“The combined impacts of new regulatory initiatives and higher interest rates caused a material reduction in home sale volumes in all our major markets,” said CEO Yousry Bissada. “We responded by investing in relationships, with emphasis on becoming a partner of choice for our brokers.”
“We dedicated resources to focus on our renewal business and grew uninsured residential mortgage underwriting,” he added.
During the presentation, Bissada announced the start of a “multi-year plan of technology investment that will improve our operating efficiency, offer our clients more flexibility in how they engage with us and increase the level of service to our brokers, borrowers and depositors. You’ll be hearing more of this initiative in the quarters to come.”
“Margins in Q4 were held by higher yields on our mortgage loans, (and) offset by our funding requirements during the quarter,” said Chief Financial Officer Bradley Kotush.
Loan-to-value on new originations was ~70% and the loan-to-value of the total portfolio was 59% as of year-end, demonstrating Home’s “conservatism in our underwriting practices,” Kotush said.
Speaking to competitiveness in the market, Bissada said this: “We are seeing competition from new entrants, as well as from non-OSFI regulated financial institutions, such as private lenders at the low end of the beacon, as well as credit unions.” However, he noted Home has proven with its numbers that, “we believe that we are providing value to the brokers through good service and having quality mortgages. So, it has not become a price war, it’s more about offering the right service to people.”
Asked about its current number one spot as the top market share-holder among non-prime lenders and whether Home wants to increase the gap between itself and its fellow competitors, Bissada said, “I don’t think there’s a CEO who wouldn’t say they want to increase it, but we’re not going to increase it by taking more risk. We’re not going to increase it by pricing gains. We’re going to do it intelligently within our risk models.”
On increased renewals, Bissada said, “We are renewing at a very, very positive rate. We have changed a lot of our processes in customer service and how we interact with the client to improve our renewals and to offer them a mortgage that’s suited for their needs.”
In his opening remarks, President and CEO Duncan Hannay called 2018 a “challenging year, driven by disruptive regulatory and competitive forces in the mortgage market,” but added that Street was able to achieve a number of “wins” over the course of the year, including:
Introducing an off-balance sheet funding solution to meet the demands of its Street Solutions non-prime mortgage product. “In late December, we announced that we had closed an initial sale of the funded Street Solutions mortgage loans to an international third-party institutional investor,” he said. “We plan to further develop this capability in 2019, as this key funding partnership has the potential to help us better manage balance sheet growth and ensure a consistent product offering in the market.”
Sourced off-balance sheet funding for prime uninsurable mortgages and sold $56.6 million in the year. “While small and evolving, this funding has helped to close a key gap in our product offering, and we’re seeing good momentum in 2019.”
More than doubling Street Solutions originations year-over-year to $421.4 million.
Setting out to drive strong revenue contribution from prime mortgage renewal volume, “and we succeeded,” Hannay noted. “At $2.44 billion, 2018 renewals performed at the top end of our target range, and our efforts during the year drove a $28.3 million in renewal contribution.”
Advances in transforming and modernizing Street Capital. “We continue to drive a cultural shift towards agile project delivery and digital transformation, with a specific objective of improving the customer and broker experience through several initiatives, including specific middle-office improvements,” Hannay said. “We continue to work on middle-office transformation moving into 2019, where we see additional opportunities to create efficiencies and improve the end-to-end customer experience.”
Embedding dedicated risk and compliance resources on the front lines of the business “to ensure we maintain our quality standard and compliance in a changing marketplace,” Hannay added.
“[Our] strategic realignment…calls for us to improve the bank’s capital levels during 2019 and we are actively exploring the various options available to us,” Hannay said. “We made the decision to suspend the implementation of a digital banking platform, pending the outcome of these efforts. We also completed a workforce reduction in early January.”
Street has identified three priorities for 2019:
Prime new mortgage originations, as Street has placed “renewed focus on new broker onboarding, deepening share of wallet and improving the end-to-end customer experience to drive new prime origination volume growth across both the insured and uninsured segments,” Hannay said.
Prime mortgage renewals. “The goal here is to maximize customer retention and the overall profitability and contribution of mortgage renewals.”
Loan origination systems and processes.
New originations for prime insurable mortgages was $3.74 billion for the year, down about 30% from last year. Revenue from prime originations was down 39% from 2017.
Prime insurable originations were $0.88 billion in Q4, down from $1.14 billion in Q4 2017.
Renewals were strong at $2.44 billion and were up significantly year-over-year. The renewal rate was 73%. “We continue to expect them to be in the range of $2.4 billion to $2.6 billion in 2019 and $2.6 billion to $2.8 billion in 2020,” said Chief Financial Officer Marissa Lauder.
Asked about the new mortgage rules and how they figure into Street’s plans, Hannay replied: “We’re not building that into any of our go-to-market plans. We are really solely focused on our go-to-market strategy. We believe there is a meaningful opportunity for us to restore market share. We think in and of itself that creates upside for us. And certainly, if there is any loosening of the rules in the current regulatory environment that would certainly help us.”
Single-family mortgage renewals were 18% higher compared to a year ago, while single-family mortgage originations were unchanged at $2.8 billion. “We had expected renewal rates to improve as a result of government policy changes that make it more difficult for borrowers to switch financial institutions,” said President and CEO Stephen Smith. “But by the same token, we had sizeable renewal opportunities to work with.“
Adding to that, Moray Tawse, Executive Vice President, said, “Borrower retention is a very important factor in our ongoing growth and by providing good service through the initial term of every mortgage, we earn the opportunity for a customer renewal.”
Pressed further about higher retention rates and how much could be attributed to the B-20 regulations, Smith answered: “I think this whole issue generally—particularly in the press about borrowers not able to move—is a little bit of a red herring. I don’t know that we actually measure that there was a significant increase because they tend to bounce around for various reasons… I think the criticism, with respect to people not being able to move, more is a reflection of probably originators feeling that it’s affecting their business opportunities than a real problem.”
Smith noted that 2018 volumes for First National’s Excalibur program ($650 million in the year) surpassed expectations. Excalibur is an alternative mortgage program catering to the needs of self-employed and other borrowers who fall outside of traditional lending. “We find this very encouraging and a validation of this growth strategy,” he said, noting that the program was limited to Ontario as part of the rollout, and there are not currently plans to expand outside of the province at least for the first half of the year.
“In our prime mortgage business, the Toronto and Montreal regions were our growth leaders in 2018,” Smith said.
“Q4 mortgage investment income increased 12% year-over-year due primarily to an increase in market interest rates,” noted Chief Financial Officer Rob Inglis.
“While the yields on underlying government bond benchmarks have fallen, mortgage lenders have shown discipline in the face of an uncertain economy and mortgage coupons have not fallen to the same extent,” said Tawse. “The consequence is a wider spread between interest rates on prime mortgages and the costs of CMHC-sponsored funding sources, despite increased credit spreads. If they persist, these circumstances will generally provide the company with greater securitization margins in 2019 than those recorded in 2018.”
Given softness in the single-family space in several provinces, Smith was asked for his outlook for 2019. He replied: “We’d look at the origination from the single-family side as being flat for the year, maybe up slightly because of Excalibur… we feel comfortable that the originations will be comparable or a little bit higher than last year.”
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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