Q3 2016 Bank Earnings – Mortgage Morsels

Another bank earnings season has just wrapped up, giving us insight into how Canada’s Big 6 banks are monitoring and reacting to housing market risks, most notably runaway prices in Toronto and Vancouver.

Here’s some of what we learned from Big Banks’ third-quarter reports:

• While credit card and personal lending delinquencies are rising, particularly in oil-producing provinces, loss rates on uninsured mortgage and HELOCs remain low and stable overall.
  
• During the conference calls, a number of analysts openly pondered whether moderating growth in the banks’ mortgage portfolios may actually be prudent, given current market conditions.
  
• There are clear signs of an industry-wide move towards a lower ratio of insured mortgages and lower loan-to-values on uninsured mortgages.

In keeping with CMT’s quarterly tradition, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related goodies. Notable tidbits are highlighted in blue.

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Bank of Montreal

Q3 net income: $1.2 billion (+4% Y/Y)
Earnings per share: $1.86

• BMO’s total Canadian residential mortgage portfolio rose to $101.2 billion in Q3, up from $98.3 billion in Q2. (Source)
• 57% of BMO’s portfolio is insured, down from 59% in Q2. (Source)
• The loan-to-value on the uninsured portfolio is 56%, down from 57% in Q2. (Source)
• 70% of the portfolio has an effective remaining amortization of 25 years or less, down from 71%. (Source)
• The condo mortgage portfolio stands at $14.5 billion (up from $14.2 billion in Q2) with 50% insured (down from 51%). (Source)
• Loss rates for the trailing four-quarter period were less than 1 bp and the 90-day delinquency rate dropped to 22 bps, down from 26 bps in Q2 and 28 bps in Q1. (Source)
• BMO’s mortgage portfolio is distributed geographically as follows: 42% in Ontario (up from 41%); 19% in B.C. (unchanged); 16% in Alberta, 14% in Quebec (down from 15%), 5% in Atlantic Canada and 4% in all other parts. (Source)
• Net interest margin (NIM) was up 1 bp year-over-year and 4 bps quarter-over-quarter. (Source)

Conference Call

• Asked why the bank hasn’t been more restrained in its uninsured mortgage portfolio in B.C. and Ontario, and citing a $3-billion quarter-over-quarter increase, Surjit Rajpal, Chief Risk Officer, replied, “…We are very selective in how we underwrite our mortgages in all the geographies and we recognized that there are markets that are more frothy (than) others…We adjust our parameters given where we see every market. …our growth in mortgages is quite secular, it’s in all the areas and our loan-to-values on the uninsured portfolio is still at 56%.” (Source)
• In his follow-up question, analyst Peter Rutledge with National Bank Financial noted that a portion of the mortgages still have an LTV of 65%+ at origination and that “…although that seems to (be) low today, I wonder with Vancouver up 25% year-over-year, if those LTVs are really accurate, if we look back on it a year or two from today, will they be as accurate and will those credit risk decisions seem as prudent?” Rajpal then replied, “…you’re absolutely right, so what we tend to do is we tend to watch our originations in those markets and make sure that the originations at those levels are contained. And we do run our stress tests as well, we look at our numbers and we stress our portfolios given the distribution across the LTV curve. And we are satisfied that our portfolio is very robust in that sense.” (Source)

CIBC

Q3 net income: $1.44 billion (+47% Y/Y)
Earnings per share: $3.61

• CIBC’s residential mortgage portfolio rose to $175 billion in Q3, up from $169 billion in Q2 and $159 billion in Q3 2015. Condos comprise $20 billion of those loans (up from $19 billion in Q2). (Source)
• Mortgage loans are up 9% from Q3 2015. (Source)
• 57% of the bank’s residential mortgage portfolio is insured (down from 65% y/y). The uninsured portfolio has an average LTV of 57% (down from 59% in Q2 and 61% in Q1). (Source)
• Net interest margin in Q3 was 248 bps, down from 250 bps in Q2 and 253 bps in Q3 2015. (Source)
• 90-day delinquencies for both uninsured mortgages and HELOCs remained stable at 0.2% (unchanged since Q3 2015). (Source)
• The bank has $40 billion of indirect exposure to oil provinces Alberta, Saskatchewan and Newfoundland (up from $39 billion in Q2), or $19 billion excluding insured mortgages (up from $18 billion in Q2). Alberta accounts for $31 billion, or 79%. (Source)
• The LTV of the uninsured mortgage portfolio in Alberta is 66%, and 63% in Saskatchewan and Newfoundland. (Source)

Conference Call

• “…FirstLine mortgage balances… now represent approximately 4% of total mortgage balances,” said Kevin Glass, Chief Financial Officer. (Source)
• Asked what’s driving the bank’s strong growth in its mortgage portfolio, David Williamson, Group Head-Retail & Business Banking, talked about some of the initiatives they’ve been working on, particularly: “…building on deeper sustainable relationships.” He said, “I think probably the key thing is the sales force and sales productivity, like we’ve really added to our sales force over the last few years. Since we put growth as one of our two objectives, we’ve increased the sales force by 1,800-strong and then importantly even though that sales force is new and fresh, the productivity of that sales force has gone up sustainably each year. And then…on technology, our digital sales are growing at twice the rate of traditional sales channels. …we’re doing (this) in a way that clients like, our J.D. Power annual survey is up 22 points this year and we’re only 11 points away from first now. (Source)
  
• On whether the bank is growing its mortgage balances prudently given the concerns about the Vancouver and Toronto markets, CIBC’s chief risk officer Laura Dottori-Attanasio said this: “From a lender’s perspective, the real estate market, particularly in the Greater Vancouver area, continues to be robust. I think that Vancouver has become a real international destination city, it’s a different market and we need to keep that in mind. It’s a strong and diversified economy and when we look at that market, the delinquency rates are actually lower than our national average. So we have not changed our underwriting standards. They continue to be quite strong and so we’re quite comfortable with our position here and if I can give you more comfort, when we look at our Greater Toronto and Vancouver area markets, we have better scores as I said than (the) national average (and) lower at origination loan-to-values. Our serious arrears rates are much lower than our overall portfolio, and so the credit quality is very high in these particular segments. And as you can appreciate, like everything in risk management, we run stress tests on everything including this segment of the portfolio. And when we look at this portfolio, if we run a severe stress where we drop house prices down…30% and we assume the unemployment rate goes up to 11%; when we look at additional losses in that year we’re looking at less than $100 million. And so the residential mortgage book is actually a very good product. In fact, as we get worried about sort of where the economy might be headed and the leveraged Canadian consumer, I think the area that you want to look at more closely is in the unsecured product area.” (Source)
  
• Asked about the bank’s 36% year-over-year growth in uninsured residential mortgages, Williamson said, “…we haven’t adjusted our policies. What we have seen is our government stepping out of that business a bit. So I think it’s not so much that we’re going to do more on insured mortgages. I think you’ll see a more systemic industry-wide move to a lower level of insured mortgages. And again I think it’s a function of Ottawa saying they’d like to be less (involved in) that business.” He also noted the improvement in the loan-to-value of the uninsured book, now at 57%. (Source)
  

National Bank of Canada

Q3 net income: $478 million (+6% Y/Y)
Earnings per share: $1.31 a share

• The bank’s residential mortgage and HELOC portfolio rose to $57.8 billion in Q3, up from $55 billion in Q2. (Source)
• Residential mortgage volume was up 9% from Q3 2015. (Source)
• “Rising 5% from a year ago, personal lending experienced sustained growth, with the most significant increases coming from mortgage,” the bank said. (Source)
• The residential mortgage portfolio is 42.9% insured (vs. 42.3% in Q2), 24% uninsured (unchanged) and 33.1% HELOCs (down from 34.1% in Q2). (Source)
• The average loan-to-value on the HELOC and uninsured mortgage portfolio was 59%, up from 58% in Q2. (Source)
• Quebec represented 60% of the mortgage book in Q3, down from 62% in Q2. Ontario was 23% (unchanged) and Alberta represented 6% (unchanged). (Source)
• Net interest margin in Q3 was 2.25%, up from 2.20% in Q2 and down from 2.24% in Q3 2015. (Source)
• 64.1% of the portfolio has an effective remaining amortization of 25 years or less. (Source)

Royal Bank of Canada

Q3 net income: $2.9 billion (+17% Y/Y)
Earnings per share: $1.88

• Residential mortgage volume rose to $216 billion, up from $214 billion, up 1.2% from last quarter and 6.4% from a year ago. (Source)
• 52% of its mortgages are uninsured, down from 54% from last quarter. (Source)
• The bank noted “higher delinquencies across most of our retail portfolios in oil-exposed regions.” (Source)
• Residential mortgage PCL remained at 1 bp, while 30+ day delinquencies in the residential mortgage portfolio were 0.19%, down from 0.23% in Q2 and 0.21% a year ago. (Source)
• RBC’s condo exposure is 9.8% of its mortgage portfolio (down from 9.9% in Q2), with 37% insured. (Source)
• Average FICO scores of 782 on uninsured mortgages, up slightly from 781 in Q2, “remain high indicating strong customer credit quality.” (Source)
• “GTA and GVA average FICO scores are above the national average; with Alberta in line with the national average.” (Source)
• Average remaining amortization on mortgages is 18 years, up from 17 years in Q2. (Source)
• Net interest margin was 2.63%, down from 2.66% y/y and “reflecting the continued low interest rate environment and ongoing competitive pressures.” (Source)

Conference Call

• “We…continue to closely monitor our mortgage portfolios in oil exposed regions”—Chief Risk Officer Mark Hughes. (Source)
• “Overall, we remain comfortable with our exposure to the Canadian housing market for the following reasons. We did not participate in the second lien market and do not originate sub-prime mortgages. We utilized proprietary channels for mortgage origination allowing for a centralized credit adjudicating process and enhanced monitoring,” Hughes added. “We are diligent in income verification, which is a key component of our mortgage approval process. Our client’s credit profiles are strong and have remained stable. In Alberta, customer credit scores remain in line with the national average and a higher proportion of the portfolio is insured. And finally, I would note 48% of our portfolio is insured, which is up from 46% last quarter. This is due to the additional portfolio insurance that we purchased this quarter.” (Source)

Scotiabank

Q3 net income: $1.96 billion (+6% Y/Y)
Earnings per share: $1.54

• The total portfolio of residential retail mortgages rose to $191.1 billion in Q3, up from $189 billion in Q2 and $189 billion in Q3 2015. (Source)
• The portfolio was comprised of $169 billion in freehold properties (up from $168 billion in Q2) and $22 billion in condos (up from $21 billion in Q2). (Source)
• 59% of the residential mortgage portfolio was insured in Q3, down from 62% in Q2. The average LTV of the uninsured portfolio is 50%, down from 51% in Q2. (Source)
• Net interest margin was 2.38% in the quarter, unchanged from the last quarter and up from 13 bps from 2.25% in Q3 2015, driven primarily from “higher earning asset and deposit margin. The positive impact from acquisitions was 6 bps.” (Source)

Conference Call

• Asked if the bank’s 3% year-over-year growth in its residential mortgage portfolio was a sign of restraint on the bank’s part, Stephen Hart, Chief Risk Officer, replied: “There is an element of choice, certainly. I think as we construct our balance sheet in a thoughtful and risk-sensitive way, our goal I think is clear. We’ve said for over a year now that we want to not close, but certainly narrow the (margin) gap … compared to our peers. So we’re deliberately focusing on some asset classes more than others and very clearly we’re focused on deposits as well. On mortgages, we’ve had low single-digit growth in balances now for some time. It’s clear that…ceded some market share, but as I said, the outset, that is very much a choice. We feel very strongly that if we execute our strategy of investing in customer experience, shifting our business mix and improving our productivity ratio, we can continue to deliver earnings growth in the range of 6% to 9% medium term and that’s what we seek to do.” (Source)
• Asked about the growth in uninsured mortgages, Brian Porter, Scotiabank CEO, said this: “We did a very large bulk insurance deal in Q2. So 59% of our overall book now is insured, and the loan-to-value on the balance is 50%. If you look at this business from an originations perspective, the growth … is sub-3% year-over-year and if you — it’s near zero frankly if you include Tangerine. From an operational perspective, newly originated uninsured mortgages are very stable loan-to-values of about 63%. …the point is, I think we’re being prudent. I think we’re being vigilant in this market but we’re not overly concerned. We believe we can structure the very, very solid mortgage book here but clearly, given that our strategy is to shift our business mix, we’ve made a deliberate choice to do less mortgages and more of other asset classes.” (Source)
• In response to a question about the impact of the bank’s bulk insurance deal, Porter said, “It should not have any meaningful impact on margin, it’s just a cost-efficient way to enhance our capital and our liquidity positions.” (Source)

TD Bank

Q3 net income: $2.42 billion (+5.7% Y/Y)
Earnings per share: $1.27 (excluding one-time items)

• TD’s residential mortgage portfolio rose to $187.7 billion from $185.7 billion in Q2. (Source)
• The bank’s HELOC portfolio rose to $63.9 billion from $62 billion in Q2. (Source)
• 51% of the portfolio is insured, down from 53% in the previous quarter. The loan-to-value of the uninsured portfolio is 58%, unchanged from Q2. (Source)
• Within the residential mortgage portfolio, gross impaired loans declined to $406 million, or 0.22%, down from $428 million, or 0.23% in Q2. Among the HELOC portfolio, gross impaired loans also fell from $164 million (0.26%) to $155 million (0.24%). (Source)
• Net interest margin was 2.79%, up from 2.77% in Q2. (Source)

Conference Call

• “Market share, as I said, in mortgages is increasing, it’s going up. We continue to feel good about the quality of our portfolio, about our standards, about the quality of our originations, and I would say, across markets, (and we) continue to generate good business. I would say that in the B.C. market, if we look at externally available data, our net portfolio growth and our market share would be slightly below the average,” said Teri Currie, Group Head, Canadian Personal Banking. (Source)
• When one analyst disputed TD’s claim that it’s still taking mortgage market share, pointing to a relatively flat past six months according to figures released by the bank, Currie responded, “…obviously those are lagged numbers that we get externally. So I would say those numbers are the most recent that we have to measure how we’re doing. In terms of this quarter, we had record Mobile Mortgage sales force originations and record branch originations. So we’ve had strong growth in the portfolio. I would say we’ve done that by maintaining the same discipline that we’ve had in the past. So I’m not concerned about the quality of the portfolio or of those originations. We’ll have to wait and see through external reporting because obviously it is lagged whether that does play out in increased share, but for what we know today, we are continuing to grow solidly.” (Source)
• Asked if there’s been any deliberate change on TD’s part in terms of origination standards that has resulted in the slower pace of growth, Mark Chauvin, Chief Risk Officer, said: “the key part is to have a consistent underwriting strategy or underwriting guidelines that are the same throughout the cycle so that they don’t get weaker in exuberant times. We’re very strong at trying to do that. But, of course, over the last three years, four years, five years of increasing home prices, you do look at them and you say, I want to make sure that I’m comfortable with these underwriting standards and that they’re good for our customers, and that they will pass that test. So there have been some changes, clearly. We put a lot more focus on income confirmation to ensure that the mortgages that we do provide to the individual, that they can service them certainly at the time that we provided it. When we make exceptions, we put a structure in place to say, let’s elevate the thought process, the decision making. So when you’re making exceptions that are out of the underwriting standard, that’s not a bad thing as long as there’s a compensating factor... And the other is we put more focus over appraisals just to make sure that there’s a second pair of eyes on them and that we’re comfortable with them. So these are things that just naturally occurred over the last three to four years, and clearly, they’re going to have an impact on areas that grow really quickly because our policy is not to deviate from them regardless of how the market is going.” (Source)
• Mario Mendonca, an analyst with TD Securities, asked about TD’s lagging performance compared to the other big banks: “We’re all collectively scratching our heads on why this premium domestic retail bank isn’t keeping up with its peers.” He asked if there is any structural perspective, such as mix of loans, mix of deposits, etc., that could explain this underperformance, Currie replied, “…on the margin front, the biggest factor has been low interest rates and the cost of funds for residential mortgages, in particular…I think we feel that we’re all in relatively the same place as it relates to NIMs and the outlook for NIMs going forward.”
• Mendonca challenged Currie on the claim that TD is performing similar to its peers: “Year-over-year, TD’s NIMs are down about 10 basis points so far – this is year-over-year in domestic retail. What we’re seeing for the group is about half of that, maybe a little less than half. So there’s nothing, then, Teri, you can point us to that would…explain why TD’s margins are lower or deteriorating faster?” Currie replied: “Nothing beyond the lower interest rates, competitive pricing, and the cost of funds for mortgages.” (Source)

Note: Transcripts are provided by third parties (Seeking Alpha and Yahoo Finance). Their accuracy cannot be 100% assured.
*This story has been updated with a correction to CIBC’s indirect exposure to oil and gas provinces in Q2.

Steve Huebl & Rob McLister, CMT