The majority of Canada’s Big Six banks beat expectations for second-quarter earnings, despite slowing real estate activity and tighter lending rules for uninsured mortgages.
Both RBC and Scotiabank posted 6% year-over-year increases in their residential mortgage portfolios, although the other banks saw markedly slower mortgage growth, attributed in large part to the B-20 rules that came into effect on January 1.
During the conference calls the executives tackled everything from the effects of B-20 to mortgage rate increases to their growth outlooks for the second half of the year.
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 in blue.
“Year-over-year mortgage growth through our proprietary channels was similar to the previous quarter and up 4%,” said Chief Financial Officer Thomas Flynn. “We have good momentum in our commercial business with loans up 10%.”
Asked about the bank’s intentional slowing of growth in personal credit in place of higher growth on the commercial side, Cameron Fowler, Group Head, Canadian Personal and Commercial Banking, said, “We do feel it’s an advantaged mix, heavier commercial and slightly lighter in some areas on the personal side…For example, on the mortgage side, the objective of our strategy in mortgages is not to cede share, it’s to be at market or regain share in the channels that we control. So participation in third-party and other such sub-segments of the market are less interesting to us and less valuable to us… I think it’s a momentum game. Our momentum in commercial is as strong as it can be and we’re really pleased with that.”
Q2 net income: $1.32 billion (25% Y/Y) Earnings per share: $2.95
CIBC’s residential mortgage portfolio was unchanged at $203 billion in Q2, but up from $190 billion in Q2 2017.
Of the $203-billion mortgage portfolio, $28 billion is from the Greater Vancouver Area (up from $26 billion a year earlier), and $63 billion is from the Greater Toronto Area (up from $55 billion in Q2 2017).
Of the uninsured portfolio, the LTV was 64%, unchanged from a year ago.
The bank reported $7 billion in originations in the quarter, down from $9 billion in Q1.
The bank’s HELOC portfolio rose to $21.8 billion in the quarter, up from $21 billion a year earlier.
Net interest margin in Q2 was 238 bps, up from 235 bps in Q2 2017.
Of the bank’s total mortgage portfolio, 0.25% are in arrears by 90+ days, unchanged from a year ago.
For uninsured mortgages, the arrears rate is 0.20%, up from 0.19% in Q2 2017. The arrears rate is 0.10% in the GVA (up from 0.06% a year ago) and 0.11% in the GTA (up from 0.07% a year ago).
About 6% of the bank’s uninsured portfolio has a Beacon score of 650 or less (down from 7% last quarter). But only 1% of this mortgage portfolio has a Beacon score of 650 or lower and an LTV over 75%.
Asked about the moderation in mortgage growth, and how much is specifically related to CIBC’s strategic shift vs. disruption from new regulations, Christina Kramer, Senior VP and Group Head of Personal and Small Business Banking, said, “It’s still a bit early to actually pull apart exactly what change impacted what in the trend line. I would suggest that most of the slowdown that we’ve seen in the last few months is likely due to the B-20 regulation changes… on the retention front, we’re just seeing pretty consistent retention rates. We haven’t, at this point, yet seen any marked changes to retention. It also might be particularly early given the timing of the regulatory changes to actually see the outcome of that.”
“We expect loan growth to moderate in the back half of the year. So at this point, in terms of outlook, we’re seeing that the mortgage market by the end of the year will get to low single digits based on our current understanding of the market,” Kramer added.
In terms of CIBC’s strategic shift concerning mortgages, Kramer said, “A year ago, two-thirds of our revenue would be directly related to our mortgage performance and our mortgage business and today that’s about a quarter.”
“We previously talked about the transformation of the mortgage clients acquired via the non-banking centre teams, previously largely through our FirstLine business and now through our mortgage advisor team,” Kramer said. “In 2012 it would have been largely single-product clients and now it’s deeper relationship clients…We’re deepening our existing client relationships through focusing on advice and planning across our network…we’re also seeing particular success with newcomers to Canada, the key growth market in the industry.”
Asked about the bank’s transition to third-party activity through Paradigm Quest and mortgage growth this quarter of around 2%, Diane Giard, Executive VP of Finance, explained the situation like this: “If we look 12 months back, we had about $1.1 billion less in authorization, that’s a 2% hit to our mortgage growth. In Q2 this year, we had a 7% increase in disbursement and if you compare this quarter to the same quarter last year, and these results do include the impact of B-20, which we estimated to be at about 4% negative impact on originations this year. So going forward into the rest of the year, we still expect growth to be at nominal GDP in the 4% or 5% range if you include the mortgages done in wealth management. The negative impact of B-20 will be offset by the introduction of 240 mortgage specialists that we put in our branches, as well as the addition of 40 mobile development managers that we’ve added in Q1 this year…we converted 240 generalists to mortgage specialists and on top of that we added 40 new officers in the field. So in total today we have about 570 employees that are 100% dedicated to secured lending.”
“I think the one area that I think we want to pick up a little bit is our mortgages,” said CEO Louis Vachon.
Q2 net income: $3.1 billion (11% Y/Y) Earnings per share: $2.10
RBC’s residential mortgage portfolio was unchanged on the quarter at $258 billion, but up from $246 billion a year ago.
The mortgage portfolio was up 6% year-over-year.
42% of its mortgages are uninsured, down from 48% a year ago. The average LTV on the uninsured portion is 51%.
90+ day delinquencies in the residential mortgage portfolio were 0.19%, unchanged from Q1 and down from 0.22% a year ago.
Average FICO scores of 792 on uninsured mortgages were down from 796 in Q2 2017.
72% of mortgages have a remaining amortization of 25 years or less, unchanged from a year ago.
Net interest margin was 2.74%, up from 2.68% in Q1 and 2.62% in Q2 2017, “largely benefitting from higher interest rates,” said CEO David McKay. “And we expect NIM will increase a further 2 to 4 basis points by the end of the year given the current rate outlook.”
“Notwithstanding monetary tightening and regulatory changes that affected some homeowners, we continue to see solid mortgage volume growth this quarter,” said CEO David McKay. “Following the implementation of the B-20 guidelines, we saw solid volume growth of 6% in mortgages, amid a backdrop of lower average home prices in Toronto. Mortgage growth stayed relatively stable quarter-over-quarter. However, we did see a modest decline in HELOC balances as clients migrated variable-rate balances into fixed rate mortgages in a rising rate environment.”
“We continue to expect mortgage growth in the mid-single-digit range for the full-year,” McKay added. “And even if mortgage growth slows more than expected, the overall NIM benefit from rate hikes more than offset the revenue impact from slower growth. For example, if mortgage balances grow at half our expected rate, the impact on 2019 revenue would be less than the benefit we received from one Bank of Canada rate hike.”
“We remain comfortable in our clients’ ability to service their mortgage in this rising rate environment given our strong underwriting and credit monitoring practices,” McKay said.
Asked if the B-20 rules have had much impact on RBC’s mortgage business, McKay replied, “we are having deals closed that were part of some of these clients trying to get ahead of it. So this pull forward effect had, as expected, pushed into Q2 and we had never really believed that this would be a significant impact on our mortgage business. So we continue to target mid-single-digit mortgage growth, which is what we’re on plan for now. And the impacts, just we’re seeing minor skews to the portfolio, but nothing significant.”
Questioned about any changes in renewal patterns, McKay said this: “…renewals (have seen) a nice increase year-over-year. Part of that we would attribute to B-20 and part of that we would attribute to some process improvements we made just to make it more seamless for customers to renew their mortgage with us. So we believe (it’s a) combination, but that’s definitely helping the business. In terms of originations, we’re up year-over-year for the first half of the year. But we are looking for that trend to start to slow down in the back half of the year.” McKay noted originations are forecast to be down in the range of 5% year-over-year towards the end of the year.
In terms of commercial mortgages, McKay said the bank re-evaluated its risk appetite and allocated more capital towards that side of the business. “We had looked at where we were versus the market, understood the incremental risk…we will be taking on by changing our policies, and once we got comfortable with that we made the change and then coupled that with additional commercial account manager capacity and commercial mortgage specialist sales forces,” he said.
“Residential mortgage growth year-over-year remained good despite the B-20 regulations and higher mortgage rates, though the sequential pace of growth moderated somewhat,” said Chief Financial Officer Sean McGuckin.
Speaking to reporters following the earnings release, McGuckin added, “We’re still very optimistic … With all the other growth levers we have in the bank, in international banking and in commercial lending, we can overcome any slowdown or moderation in our mortgage growth.”
“Our residential mortgage portfolio is of high quality and lower risk,” said Chief Risk Officer Daniel Moore. He noted that origination levels were down this year from the previous quarter, but that Q1 was aided by a pull-forward effect on originations related to the B-20 mortgage rules. “Overall, we would say that the pipeline looks good, and we reiterate our mid-single-digit mortgage volume growth outlook for the full year.”
Commenting on Scotia’s 6% year-over-year and year-to-date mortgage growth, James O’Sullivan, Group Head of Canadian Banking, said, “We continue to view ourselves as quite fortunate in that we’re participating in three channels, and we’re particularly pleased with the broker channel. There, we can modulate volumes, if you will, consistent with our view of risk and reward.”
“In terms of retention, it’s high,” O’Sullivan added. “It trended up modestly. I would describe it as strong. We’re pleased with retention.”
Asked if the bank plans to rely more on the broker channel in the coming quarters, O’Sullivan replied: “as with every channel, competitive dynamics shift. And as others have left (the broker) channel, I think that has become a relatively attractive channel to us. We have very strong leadership in the mortgage business, led by John Webster who has 30 years of experience in that channel. So it’s an important channel, to be sure. But I want to be clear. Our direct sales force channel and our branch channel are very important to us as is what I would describe as an emerging digital channel that we’re investing dollars in as we speak. So look, we like the optionality that multiple channels give us. We’re committed to all of these channels. But certainly, we’re finding in this market many Canadians are attracted to the mortgage broker channel, and we’re pleased to participate in it.”
President and CEO Bharat Masrani spoke about the investments the bank has made in its real estate secured lending business: “…we enhanced our digital homeowner’s journey with the addition of a new mortgage preapproval tool. Customers can now complete the online application in minutes and are contacted by a phone channel representative promptly. This best-in-class capability empowers our customers to get the advice they need in the moment for one of the most important purchases they will ever make.”
Theresa Currie, Group Head, Canadian Personal Banking, said the following on the bank’s posted rate changes: “So in real estate secured lending…we are constantly watching two things…in particular: the cost of funds and then the competitive situation. And certainly at the end of April for the 5-year fixed rate our feeling was that from a yield curve perspective there was an opportunity to raise that rate and others followed us. In terms of the variable interest mortgage…(there was) some competitive dynamic there. We are so comfortable that we are originating deals (where) customers’ rates are competitive, and continue to feel comfortable with our gross guidance that we have given as low-, around mid-single-digit for fiscal ’18 for total proprietary real estate secured lending.”
With year-over-year mortgage growth of around 5-6% in Q2, an analyst asked whether the bank expects even stronger growth in the second half of the year, in what typically is a stronger period for real estate loan growth. Currie replied: “…we would expect to hit the mid-single-digit guidance for fiscal ’18… We did have some pull forward in Q2 for sure of November and December pre-approvals. And Q2 applications were a little bit later. Having said that, we’re starting to see a little bit of the spring market come to fruition and we’ve made significant investments in this business, which gives me the confidence to stand by the guidance. (And) we have been adding to our mobile mortgage specialists in high-growth markets.”
Asked about the banks’ involvement in the broker channel and any concerns or future plans, Currie replied: “we want to be available for our customers in their channel of choice and that could be digitally…through the mobile mortgage specialists, or many customers do seek out the help of a broker and we don’t want that to preclude them from becoming a customer of TD on a franchise basis. We’re very careful in ensuring that any partner that we deal with meets our risk appetite. Those are underwritten to TD standards. There is good second-line overview of the adjudication that happens and we don’t feel like we’re overpaying for those deals versus other deals that we make. So it’s a great client acquisition strategy for us.”