The dust has settled following the latest round of big bank earnings, which unveiled another solid quarter and record earnings.
The new B-20 regulations and higher interest rates so far appear to be having little effect on mortgage growth (aside from CIBC), with RBC reporting that customers are “self-adjusting” to the new landscape.
One big gift delivered to the banks courtesy of the B-20 guidelines is turning out to be higher renewal rates, since the new rules make it more difficult for existing homeowners to qualify at a new lender. Both RBC and CIBC report renewal rates in the 90-94% range.
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.
“Personal loan balances were essentially unchanged from last year, which reflects our decision to reduce participation in the third-party mortgage market,” said Tom Flynn, Chief Financial Officer. “Mortgage growth through proprietary channels was 3%.”
“…we’re now seeing some positive signs that suggest a potentially better growth on our (mortgage) portfolio than we had seen over the past 6 months,” said Christina Kramer, EVP and Group Head of Personal & Small Business Banking. “For example, recent housing market data has been more positive. Our Q3 originations were up $2 billion quarter-over-quarter.”
Kramer added: “Our commitment pipeline has improved from earlier in the year. So, what we’re seeing now is, we think it’s clients beginning to adjust to the higher rates and to the regulatory changes.”
On mortgage renewals, Kramer said, “We’ve had strong renewal rates around the 90% range and…over the past 6 months have remained that way. So, we’re feeling good about that performance.”
Q3 net income: $569 million (19% Y/Y) Earnings per share: $1.52 a share
The bank’s residential mortgage and HELOC portfolio rose to $66.7 billion in Q3, up from $64.5 billion in Q3 2017.
The average LTV on the HELOC and uninsured mortgage portfolio was 59%, up from 58% in Q3 2017.
Quebec represented 55% of the mortgage book (unchanged from a year ago), while Ontario made up 26% (up from 25%) and Alberta 8% (unchanged).
Net interest margin in Q3 rose to 2.33%, up from 2.27% in Q3 2017.
The bank’s residential mortgage portfolio is 42% insured, down from 43% a year ago. The average LTV of the uninsured mortgage and HELOC portfolio was 59%, unchanged from a year ago. Meanwhile, the average LTV of uninsured mortgages originated during the quarter was 70%.
Uninsured mortgages and HELOCs in the GTA and GTV represented 9% (up from 8% in Q3 2017) and 2% (unchanged) of the portfolio, respectively, and have an average LTV of 51% (up from 43% a year ago) and 45% (up from 44%), respectively.
24.9% of the bank’s residential mortgage portfolio has a remaining amortization of 25–30 years (down from 27.3% in Q3 2017). Just 0.9% has a remaining amortization of 30–35 years.
Gross impaired loans ratio was 44 bps, up 2 bps from Q2 and attributable to the commercial banking portfolio.
“…we’ve seen a healthy normalization in Canadian housing and our mortgage portfolio continues to grow,” said Rod Bolger, Chief Financial Officer. “We saw mortgage growth of nearly 6% year-over-year and increased renewables of nearly 92%.”
“…mortgage pricing competition has increased and if this persists, then the benefit (to net interest margin improvement) from a Q4 rate hike could be realized in Q1 instead,” Bolger added.
On the commercial lending side, Bolger said: “That’s a competitive market as all these markets are. So, there is always pressure there, but they’ve held up better in terms of spreads than the mortgage side.”
Asked about whether the four interest rate increases to date have put additional pressure on consumers in their ability to manage debt loads, Neil McLaughlin, Group Head, Personal & Commercial Banking, replied: “You know, qualitatively, we get a lot of feedback from our front-line sales advisors that these changes in interest rates and the housing market have been really well telegraphed that consumers are adjusting proactively…They are thinking about frankly just buying less expensive homes, and actually moving down. And in terms of our renewal rates, we’re actually seeing a real nice increase in the renewal rates on our mortgages, and that’s been a real positive.”
Bolger added: “We do look at our TDS ratios and we are seeing some pressure there. The pressure on TDS ratios wasn’t as high as we were expecting. And again, we attribute that back to customers really self-adjusting.”
“Residential mortgage growth year-over-year remained good despite the B-20 regulations and higher mortgage rates, while the sequential pace of growth moderated,” said Raj Viswanathan, Acting Chief Financial Officer.
“Origination volumes did increase relative to last quarter, reflecting seasonality, but it declined relative to the same quarter last year,” Viswanathan added. “We attribute some of this year-over-year decline to B-20 and there are other contributing factors such as the cumulative effect of other regulatory changes as well as rising interest rates… the mortgage pipeline remains strong and we reiterate our mid-single-digit mortgage volume growth outlook for the full year.”
Speaking about service improvements made over the quarter, CEO Bharat Masrani said the bank grew its Mobile Mortgage Specialist team by about 250 people “to ensure we have the right people aligned with the conversation our customers want to have.”
Masrani noted the “matchmaking mortgage concierge service” that was added to TD’s banking app, “which uses geolocation technology to connect customers to a mortgage specialist, another piece in our end-to-end homeowner’s journey.”
Asked about the bank’s 5% year-over-year growth in real estate secured lending, Theresa Currie, Group Head, Canadian Personal Banking, said, “It’s a business that we’ve been talking about over the last number of quarters and the investments we’ve been making in that business, and we’re seeing those investments pay off and that’s really what’s behind the growth.”
Currie also pointed to the increased number of mobile mortgage specialists, saying, “That certainly is helping. We also have underwriting standards through the cycle. So we feel very comfortable with the risk we’re putting on our books.”
Asked about the bank’s 35% year-over-year growth in its amortizing HELOC portfolio, Currie confirmed that growth was driven by its Flexline offering. “We’ve consistently been growing that as we improve the product going back a few years ago to really be a credible mortgage substitute for the right customers in a flexible and convenient offering,” she said.
Asked about the double-digit year-over-year declines in the bank’s insured book and 15-17% growth in uninsured balances, Currie said: “I would say just given the market dynamic around insured mortgages and the competitiveness and funding cost issues around that piece…we might continue to see (a) continued sort of slight erosion in insured balances… And on the uninsured, I would expect us to continue to see increasing—an increased proportion.”