Here’s the second instalment of CMT’s coverage of the 17th Annual Scotiabank Financials Summit (see Part I). In it, Canada’s banking leaders expound on everything from mortgage risk to regulation to housing affordability.
Their most notable quotes are sorted by category below.
Key commentary appears in blue with our thoughts in italics.
On mortgage lending risk / impairment
David McKay, President and Chief Executive Officer of RBC
In response to a question about why RBC’s impairments are higher than its peers: “…we have got significant revenue coverage of the risk position we are taking. And while our cumulative losses are higher than maybe our peers are, we make on average $300 million more a quarter in the capital markets business than our peers, which is a billion and two over a year, and we have lost I think $150 million more…So yes, our higher loss rates is only $150 million more than our peers on average but we have made a billion more – that is pretty good coverage.”
Victor Dodig, President and Chief Executive Officer at CIBC
“…A shift has been happening from the insured to the uninsured at CIBC, partly driven by secular trends. I mean, CIBC is just not doing as much of it as it used to. We look at those mortgages and the larger ones, particularly on the West Coast, are manually adjudicated. We comb through them in quite a detailed fashion. We look at the client base that we are bringing in, not only in terms of the mortgage that they are taking out, but what other business are they bringing in. And some of the non-conforming mortgages, where you have larger homes being purchased, we see a correlation between deposits and investments come into Canada. The fact of the matter is people are resettling here and we are investing in our business and benefiting from that growth.” . (As Dodig suggests, the percentage of uninsured mortgages has been rising industry-wide. The problem is, uninsured liquidity hasn’t been rising in parallel. The government’s talked a big game in the past about fostering lender competition, and one might argue that it’s not a priority anymore given Canada’s housing imbalances. But those capital, insurance and securitization restrictions should have created a level playing field, and they haven’t. Funding costs have risen disproportionately for smaller lenders that drive consumer savings, and that’s been a major failing of post-crisis policy.)
Scotia on government regulations and mortgage growth:
Brian Porter, President and CEO of Scotiabank
“…In the past we have been very supportive of the changes that Ottawa has made to the Canadian housing market—generally post-crisis to today, whether it is down payments, whether it is adjusting amortizations, those type of things.”
“If you look at our mortgage growth this year, because we were concerned about the market being maybe a little heady in Vancouver, maybe a little heady in the GTA, if you look at our mortgage growth this year it has been 2.7%.” (i.e., below its peers).
“If you look at our mortgage book we have got the highest amount of insured [mortgages] at 59%. We have got the lowest LTV on the uninsured portfolio, and if you look at our tail risk of higher LTV mortgages it has been turning down over the last two years, and that is by design.”
From the panel discussion on housing affordability across Canada
Stuart Levings, President and CEO of Genworth Canada
“I think the obvious statement is that we’re seeing increasingly a trifurcated housing market with Vancouver/Toronto absolutely running away, with Calgary/Edmonton showing some weakness and the rest of Canada basically just plodding along very, very flat. The Vancouver/Toronto markets are obviously gaining a lot of attention, for a good reason. Affordability is at crisis levels in those cities. Obviously Vancouver has chosen to do something about it now more recently…It does appear to be having somewhat of the desired impact as far as slowing down some of that activity and softening some of the prices at a higher end in particular. Toronto may well become the Vancouver of Canada if nothing else is done here, and if some of that foreign capital comes to this city we all think very strong numbers could come out of Toronto.”
“For me, the biggest takeaway is: let’s pause and let some of the measures that are currently in place or recently implemented or about to be implemented in terms of new capital requirements from OSFI take effect, because there are a lot of indicators that…suggest that things are already slowing. I mean, eventually the levels of house price appreciation we’ve seen are not sustainable. Affordability becomes a constraint unless you’re an unlevered wealthy buyer, not buying with any debt. Outside of that, which is the majority of buying, there is some point where you cannot debt service anymore and people will also deem it as no longer a good investment…So I think there are already some really obvious breaks on the demand factors that need to fully play out and need to be fully…measured in terms of the effect in the market before additional intervention.” . (Some refreshing common sense there from an industry leader. A slew of rules have been thrown at the mortgage market in recent years. The potential exists that material government mortgage tightening from this point on—until we reach the next housing trough or plateau—could dangerously reinforce the down cycle. With 40% of Canada’s growth linked to housing as of late, pro-cyclical policy—assuming we’re entering a contractionary phase of the cycle—boosts odds of a hard landing and its accompanying economic consequences. As long as median home prices in high-risk cities stay below their peak, regulatory patience may be the most prudent play…for now.)
Stephen Smith, Chairman and CEO of First National Financial Corporation
“If there was anything at all that the government could possibly do, it would probably be reverse the changes made four to five years ago where the maximum loan-to-value would be 80%. They could certainly scale that back down to 75% or maybe even 70%. It would take some of the liquidity away from the marketplace. But generally we’re really dealing with issues that are predictably in Toronto and in Vancouver. And then we have the issues in other markets, which really aren’t crying out for any type of solution. So I think, to a large extent, these things will be self-correcting.”
Martin Reid, President and CEO of Home Capital Group
“So a lot of the changes that had come into play in the last five years have really been around prudent lending and I would say that the lending that’s happening today is far more prudent than it was 5, 10 years ago. But what a lot of those changes didn’t address was the supply side. And aside from Vancouver, which is really directed at the demand side, I think you really want to be careful of unintended consequences. You know some of the regulatory changes, B20 for example, did shift a lot of business into the shadow banking sector. The unregulated space may help the regulated lenders but systemically [that] may not have been the most prudent thing to do, in that it’s increasing risk in an area where you don’t have a line of sight. So I think you really want to be careful of the types of changes you put into play and you really do need to address the supply side…That really is the tale of two cities, Toronto and Vancouver, where that needs to be addressed.”
John Webster, SVP & Head, Real Estate Secured Lending at Scotiabank
“A lot of the high-end purchases in Vancouver aren’t being financed by lenders and by us, but it does have a downstream effect on affordability. So that is the issue…We’ll have to see whether or not that measure has some impact [and] whether equal measure should be brought to bear in other markets.”
“One of the things that the industry has done that you may not be familiar with, we’ve always, with the exception of the 5-year term, been underwriting to…the Bank of Canada posted rate, which can be as high as 200 basis points higher than the effective contract rate. The only terms that doesn’t apply to is the 5-year+ category. Lenders have [suggested] to [the Department of] Finance and OSFI that we would be willing to undertake that [i.e., apply the posted rate to 5-year fixed terms], to give a little bit more interest rate cushion. But so far what I would say, witnessing the behaviour of our borrowers…Canadians do value home ownership and they are in as quick a hurry as possible to pay down their mortgage. So even if they take a longer amortization, then they’ll do bi-weekly payments and…we still have big pay downs every year…I would say that most of my competitors worry about the fact that the portfolio runs off too quickly, not the other phenomenon.” .
(The Feds have been seriously considering whether to make 5-year fixed borrowers qualify at the posted rate, which is 4.64% today. Compare that to current qualification rates, which can be 2.39% or lower. Any mortgage originator can tell you what a sizable impact this would have on approval rates.)