Q1 bank earnings season came and went with less fanfare than usual, at least on the mortgage front.
Executives’ mortgage commentary focused primarily on conditions in Canada’s two hottest housing markets and on strong credit quality.
Earnings reports show continued robust mortgage activity at CIBC and National Bank, with both reporting a 12% year-over-year increase in mortgage volumes. We also saw stronger-than-expected mortgage volumes at Scotiabank.
As we do every quarter, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage notables right here. Key tidbits are highlighted inblue.
Bank of Montreal
Q1 net income: $1.49 billion (+39% Y/Y) Earnings per share: $2.22
BMO’s total Canadian residential mortgage portfolio rose to $103.9 billion in Q1, up from $103.6 billion in Q4.
BMO’s mortgage portfolio grew approximately 5% year-over-year.
57% of BMO’s portfolio is insured, up from 56% in Q4 and down from 59% a year ago.
The loan-to-value on the uninsured portfolio was 54%, unchanged from the previous quarter but down from 57% a year ago.
70% of the portfolio has an effective remaining amortization of 25 years or less, down from 71% a year ago.
The condo mortgage portfolio stands at $14.8 billion (up from $14.1 billion in Q1 2016) with 50% insured (down from 51% a year ago).
Loss rates for the trailing four-quarter period were less than 1 bp and the 90-day delinquency rate was unchanged from the previous quarter at 24bps, but down from 28 bps a year ago.
BMO’s mortgage portfolio is distributed geographically as follows: 44.1% in Ontario (up from 42% in Q4); 19.5% in B.C. (up from 19% in Q4); 16% in Alberta (unchanged) and 14.9% in Quebec (up from 14% in Q4).
NIM in the quarter fell to 2.51%, down from 2.53% in Q4 2016, “largely due to the low rate environment,” said Thomas Flynn, Chief Financial Officer.
“Looking at GVA and GTA, which have been the focus of much attention, we are well-positioned with loan-to-value, delinquency and bureau scores, all better than the national average,” said Chief Risk Officer Surjit Rajpal. “Our approach to consumer adjudication is based primarily on the financial strength of the borrower and we remain prudent in our underwriting practices with lower LTVs for higher-risk segments.”
Q1 net income: $1.17 billion (+13% Y/Y) Earnings per share: $2.89
CIBC’s residential mortgage portfolio rose to $186 billion in Q1, up from $181 billion in Q4 and $166 billion in Q1 2016.
Of the $186-billion mortgage portfolio, $25 billion is from the Greater Vancouver Area (unchanged from Q4), and $52 billion is from the Greater Toronto Area (up from 50% in Q4).
Mortgage loans are up 12% from Q1 2016 (well above CIBC’s peers).
The bank’s HELOC portfolio rose to $20.4 billion in the quarter, up from $19.5 billion a year earlier.
Net interest margin fell in Q1, from 251 bps in Q1 2016 to 239 bps, “reflecting lower deposit spreads due to promotions during the quarter, continued impact of the low interest environment and also business mix,” said Chief Financial Officer Kevin Glass.
CIBC repeated this line from its last quarterly presentation: “Uninsured mortgages in the Greater Vancouver Area (GVA) and Greater Toronto Area (GTA) have lower 90+ days delinquency rates than the Canadian average.”
Of the bank’s total mortgage portfolio, 0.26% are in arrears by 90+ days, up from 0.25% in Q4 but down from 0.27% in Q1 2016. For uninsured mortgages, the rate is 0.19% (0.06% in the GVA and 0.07% in the GTA).
8% of the bank’s uninsured mortgages have a current Beacon score of 650 or less and 12% have loan-to-values over 75%. Less than 1% of the mortgage portfolio have both a Beacon score of 650 or lower and an LTV over 75%.
“The Vancouver and Toronto markets continue to have better credit profiles than the Canadian average,” said Chief Risk Officer Laura Dottori-Attanasio.
“…some of the government actions, such as the tax change in the west coast, has impacted volumes in that region (and) volumes in other parts of the country have adjusted well over the same period of time. There is some degree of change in the regional element of the markets, but irrespective of that markets continue to be strong and aggregate,” said David Williamson, Senior VP and Group Head, Retail and Business Banking.
Williamson added: “We feel quite good about the nature and the size of the growth we are achieving for probably three reasons: One is, we are not using prices…to compete in the current market. Our NIMs and the mortgage business quarter-to-quarter, year-over-year is stable. The NIM compression… (is) a result of promotions in the deposit space, promotions that affected in the short-term in this particular quarter and the current interest environment and business mix. So we are not competing on price…Second we are not competing on risks…the loan-to-value of our uninsured new originations in Q4 was 64%. Only one of the big five were lower than us… And then in the mobile advisors, where we have grown that force, it’s performed very well and it’s very consistent with our client experience aspirations of allowing our clients to bank when, where and how they would like. The mortgage advisors will come to you…30% of [mortgage advisor] clients are new to the bank and from that new client base we are building deeper relationships, something we couldn’t do in the broker channel. So we have exited the broker channel and (are) actively building our mobile advisor channel.” (Ed. Opinion: CIBC utterly failed to capitalize on cross-sell opportunities when it was in the broker channel, and arguably overspent on perks, trips, sponsorships, compensation and the like. Some might view that as mismanagement, but this never seems to come up in its commentary about brokers. Scotia’s cross-marketing efforts in our channel are a case study that CIBC could learn from.)
Speaking to the 6 bps decline in NIM in the quarter, Williamson said this: “Let’s just break apart the six, so the six is half promotional, right. It’s during this period of time when we are in the market trying to build those balances. (For) the other half… one basis point is mix and two is rates. So the promotional part will become less a factor during the rest of the year. We are still in promo now and we are now in Q2 so it’s going to impact Q2 a bit. But that will not be a factor on the latter part of the year. But rates and that basis point of mix, likely will be.”
“During the first quarter, we launched Digital Cart, an innovative mobile app that allows our clients to apply for mobile banking products easily and securely using their mobile device or online,” said President and CEO Victor Dodig. “Our continued focus on leveraging technology to enhance the client experience was also once again recognized by Forester Research. For the third consecutive year CIBC earned the highest score for online banking functionality among the five major retail banks in Canada.”
Q1 net income: $497 million (51% Y/Y) Earnings per share: $1.34a share
The bank’s residential mortgage and HELOC portfolio rose to $64.4 billion in Q1, up from $58.2 billion in Q4 and $54.8 billion in Q1 2016.
Residential mortgages are up 12% from last year.
The residential mortgage portfolio is 48% insured, up significantly from 43% in Q4 and 42% in Q1 2016.
The average loan-to-value on the HELOC and uninsured mortgage portfolio was 59%, unchanged from Q4 2016.
Quebec represented 55.4% of the mortgage book (down from 60% in Q4), while Ontario made up 25% (up from 23%) and Alberta 8% (up from 6%).
Net interest margin in Q1 was down 1 bp Q/Q and Y/Y to 2.24%.
29.3% of the bank’s residential mortgage portfolio has a remaining amortization of 25-30 years (down from 35% in Q1 2016). Another 49.1% has a remaining amortization of 20-25 years (up from 40% in Q1 2016).
Its halt of distributing National Bank brand mortgages through brokers didn’t come up at all during its conference call.
Q1 net income: $3.03 billion (24% Y/Y) Earnings per share: $1.97
RBC’s residential mortgage portfolio stands at $244 billion.
54% of its mortgages are uninsured, up from 53% from last quarter.
The bank noted that while Ontario and B.C. represent 42% and 18% of Canadian residential mortgages, respectively, both provinces have lower LTV ratios (50% and 47%, respectively) than the Canadian average of 54%.
RBC’s condo exposure is 9.8% of its mortgage portfolio (unchanged from Q4).
Average FICO scores of 790 on uninsured mortgages. The bank noted that 46% of uninsured mortgages have a FICO score of 800+.
0.23% of the bank’s residential mortgage portfolio was 90+ days past due, unchanged from Q4 and down from 0.24% in Q1 2016. “While residential mortgage delinquencies increased in oil-exposed provinces, they were stable nationally,” the bank said.
Average remaining amortization on mortgages is 18 years, unchanged from Q4.
Net interest margin was 2.61%, down 1 bp Y/Y and down 2 bps from Q4.
“Looking at the Greater Toronto and Vancouver areas, these two portfolios continue to be characterized by higher-than-average credit scores, as well as lower-than-average LTV ratios and delinquency rates,” said Chief Risk Officer Mark Hughes. “Given accelerated house price appreciation in both of these markets, we continue to closely monitor this portfolio with extra due diligence for higher value mortgages. Overall, we remain comfortable with our residential mortgage portfolio given our clients’ ability to repay and the strong underlying credit quality of this portfolio.”
Hughes was asked whether, in the event of stresses to the residential mortgage portfolio, the losses would be concentrated in the portion of the portfolio with high LTVs and low FICO score ratings. Hughes replied: “We do multiple different stress tests where we would look at different situations. So we would look at different regions, we would look at different global impacts, and it really depends upon the type of the stress that we would be considering at the time…I would not agree that it would necessarily be in this particular portfolio. What I’m saying is it depends on the scenario that would actually be playing out.”
Asked about the bank’s decision in 2016 to de-emphasize mortgage growth in favour of unsecured credit card lending, and whether that outlook has changed given the slowdown in the credit card book, James O’Sullivan, Group Head, Canadian Banking, said: “…we’re very much executing our plan. We continue to be focused on asset mix, and frankly on growing deposits faster than assets…what we saw in the first quarter was higher mortgage volumes than we planned. I think we found ourselves very well positioned, frankly, with an available balance sheet and three strong distribution channels, so mortgage volumes did come in a bit higher than we originally planned. Our appetite for those volumes on an ongoing basis is going to be very dependent on the outlook for margins, but we like the optionality. We’ll see how margins develop.”
Asked about the bank’s cautious tone towards the Canadian mortgage market last year, and whether that outlook has changed, CEO Brian Porter replied: “No, I made some comments at the end of Q2 last year, and it was a primary concern, our primary concern was around the Vancouver market, secondarily the Toronto marketplace. And we’ve been supportive of the changes that the government has made to the mortgage market. I think we’re going to need some time to see those take hold, and we’ll see that through the spring mortgage season, but there’s a number of factors that work here. There is population growth, immigration, there’s the time that it takes to develop a property in terms of getting through the government processes, all those different types of things here. So this is a complicated issue. We’re concerned…that trees don’t grow through the sky, and markets will correct at some stage here. And we’re proud of the fact that we believe we’ve got a very conservative mortgage book here with 50-plus percent is insured, and the LTV on the remaining portion is 51%, and we’ve reduced tail risk in our portfolio. So really, the message is we’re governing ourselves accordingly.”
Q1 net income: $2.53 billion (+14% Y/Y) Earnings per share: $1.32
TD’s residential mortgage portfolio fell to $188.1 billion from $189 in the last quarter and $185.9 billion in Q1 2016.
The bank’s HELOC portfolio rose to $65.09 billion, up slightly from $65 billion in Q4.
Within the residential mortgage portfolio, gross impaired loans remained unchanged at 0.21%.
Net interest margin in the bank’s retail portfolio was up 4 bps Q/Q and Y/Y to 2.82%, “reflecting favorable business mix, Treasury actions and product repricing,” said Riaz Ahmed, CFO. “We nevertheless continue to expect moderate pressure on margins, reflecting the low interest rate environment and competitive pricing.”
Rapidly changing technologies are opening up new frontiers and we’re well situated to seize the resulting opportunities,” said Bharat Masrani, CEO of TD Bank. “We will continue to make investments to advance our digital transformation, deliver a more connected customer experience and simplify the way we work. Our spending is purposeful, pragmatic and aligned with our strategy to build a better bank, a bank of the future.”