctantly. They can afford the houses … and we haven’t really seen any difference in credit quality. If anything, the credit quality sort of upticks year-over-year when we do all the analysis. As funny as it sounds, people are basically coming with larger down payments and better Beacon scores.”
Asked about the narrowing net interest margin, and whether Home is seeing competitive pressure on the pricing side, Soloway said, “the mortgage market remains quite competitive especially at the high credit quality end of the business. There has been a little tightening of spreads, but we’ve also been able to do acquisition funds that were a little more reasonable. We’ve found that our funds that we raised directly are cheaper on the whole than what we raised through the broker portal.”
Reid said the company is about 75% through the verification process of mortgages that were handled by brokers cut off from Home Capital. “What we are finding is that out of that portfolio, less than 10% we would not be willing to renew.”
Notables from its call (Source):
Mortgages Under Administration increased 8% year over year to $94.3 billion, a new record, driven higher by strength in mortgage origination and renewal retention.
Originations in the quarter amounted to $2.9 billion, also an 8% increase over last year.
“…originations increased in spite of an obvious decline in mortgage activity in Alberta,” said CEO Stephen Smith. “As we’ve discussed on recent calls, volumes in our Calgary office have declined in the face of the oil industry’s downturn and higher unemployment. This quarter, First National’s single-family originations were down in the region by 10% over last year. We expect weak activity in oil patch communities to continue.”
“…the single-family team made up for this with higher originations in other areas of Canada such that total single-family originations were 3% higher than a year ago at just about $2 billion,” Smith noted. “First-quarter single-family renewals were higher than a year ago as well, up 28% on a good volume of renewal opportunities.”
Mortgage investment income was 5% or about $700,000 lower than a year ago, reflecting a provision for loan losses. “Lower mortgage rates also affected the amount of interest earned on mortgages warehoused prior to securitization,” noted Chief Financial Officer Rob Inglis. “In last year’s first quarter, 5-year mortgage rates were about 3.09% compared to 2.79% to start 2016.”
“From a market perspective, we think 2016 will be somewhat similar to 2015 with strength in most regional markets, save for Alberta and Saskatchewan,” said Executive Vice President Moray Tawse.
“The Alberta market downturn also elevates the risk of credit losses, but as we’ve noted previously – and as our long-term results show – First National does not have the same exposure as other financial institutions because our securitized mortgage portfolio is almost 100% insured and the uninsured MUA is on the balance sheets of our institutional customers,” Tawse said.
“First National has significant mortgage renewals coming up this year and we started to take care of this opportunity in the first quarter and we will continue to do so going forward,” Tawse added.
Asked about arrears for the quarter, Rob Inglis said: “…we haven’t seen a deterioration in arrears numbers with respect to Q4 numbers nor have we seen a deterioration in arrears numbers in Alberta or Saskatchewan.”
Asked about mortgage spreads in quarter, Smith said: “Earlier in the quarter we had some good opportunities. To some extent what we’re benefiting from here on the spreads is the fact that we took the fair market loss in the first quarter of last year and that starts to manifest itself in wider spreads for this year, so that would be one factor. I think actually spreads were fairly good in the fourth quarter and then in the first quarter, so that’s another good factor. Actually as we speak, I think spreads are quite tight. We’ve had a backup in the bond market in the last week or so, so we think we’ve seen spreads tightening. I think that will correct but, you know, it could remain tight for a while so predicting where spreads will go is always a little bit of an issue.”
On the topic of discipline among competitors, Smith noted: “every spring we see competitors not being particularly disciplined, just generally there always seems to be a bit of push for market share. I think (because of) the recent rule changes where aggregators now have their own NHA-MBS allocation. This provided a degree of liquidity to the market that put some pressure on spreads in the broker space, [where] monolines participate. I think we might see tighter spreads there.”
Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.
Steve Huebl & Robert McLister
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