It was a good year for Canada’s Big 6 banks, which earned a combined $42 billion for fiscal year 2017.
As with the rest of the mortgage industry, there was a fair amount of attention this quarter given to the incoming B-20 regulations that take effect January 1, 2018.
Overall the big banks expect a moderate negative impact from OSFI’s new stress test for uninsured mortgages, however most concede consumers will be quick to adapt, either through buying less expensive properties, saving up—or securing through other means—larger down payments or lengthening their amortization.
Rising interest rates also helped boost the net interest margin nearly across the board.
As we do every quarter, we’ve gone through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage notables right here. Key tidbits are highlighted in blue.
Bank of Montreal
Q4 net income: $1.23 billion (-9% Y/Y) Earnings per share: $1.81
2017 net income: $5.35 billion
BMO’s total Canadian residential mortgage portfolio rose to $106.7 billion in Q4, up from $103.6 billion a year earlier.
Mortgage balances were up 3% year-over-year.
The bank’s mortgage portfolio represents 30% of its total loan book, unchanged from Q3.
51% of BMO’s portfolio is insured, down from 52% in Q3 and down from 56% a year ago.
The loan-to-value on the uninsured portfolio is 52%, unchanged from last quarter but down from 54% a year ago. For new originations in Q4, the LTV on the uninsured portfolio was 68%.
69% of the portfolio has an effective remaining amortization of 25 years or less, down from 70% a year ago.
The condo mortgage portfolio stands at $15.2 billion (up from $14.7 billion in Q4 2016) with 45% insured (down from 49% a year ago).
Loss rates for the trailing four-quarter period were less than 1 bp and the 90-day delinquency rate was 20 bps, down from 24 bps in Q4 2016.
The bank again noted that the Greater Toronto and Greater Vancouver areas “demonstrate better LTV, delinquency rates and bureau scores compared to the national average.”
Net interest margin (NIM) in the quarter was 2.59%, up from 2.54% in Q3 and 2.53% in Q4 2016. The bank attributed this increase to “higher deposit spreads and also some benefit from interest recoveries.”
“Mortgage growth of 3% reflects our decision to scale back participation in third-party mortgages given their return profile,” said Tom Flynn, Chief Financial Officer. “We continue to focus on growing in our own channels where mortgages were up 5% from last year.“
Asked to talk about the bank’s scaling back of third-party mortgages and what that means for mortgage growth in 2018, Cam Fowler, Group Head, Canadian P&C, said, “the economics are getting tricky to rationalize from an ROE perspective given the other places we could be deploying capital. We are just as focused on the market though as we ever have been. This is, to us, a primary customer game and we like our propriety channels best, we made that decision 8 or 9 years ago when we left the broker market. So, from our proprietary channels, we would expect to be at market, which [in 2017] has been 5% or 6%…and in 2018 I expect will be maybe a little more modest at 4%, 5%…“
Asked about the impacts of OSFI’s new B-20 regulations, Fowler said: “…we are prepared for it. I would expect that the impact on our originations would be between 5% and 10%. That is factored into the forecast that I gave you in terms of expected growth.”
Q4 net income: $1.16 billion (25% Y/Y) Earnings per share: $2.81
2017 net income: $4.7
CIBC’s residential mortgage portfolio rose to $201 billion in Q4, up from $197 billion in Q3 and $181 billion in Q4 2016, or 11% YoY.
Of the $197-billion mortgage portfolio, $27 billion is from the Greater Vancouver Area (up from $25 billion a year earlier), and $60 billion is from the Greater Toronto Area (up from $51 billion in Q4 2016)
$12 billion of uninsured mortgages were originated in the fourth quarter, down from $16 billion in Q3. The average LTV of this portfolio was 64% (58% in the GVA and 62% in the GTA)
Of the uninsured portfolio, the LTV was 53%, down from 56% a year ago
The bank’s HELOC portfolio rose to $21.7 billion in the quarter, up from $20.3 billion a year earlier
Roughly 5% of the bank’s Canadian residential portfolio has an amortization of 30-35 years, up from around 1% at the start of 2017
Net interest margin in Q4 was 236 bps, down 1 bp from Q3 and down from 245 bps in Q4 2016.
Of the bank’s total mortgage portfolio, 0.23% are in arrears by 90+ days, down from 0.25% in Q4 2016.
For uninsured mortgages, the arrears rate is 0.17%, down from 0.19% in Q4 2016. The arrears rate is 0.05% in the GVA (down from 0.06% a year ago) and 0.08% in the GTA (up from 0.07% a year ago).
About 7% of the bank’s uninsured portfolio has a Beacon score of 650 or less (up from 6% last quarter). But only 1% of this mortgage portfolio has a Beacon score of 650 or lower and an LTV over 75%
In its presentation to investors, the bank stressed the gains it has made over the years in building deeper relationships with its mortgage clients. In Q4, 32% of the bank’s secured real estate lending was originated through CIBC mortgage advisors (vs. 8% in Q4 2012), while 1% was originated from CIBC FirstLine Mortgages (vs. 24% in 2012). Less than 15% of mortgages originated thorough CIBC mortgage advisors are single-product relationships, whereas in 2012 more than 75% of clients though Firstline Mortgages had only a single product.
The bank reported that as of Q4 it has 1,083 mortgage advisors averaging 59 sales each (vs. 532 advisors and 37 sales each in 2012)
Commenting on the forthcoming B-20 regulatory changes, Chief Risk Officer Laura Dottori-Attansasio said the 200-bps stress test for uninsured mortgages “may result in a reduction of 10% to 12% of our annual new origination volumes, which is relatively in line with the 10% guidance that we provided last quarter.”
Christina Kramer, Group Head, Personal & Small Business Banking, added: “…as with any regulatory change…we have seen as clients adjust, and we saw in the Vancouver market, there was originally a bit of a dip and then we saw activity increase. So, even with B20 changes slowing growth, we expect demand for real estate secured credit to remain quite healthy in 2018 and we expect some kind of adjustments amongst the consumer base. For example, they may adapt to new rules by finding new sources of equity, extending amortization periods or adjusting their purchase criteria.”
Regarding the move towards deeper client relationships and where the bank goes from here, Kramer said, “..in recent months our mortgage growth has moderated as industry growth has slowed. Our growth is also converging towards peer levels, as we stated it would, with us having reached…our steady states on…our mortgage advisor team, both in terms of size and productivity.”
Asked if the bank expects the percentage of mortgage loans with amortizations of 30-35 years to increase as a result of the new B-20 regulations, Larry Richman, Senior Executive VP, said: “Yes. I suspect that you would likely see that again. If you can extend…the amortization, it’s equivalent to dropping an interest rate. And, so, if you are having a hard time qualifying with the higher interest rate, if you extend the amortization it could help you qualify. So I would expect we would see some of that migration in the industry.“
Q4 net income: $525 million (15% Y/Y) Earnings per share: $1.39 a share
2017 net income: $2.02 billion
The bank’s residential mortgage and HELOC portfolio rose to $66.4 billion in Q4, up from $64.5 billion in Q3 and $58.2 billion in Q4 2016.
The residential mortgage portfolio is 45% insured, down from 46% last quarter, but up from 43.1% a year ago.
The average loan-to-value on the HELOC and uninsured mortgage portfolio was 58%, down from 59% in Q4 2016.
Quebec represented 55% of the mortgage book (down from 61% a year ago), while Ontario made up 26% (up from 23%) and Alberta 8% (up from 6%).
Net interest margin in Q4 rose to 2.30%, up from 2.27% in Q3 and 2.25% in Q4 2016.
Uninsured mortgages and HELOCs in the GTA and GTV represented 8% and 2% of the portfolio, respectively (unchanged from Q3), and have an average LTV of 46% (up from 43% in Q3) and 42% (down from 44% in Q3), respectively.
26% of the bank’s residential mortgage portfolio has a remaining amortization of 25–30 years (down from 31.5% in Q4 2016. Just 1.3% has a remaining amortization of 30-35 years (down from 2.3% a year ago).
Gross impaired loans was 28 bps, down from 39 bps last year.
Q4 net income: $2.84 billion (12% Y/Y) Earnings per share: $1.88
2017 net income: $11.47 billion
RBC’s residential mortgage portfolio rose to $256 billion, up from $251 billion in Q3 and from $221 billion a year ago.
The mortgage portfolio was up 6% year-over-year “as we won new customers and…increasingly retained existing ones,” said CEO David McKay.
56% of its mortgages are uninsured, up from 46% in the last quarter and 53% a year ago.
The bank noted that while Ontario and B.C. represent 43% and 18%, respectively, of Canadian residential mortgages, both provinces have lower LTV ratios than the Canadian average of 51%.
90+ day delinquencies in the residential mortgage portfolio were 0.19%, down from 0.20% in Q3 and 0.22% a year ago.“Delinquency trends in Alberta remained elevated but were offset by favourable performance in Ontario and B.C.,” the bank said.
RBC’s condo exposure is 10% of its mortgage portfolio, up from 9.8% in Q24 2016
Less than 1% of the uninsured mortgage portfolio have a FICO score of less than 650 and an LTV ratio of more than 75%. The bank noted that 47% of uninsured mortgages have a FICO score of 800+, unchanged from Q3.
73% of mortgages have a remaining amortization of 25 years or less. The average remaining amortization on mortgages is 18 years.
Net interest margin was 2.65%, up from 2.61% in Q3 and 2.63% in Q4 2016.
“As the Canadian housing industry digests the changing regulatory landscape, we expect mortgage growth [to] slightly moderate to the mid single digits,” said President and CEO David Mckay. “Household demand, however, should still be supported by changing demographics including the large influx of Americans expected in Canada over the next three years.”
The bank noted its mobile community grew 19% over the year to 3.2 million active users and growth in mobile sessions was up 30%.
“In this rising rate environment we remain comfortable with our clients’ ability to repay given over 90% of our mortgages have already been thrust [into] rates above the contract rate,” said Mark Hughes, Chief Risk Officer. “At origination we have not seen any material changes in average FICO scores LTV or amortization periods over the last 12 months. And more recently we have seen an increasing number of fixed rate mortgage originations, signalling increased conservatism by our clients in a raising rate environment.”
Asked if the bank has seen an increase in mortgage applications ahead of the new B-20 regulations, Neil McLaughlin, Group Head, Capital Markets and Investor & Treasury, said, “We have seen a little bit of pull forward this fall as we talk to customers, some of them are surprisingly aware of what the stress test is about and have decided to move more quickly.“
Further to the implications of B-20, McKay said this: “...over 90% of our mortgages are already underwritten at the–at these [200 basis points] higher rates. So the vast majority of the portfolio and our originations are not really going to be impacted… But one thing we also want to emphasize is that the regulations do not apply to existing customers. So as we look at the size of our franchise, we…see this is a positive and we do expect some lift in our retention rate.“
Asked about the impact of B-20, President and CEO Brian Porter, said this: “…we think there will be some impact and it will represent a bit of a headwind. But I would point out that some customers are going to find more equity. Others will extend the amortization. And some to be sure will purchase less home…So, as we look at it we kind of think about a 5% headwind to originations may be a reasonable guess.“
“We’ve outfitted all of our Canadian branches with Wi-Fi and iPads and doubled our network capacity improving response times by more than 50%,” said CEO Bharat Masrani. “We continue to add digital capabilities, like a unique way for customers to understand the cost of home ownership, search for a property and get prequalified for a mortgage [into] one seamless online experience.“
Asked about the impact of the incoming B-20 regulations, Teri Currie, Group Head, Canadian Personal Banking, said, “…it’s hard to tell whether we’re seeing [mortgage applications] pull-forward. I think anecdotally we think that that is the case given the January 1st timing of the rule. In terms of quantifying the impact to originations, there are a lot of moving parts and I think we feel comfortable that the numbers…cited by our peers would be something that would be representative of the impact that we might experience as well. As many have stated, it’s not a pure mathematical exercise [of] just assuming people would behave the same way they did in 2017. There’s lots of ways that borrowers can [adapt], including buying less expensive properties, amassing a down payment over a longer period of time, accessing more down payment funds, expanding their amortization. So I would say, on balance, we expect our impact to be in line with the industry.”