Canada’s biggest non-bank lenders have all reported third-quarter earnings. In their conference calls they outlined some of the expected impacts from OSFI’s new mortgage regulations that will take effect January 1, 2018.
All unanimously forecast a sizeable decline in uninsured mortgage lending activity.
Meanwhile, Home Capital’s new CEO reported on progress made to date to turn the lender around following its liquidity crisis in the second quarter.
Highlights from the conference call transcripts from Street Capital, Home Capital and First National are below. The comments in blue deserve particular attention.
Home Capital reported net income of $30 million in Q3 compared to a loss of $111 million in the previous quarter.
Total loans under administration declined to $23.2 billion in Q3, down from $25.9 billion in Q2 and $26.4 billion in Q3 2016.
Net interest margin stood at 1.85% in Q3, up from 0.07% in the previous quarter and down from 2.35% a year ago.
Single-family mortgage originations were $201.1 million in Q3, down from $699.9 million in Q2 and $1.416 billion in Q3 2016.
Home sold $488.8 million of mortgages for proceeds. It also repaid all outstanding amounts under its $2-billion credit facility.
“Today we have ample liquidity and wide access to deposit funding that we can flex-up or dial-in in line with demand,” said Yousry Bissada, who took the helm as CEO during the quarter. “We have the capital, liquidity, expertise and team to accelerate the business. Home has emerged from the events of the second quarter of 2017 a significantly stronger company on solid footing.”
On the company’s current relationship with mortgage brokers, Bissada said this: “We have the relationships and the tremendous support from the mortgage brokers. We have spent time with leaders from some of the largest brokerages in Canada who have said they see Home has been on the right track and they’re ready to work with us.”
On the credit quality of the mortgage portfolio, Bissada said, “Non-performing loans remain low and we maintained credit quality as highlighted by the average beacon score of 695 for our single-family residential portfolio at the end of Q3.”
On OSFI’s new B-20 regulations coming into effect on January 1, 2018, Bissada noted that the stress-testing requirement will have “the most material impact to our addressable market” as some borrowers will qualify for smaller loan sizes than they would have without the stress test.
Bissada noted that it’s difficult to quantify what the impact will be on Home’s origination volumes in 2018 due to additional factors, such as changing borrower behaviour (those seeking smaller loans or coming up with larger down payments), borrowers migrating from the prime market to the alternative market, and “continued expectations for robust growth in the self-employed and new immigrant segments of the alternative market (which) will contribute to growth in potential customers.”
On a positive note, he said, “We expect that renewal levels will increase in our existing portfolio as borrowers will not have to re-qualify” under the new stress test if they remain with their existing financial institution.
Bissada said Home’s low origination level is unrelated to deposits and instead is a product of the fact that that Home has been turning down over 70% of applications because “some of it doesn’t meet our risk quality and some of it because we couldn’t respond quickly enough.”
Asked whether that high rejection rate was due to more stringent underwriting criteria, Bissada replied: “No doubt what happened in the second quarter of this company made us look at all our risk modelling and all our regulatory rules we are in a better place than we used to be…We’ve changed how we do things. we’ve used systems to automate a lot of things.”
He added that improving communication with brokers is part of the work Home has cut out for it in the coming months: “Part of that is we have to go back out and communicate to brokers what kinds of deals fit our risk portfolio…so that deals that are being sent here have a higher chance of being approved.” (He spoke more in-depth about that in an interview with CMT this week).
Home is currently reviewing its opportunities to drive growth, with more details expected by Q2 2018. “This will include improving the use of our technology and digital strategy bringing new and innovative products to the market and potentially expanding our geographic footprint,” Bissada said, adding that the geographic expansion would include the West and Quebec. “We are in those markets today, but we believe we can be more aggressive and that we have things to offer in the Western markets as well as Quebec and we intend to get more aggressive in those areas.”
Street Capital Bank
Notables from its call:
Street originated $1.5 billion of new mortgages, down 39% from last year and due to last fall’s mortgage insurance rules, said Marissa Lauder, Chief Financial Officer. Year to date, Street has originated $4.2 billion, down 27% compared to last year.
“While we continue to work hard to find funding options for prime uninsurable mortgages, it has taken longer than we had hoped or expected,” Lauder noted. “It is important that any funding solutions for prime uninsurable mortgages are both capital- and economically efficient for the Bank.”
As a result, Lauder said Street has adjusted its guidance for prime new origination from a decline of 20-30% to a decline of 30-25%.
Renewal rates stood at 73% in the quarter, slightly off from Street’s 75-80% ongoing target. Renewal volumes, however, were up 22% on the quarter and up 55% from last year.
“A few factors have contributed to the lower renewal rate compared to our targets, including seasonality along with some additional discounting in the markets as lenders compete for insured mortgages and a current inability to renew customers requesting a refinance at renewal,” Lauder said. “For renewals, the net gain on sale rate was 142 basis points, improving from 137 basis points last year and 139 basis last quarter.”
Street originated $131 million in Street Solutions mortgages in the quarter at an average rate of 4.88% (down from 5.00% last quarter). “In mid-October, we put a hold on further Solutions applications for closing in 2017, as we were within both our targeted mortgage volumes and our funding plans. We continue to accept applications for 2018 closing, and aim to restart our Street Solutions programs in the new year,” Lauder said. She added that Street expects to meet the $600-700 million in originations target for 2018.
Commenting on the impact of OSFI’s new B-20 guidelines, Lauder said “…we believe there could be an overall decline in uninsured mortgage lending activity in the regulated space along with buyers adapting their borrowing. For example, choosing less expensive properties or accumulating larger down payments or adding co -borrowers. For us, as we communicated, we have relatively modest non-prime uninsured mortgage origination targets over the next two years compared to the overall size of the available market. Right now, we believe we can meet these targets even with the changes to B-20 in place.”
“…we anticipate that the announced regulatory changes, coupled with a rising rate environment, will dampen transferring between financial institutions,” noted CEO Duncan Hannay. “This, combined with a renewed focus on client retention, could lead to higher renewal rates as we come into 2018.”
Hannay noted that the prime and non-prime segments will be subject to “very different” growth prospects for Street Capital in the coming years. “The addressable prime insurable market for lenders of our size has shrunk considerably, and will likely continue to do so in favour of large Canadian banks. Our focus will be on maintaining our market share in the broker channel for this business line…” he said. “…for the prime uninsurable loans, we are actively exploring funding alternatives for this product…we have not included any upside from this in our guidance at this time because it is an industry problem that a number of players are working to solve.”
Hannay reiterated the early success of the Street Solutions program, which will reach the $150-200 million in origination targets within the coming months. “Having met with several of our mortgage broker partners over the past few weeks, I can confidently tell you that there is more demand for this product. The challenge here will be expanding our funding as we pivot to support this growth, which is a significant thrust of our strategic focus.”
As part of the company’s ongoing strategic review, Hannay outlined several key opportunities for growth over the next three years, including:
Improving the end-to-end experience for consumers and broker partners. “This is the core of our long-term value equation of the financial institution. We will be adding analytics, talent and automation to make processes as efficient and experiences as positive as possible for our customers and brokers.”
Putting Street’s credit card product on hold. “In our view, there are better ways to utilize our capital and resources to drive cross-sell, broker and customer loyalty, and profitable growth in the business.”
Modernizing Street’s operating platform towards a “lean and scalable organization.”
Driving higher customer renewal and retention rates.
Notables from its call:
Mortgages under Administration in Q3 increased 2% year-over-year to a record $100.2 billion.
This is up more than 50% from 2013, but Chief Financial Officer Robert Inglis noted, “…with changing market dynamics, the pace of MUA growth has slowed this year to low single digits. And certainly, this is a function of tighter mortgage regulation…”
Single-family originations were down 12% from a year ago to $3.2 billion. The biggest drop in volumes was seen in Vancouver, Calgary and Montreal, where the average declines were ~19%.
“Declines of this magnitude were not surprising, given the material nature of recent policy changes,” said Stephen Smith, CEO. “And all things considered, our single-family team did a great job of originating our traditional share of growing mortgage renewals.”
Single-family renewals, however, were up 31% from last year.
First National’s commercial originations were up 47% year-over-year, with renewal up 87%.
Looking forward to the fourth quarter, Executive Vice President Moray Tawse said, “…we believe mortgage insurance rules in place since last year, foreign buyers taxes and somewhat higher interest rates will exert downward pressure on the market for residential mortgage credit in our single-family origination opportunities. Our working assumption is that residential originations in the fourth quarter could be down year-over-year, in a range similar to declines of 21% and 12% we experienced in the second and third quarters, respectively.”
Tawse added: “Single-family origination costs will also rise as a result of temporary promotions we’ve put in place in the quarter to fuel some summer activity. As mortgages originated under those promotions fund, higher cost will be capitalized against securitized mortgage or recorded as brokerage fee expense on mortgages placed with institutional investors. As a partial offset, we expect to see growth in single-family renewals, given the opportunities at hand, and capturing that business will be a priority for First National.”
Looking further out to next year, Tawse said, “It’s a bit early to call it on 2018, although the initial underwriting restrictions announced October 17 by OSFI certainly are worth noting as part of the medium-term outlook. As we say in our news release on the same day, we will follow those revised B-20 guidelines, and we believe that they will result in a slowdown in the conventional single-family market activity levels when enacted on January 1 of this year.”
Tawse noted that about $1 billion of the $4.2 billion of uninsured new single-family mortgages First National originated in the past nine months would have been affected by OSFI’s new restrictions. “Those affected borrowers would’ve needed to reduce the amount of their mortgages in order to qualify under the new rules. This is less than 1% of the company’s overall origination volume for that period. On the upside, we do not anticipate any material impact on our other originations and renewals as a result of the revised B-20 guidelines,” he said. “Overall, there are very few countermeasures we can take to offset the challenges faced by a changing marketplace. Like all mortgage lenders, we cannot swim against the tide of government policy changes. What we can do is stay heavily focused on response to service. There is an advantage to be gained from providing good service to the mortgage brokerage community, borrower and funding partners in all the market conditions.”
Smith confirmed that First National has not yet implemented the stress test, despite OSFI suggesting financial institutions could adopt the new regulations ahead of the official January 1, 2018, implementation date. “We’ll be implementing it January 1. We won’t be doing that earlier,” he said.
Asked whether First National expects OSFI’s B-20 regulations to have a positive impact on renewal rates (given that clients would be subject to the new stress test if they moved to another lender), Tawse replied, “we don’t think that the B-20 will affect our renewal rates or expect that they’ll be shooting up because we have very strong clients with strong mortgages. If we can’t provide competitive products, they’re going to leave. So we don’t think that we now have a better hold on our clients, no.”
Asked about the increase to broker commission rates in the previous quarter and whether those increases are viewed as temporary or to be continued into 2018, Tawse said, “Most of those rises were to the competitions program. So it really depends on how competitive a market stays. We never like to be leaders, but we don’t want to fall too far behind. So that could move around, depending on how the competitive market goes.”
Asked about performance for the first few weeks of Q4, Smith said, “…I was looking at commitments just for October, and they look good. I would think they’re down from last year but not down as much as I thought they would be.”
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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