The country’s largest broker-channel lenders recently released their third-quarter earnings, providing an update on how each is faring in this new regulatory environment.
Home Capital announced a share buyback of up to $300 million, which caused its shared to jump 24% on the news. Also during its conference call, executives addressed the issue of competition from private mortgage lenders.
Street Capital reported that it continues to recover from earlier funding challenges, and announced the forthcoming sale of the first pool of Street Solution mortgages to an international Tier 1 financial institution.
All three lenders continued to report strong renewal rates, which have been higher this year in part thanks 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 blue deserve particular attention.
CEO Yousry Bissada kicked off an upbeat earnings call by saying: “I’m very pleased with the progress we have made in our business. Our earnings, book value and return-on-equity results are all higher than in Q2. Our markets appear to be absorbing the volatility brought by lower real estate market activity and interest rate changes. We are observing some real estate activity returning to modest growth.”
Home announced its substantial issuer bid of up to $300 million of its common shares, which is now underway.
Asked about how the SIB will be funded, Bissada replied: “We will be funding it, but the way to think of it is we fund to our requirement, so we’ve been able to raise GICs depending on the rates that we would put out to the market… we’ll get some more liquidity on our balance sheet and we’ve been able to accomplish that. We’ve shown the capability of rising and falling in accordance with our demand and we’re very capable of managing our liquidity and we don’t foresee any issues at all with doing that.”
The loan-to-value ratio of Home’s new mortgage originations and its overall mortgage portfolio has “stabilized at conservative levels,” CFO Brad Kotush reported.
Bissada said he expects net interest margin to hold at around the 200-bps level for the foreseeable future.
“The growth in originations suggests our lending market has begun to absorb the impact of the new mortgage rules and is adjusting to a higher interest rate environment,” the company said in a release.
Asked about Home’s strong mortgage growth in B.C., and expanding loan-to-value ratios on those originations, Bissada said: “Lending in B.C., we are cautious. We do it one deal at a time. We look at the loan-to-value and the covenants of the individuals very carefully…we think it’s a market that is experiencing some volatility for sure but our LTV in B.C. is around 63%, so we’re lending relatively low and we’ve continued to look at it that way.” He added that the only place Home Capital lends in B.C. is the Greater Vancouver Area.
Kotush noted that the percentage of renewals is about 10-12% higher from where they were last year.
Asked to comment on competition from private lenders, Kotush said there’s no question a lot of business is now going to that segment. He noted the rates are generally much higher, in the 9-12% range, with fees of up to 4% on top of that. “And they are lending to people who either don’t pass the stress test or don’t go through the rigorous income verification that a company like ours would have to do,” he said. “So again, they are definitely large volumes, what we don’t know is how much capital they collectively have, and how long they can sustain that, that’s to be determined in the future.”
Street’s earnings report noted the 33% decline in new originations from Q3 2017, saying “The declines continue to reflect the heightened competition for a smaller addressable market of prime insurable mortgages and the Bank’s lack of competitive funding for prime uninsurable mortgages, along with softer housing markets in B.C. and Alberta.“
“Street Capital continued to make steady progress against its strategic priorities in Q3 despite persistent market-related challenges facing our legacy prime insurable mortgage business,” said CEO Duncan Hannay.
“I am pleased to say that we have made meaningful progress toward the expansion of our funding capacity,” he added. “We are near conclusion of the first sale of a pool of Street Solution mortgages to an international Tier 1 financial institution. We expect to complete this transaction during Q4. We have been working on this for the better part of a year, and we are very happy to be at this stage.”
On the prime side, Hannay said his team is focused on “driving maximum contribution from new originations while generating a stream of profitable revenue from prime mortgage renewals. To bolster our position, we are working to both meaningfully improve the customer experience and strengthen our go-to-market programs.”
Asked about borrower misrepresentation on mortgage applications seen in the quarter, Hannay responded by saying, “We saw sort of a heightened environment given the current markets, a lot of the regulatory changes and so forth, and we see that really across the business, not specific to Street Capital. We have been, as noted, taking normal course action within our business to address this issue. And we’ve had to make some choices as it relates to certain relationships and obviously, certain borrowers, that has had some near-term impact on our business. But we do see that as having stabilized… I don’t think it would be surprising to note that we do see misrepresentation in applications on an ongoing basis. That’s part of the mortgage business. So that’s not exactly new. We’ve just seen the heightened level of risk in the marketplace, given a lot of the regulatory changes and rising interest rates and affordability issues in particular.”
Hannay said Street will launch a high-interest savings account in 2019 to further strengthen deposit funding and to better build customer relationships.
Street will also be launching the “first modern, open architecture, cloud-based, digital banking solution in Canada,” Hannay said. “This is important because it will both enable Street Capital to deliver a world-class customer experience, while meaningfully expanding our deposit-gathering capabilities.”
Commenting on a “challenging” period for originations, CFO Marissa Lauder said “net gain on sale rates also suffered on the prime side with new originations at 63 bps in the quarter compared to 87 bps in the same period last year. Renewals came in at 105 bps compared to 142 bps in Q3 2017.”
Street reported significantly higher renewal volumes in the quarter, up 24% from the same period last year. Prime insured renewals are up 49% year-to-date.
Mortgages under administration reached a new high water mark this quarter of $105 billion, up 5% from a year ago.
Residential mortgage renewals were up 17% year-over-year.
Commenting on the 23% increase in single-family originations—and 54% increase in Montreal—CEO Stephen Smith said, “We attribute this to improved market fundamentals, and more rational pricing behaviour by competitors, which had the effect of making First National’s offerings more attractive. Calgary and Vancouver volumes were flat to last year.”
On First National’s alternative product, Excalibur, which was re-launched earlier this year, Smith said the economics are “coming in absolutely as expected,” with around $300 million in volume.
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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