The country’s largest broker channel lenders wrapped up their second-quarter earnings, which provided a little more insight into the ongoing effects of this year’s new stress test.
This year’s second-quarter results are thought to be a more accurate year-over-year comparison to gauge the stress test impacts than the first-quarter results, which the lenders say were impacted by a rush of borrowers trying to get a mortgage before the new rules took effect on January 1, 2018.
As expected, all lenders reported strong renewal rates thanks—at least in part—to the new stress test rules that make it harder for existing homeowners to renew with a new lender.
Highlights from the conference call transcripts from Street Capital, Home Capital and First National are below. The comments in bluedeserve particular attention.
Net income: $29.6 million vs. a net loss of $111.1 million in Q2 2017.
Total loans under administration: $22.5 billion, down 13% from this time last year due to “lower origination levels and asset sales starting in the second quarter of 2017,” explained Bradley Kotush, Chief Financial Officer.
Total mortgage originations: up 10% year-over-year to $1.23 billion.
Net interest margin: fell to 1.91%, down 11 bps from the previous quarter, but up from Q2 2017.
Notables from its call:
CEO Yousry Bissada outlined some areas of progress over the first half of the year: “We are continuing to grow mortgage origination volumes and deliver profitable results against the backdrop of rising rates, slower housing market and an evolving regulatory operating environment. Our team has made strong progress growing volumes, while improving retention rates and maintaining our loan portfolio,” he said. “In the first half of 2018, we prioritized growing mortgage origination volumes via the mortgage broker channel, first and foremost. This channel is the core foundation for the distribution of single-family residential mortgages, and we have enhanced the broker experience by investing in technology to help us improve service delivery.”
Commenting on the effects of the new B-20 regulations, Bissada said, “We have observed that the market has largely adjusted to the rule changes that came into effect at the beginning of this year. We continue to experience an increase in higher credit quality customers and are maintaining strong pricing discipline around all products.”
On narrowing net interest margin spreads, he said: “…while improving credit quality is one driver of reduced net interest margin, the second driver is the mortgage pricing increases have not kept pace with the increased cost of deposits in the current rising rate environment. Mortgage rate increases have lagged GIC and Bank of Canada rate increases, which have narrowed spreads on new and renewing loans. Over time, we expect margins to improve…“
Home is also moving forward on its digital strategy, with Bissada saying the company plans to build digital and technology solutions that “will attract and enhance the customer and broker experience.”
On Home’s capital position, Bissada said the company maintained a level of CET1 capital in its regulated entities at 23.21%, down from 23.64% in Q1 but above the company’s historical average CET1 capital range.
On renewals, which are up 10% year-over-year, Bissada said about half of that increase, roughly 5%, can be attributed to the new B-20 rules.
Street Capital Bank
Mortgages Under Administration: up slightly to $27.90 billion, compared to $27.81 billion in Q2 2017.
Total originations: $1.17 billion, down 23% from $1.51 billion a year earlier, “reflecting softer housing market conditions in the regions and market segments the bank serves, limited funding for prime uninsurable mortgages and heightened competition for a smaller addressable market of prime insurable mortgages,” Street said.
Renewal rate: 73%, slightly off from Street’s 75-80% ongoing target.
Notables from its call:
“Street Capital continued to make progress against its strategic priorities in Q2,” said CEO Duncan Hannay. “First, we continue to build momentum in new addressable markets… Second, renewals were a strong contributor to our financial results in Q2. We have put initiatives in place to ensure we are maximizing the contribution of this profitable stream.“
“…Street Solutions’ NIM performance and strong renewal contribution are starting to make a larger impact on our business with each new quarter,” Hannay added. “This demonstrates the power of our emerging business model and the predictability of our legacy mortgage origination engine.” (Street Solutions targets the uninsured segment of the market and was rolled out in early 2017.)
Hannay also touched on the implementation of a “modern, cloud-based, digital banking solution,” which Street expects to roll out over the second half of the year.
On near-term headwinds, Hannay said this: “…in the current environment, where significant regulatory change is impacting affordability for many buyers and interest rates are moving higher, management and the board of directors see additional risk in the short term and have taken proactive measures to strengthen the company’s internal controls, processes and technology capabilities to proactively defend against potential issues that may arise. And while these measures can come at the expense of near-term volume growth and market share, they serve to protect the company’s historically strong underwriting and credit performance.“
On Street’s plans for developing its business, Hannay said: “…our transition from price-taker in our legacy business to price-maker in our business of the future is ongoing. We remain in the relatively early stages of our transformational journey from being a monoline prime insurable mortgage lender to offering a highly progressive, digitally enabled, open banking platform. And we continue to focus on building durable, quality relationships with brokers and homebuyers, prudent risk management, and stable sustainable long -term growth.”
Regarding the Street Solutions origination target of $600-$700 million for the year, Chief Financial Officer Marissa Lauder said, “demand remains very strong for the product (but) there is a risk we will not meet this target in 2018. We are working on several funding solutions for these mortgages, and the ultimate 2018 result will depend on the extent to which we are successful in obtaining additional funding.”
Asked about a reference in the quarterly documents to the inherent risk of misrepresentation on mortgage applications, and whether that was in response to a specific incident, Hannay replied, “We see greater risk in the market right now… given the challenges buyers have from the perspective of affordability, comparatively high home prices, rising interest rates, a number of factors, I’d say the incentives are higher there as it relates to misrepresentation, and we’re putting in place additional controls and processes in our business just to make sure that we can protect our business and maintain that high underwriting quality and credit quality that we’re known for.”
Asked about CMHC’s request that the Canada Revenue Agency take a more direct role in tackling mortgage fraud, Hannay said, “…we have ongoing conversations with CMHC. We’re certainly supportive of any advancements or help that they can provide and any way that we can further strengthen the controls and processes that we have in place to manage risk within the business.”
Mortgages under Administration: up 4% year-over-year to $103.6 billion.
Single-family originations: up 5% from a year ago and single-family renewals were up 45% on “higher renewal opportunities and good execution,” according to First National. Overall originations were up 9% while renewals rose 18% year-over-year.
Commercial originations: up 17% year-over-year, while renewals were up 33%.
Net income: down nearly 50% to $46.3 million from $68.8 million a year earlier. Earnings were down 18% on an adjusted basis.
Explaining the lower income, CEO Stephen Smith said, “this was partially because we shifted mortgages to our securitization programs, which defers the earnings process until the securitization cash flows come in over 5- and 10-year terms. Considering the housing market interventions made over the past 18 months by various governments, strong competition and tighter mortgage spreads, we are pleased with the Company’s ongoing progress.”
Notables from its call:
Smith noted that, despite recent mortgage rule changes, First National’s single-family originations were up 5%, or $100 million, from last year. “(Our) Montreal office led our national single-family growth with an increase of 24%,” he noted in his prepared remarks. “As you know, Montreal’s economy has performed well in recent periods and this has increased our opportunity.”
Smith commented on the re-launch of First National’s Alt A product, Excalibur, which contributed to the uplift in originations. “We had good success with this Alt A product prior to the 2008 credit crisis, and in 2007, we originated about $700 million with this program,” he said. “After reviewing market conditions and consulting our mortgage broker and funding partners, we decided to reintroduce it this year, beginning in Ontario. To start, Excalibur mortgages will be originated for placement with our institutional funding partners so that First National will earn a one-time placement fee and servicing income over the terms of these mortgages. So, Excalibur is a natural fit with our business model.”
Asked about expected volumes from Excalibur, Smith said, “I think we can certainly see over time that we could easily get back up to $700 million a year, if maybe not a billion. I would think we would hope that we would get—could originate a billion dollars a year in that over time within the next year to two years.“
Adding his own comments about the re-launch of Excalibur, Executive VP Moray Tawse said, “…I think the ease with which we relaunched Excalibur demonstrates that there is still a large market for buyers who can’t prove income but are otherwise solid credits (and) our relationships with our mortgage broker partners are strong such that this product offering got immediate uptake…”
Commenting on First National’s increased single-family and commercial originations, and higher renewal rates, Smith said, “We’re pleased with this performance and what it says about First National’s durable and diverse business model.”
On the impact of B-20, Tawse noted the new rules are only partially to account for First National’s growth in renewals. “Perhaps some of the 45% growth in our single-family renewals in Q2 2018 can be attributed to B-20, but we believe the real driver is the business we did in 2013 and the fact that our borrowers are renewing with First National for the second and third terms of their mortgages.”
Asked about whether First National sees a rebound in origination business towards the latter half of the year, Tawse said this: “I don’t know about the rebound. I think one would feel that a little bit. One of the reasons I think we had a strong Q1 and Q2 is because we had a very weak Q1 and Q2 last year in 2017. What people don’t fully understand with B-20 is that there was the equivalent of B-20 in the insured space with regulations that came in the latter part of 2016, so that about 50% of our business is insured. So, we took a bit of the beating in Q1 and Q2 last year because of those changes. That got no press, and everyone’s talking about B-20 now, but B-20 only affects 50% of our originations. So, we got a nice rebound back on the insured business this year, and I think just generally there’s been a bit of a reallocation in the monoline space where we still have a full range of products, and I think that’s helped us gain a little bit of market share relative to our competitors.“
Asked about how much regional disparity he sees in the markets across Canada in terms of intensity of competition and pricing discipline, Smith answered: “I have always thought in Canada there’s been two markets, and it’s Quebec and then the rest of the country. And then sometimes you see a little bit of pricing disparity out in British Columbia because the credit union sector out there is a little bit stronger. So sometimes you see some more competitive, more competition out in Vancouver… The credit unions being so much more powerful in Quebec, they create a little bit of their own market, and then a little bit of the same effect out in maybe the Lower Mainland. But it’s competitive across the country.”
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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