The dust has settled after the latest round of Big 6 bank earnings, which indicated a sluggish start to the year on the mortgage front.
Residential mortgage growth was subdued in the quarter, hit by a housing slowdown in the country’s largest markets, Toronto and Vancouver, but exacerbated due to higher activity a year ago as homebuyers rushed to purchase ahead of the B-20 Guidelines.
We also saw a small uptick in delinquencies, while net interest margin was generally lower compared to Q4. Several, like BMO, CIBC and TD Bank, saw overall income hit by one-time charges in the quarter.
“I think we’re hopeful that the [first-quarter] experience, especially in capital markets…was a one-off. It certainly appears to be that way,” said Louis Vachon, chief executive officer of National Bank, during the conference call. “We’re hopeful that in the next few quarters, the revenue line will be better on a year-on-year basis than it was in Q1.”
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.
“Our diverse business mix across geographies, products and customers continues to produce sustainable earnings power even as the environment in which we operate evolves,” said President and CEO Darryl White. “That diversity, together with our strong risk and underwriting practices, also leads to consistently good credit performance.”
“While the financial markets have been more volatile this quarter, underlying economic conditions were stable and the performance of our credit portfolios remain strong,” said Patrick Cronin, Chief Risk Officer.
Cameron Fowler, President, North American Personal and Business Banking, said he expects 3–5 bps of improvement to the NIM over the course of the year, and that it wouldn’t require further Bank of Canada rate hikes to achieve that. “In this particular quarter, pressure on prime BA was a little bit greater, and that’s why we’re down. But it’s relatively stable.”
Q1 net income: $1.18 billion (11% Y/Y) Earnings per share: $2.60
CIBC’s residential mortgage portfolio fell to $201 billion in Q1, down from $202 billion in Q4 and $203 billion in Q1 2018.
Of the portfolio, $27 billion is from the Greater Vancouver Area (down from $28B a year earlier), and $63 billion is from the Greater Toronto Area (unchanged from a year ago).
Of the uninsured portfolio, the LTV was 54%, down from 64% a year ago.
The bank reported $6 billion in originations in the quarter, down from $9 billion a year ago.
The bank’s HELOC portfolio fell to $21.8 billion in the quarter, down from $22.1 billion last quarter but up slightly from $21.6 billion a year earlier.
Net interest margin in Q1 was 242 bps, down from 245 bps last quarter but up from 235 bps in Q1 2018.
Of the bank’s uninsured residential mortgage portfolio, 0.21% are in arrears by 90+ days, up from 0.19% in Q1 2018.
For insured mortgages, the arrears rate is 0.37%, up from 0.34% in Q4 2018 and 0.30% a year ago. “Residential mortgages higher in the insured segment where losses would remain low,” CIBC noted in its investor presentation.
About 6% of the bank’s uninsured portfolio has a Beacon score of 650 or less (down from 7% last year).
“Our volume growth was below market and that’s a function of the market and our strategy,” said Christina Kramer, Executive Vice President and Group Head, Personal and Small Business Banking. “So we’ve been transparent about our strategy and our expectations of moderating growth in this space. We’re not as concerned about the volume gap in Q1 as margins were unusually tight in the quarter and considerably lower than the margins that we saw during our period of higher growth in mortgages… Our outlook is low single-digit growth…we do see that the mortgage season is starting to come to life. But likely won’t be at the same rate as what we saw in the prior year…”
Kramer added that the pullback in the GVA and GTA markets was largely responsible for CIBC’s weaker growth figures. “Our relative performance also was impacted by our strength in the GTA and GVA markets, where we had pursued opportunities to serve client demand and growth over the last few years, and it was an opportunity for ourselves to grow our business,” she said. “In those markets, we’ve seen a pullback in the real estate activity and the markets have seen double-digit unit sales decline in the last quarter. And so given our strength and our focus in these areas, that has had a more pronounced impact on our growth rate.”
“We’re pleased with the market share that we’ve grown and the quality of the portfolio,” Kramer added. “87% of our residential mortgage clients have multiple CIBC products with us and that’s been consistent over the past couple of years.”
Q1 net income: $552 million (0.3% Y/Y) Earnings per share: $1.50 a share
The bank’s residential mortgage and HELOC portfolio rose to $67.9 billion in Q1, up from $65 billion a year ago.
The average LTV on the uninsured mortgage portfolio was 60%, while the average LTV on the HELOC portfolio was 58%.
Quebec represented 54% of the mortgage book (down from 55% from a year ago), while Ontario made up 26% (unchanged) and Alberta 8% (unchanged).
Net interest margin in Q1 fell to 2.22%, down from 2.25% in Q4 and 2.24 in Q1 2018.
The bank’s residential mortgage portfolio is 41% insured, down from 44% a year ago. The average LTV of the uninsured mortgage and HELOC portfolio was 60%, up from 58% a year ago.
Uninsured mortgages and HELOCs in the GTA and GTV represented 10% (up from 8% in Q1 2018) and 2% (unchanged) of the portfolio, respectively, and have an average LTV of 52% (up from 50% a year ago) and 49% (up from 44%), respectively.
22.7% of the bank’s residential mortgage portfolio has a remaining amortization of 25–30 years (down from 25.5% in Q1 2018). Another 24.5% have a remaining amortization of 0–20 years.
The gross impaired loans ratio was 41 bps, down from 43 bps in Q1 and up 1 bp from Q1 2018.
“Actions taken over the last few years to reposition our distribution model are producing the desired impact with solid volume growth of 5% for the quarter,” CEO Louis Vachon said. “We are well-positioned to benefit from Montreal’s strong and healthy real estate market.”
“In both personal and commercial banking, we continued to balance volume growth, margins and credit quality in order to position the bank to continue to perform well throughout the complete cycle,” Vachon added. “Looking forward, our overweight positions in the Quebec market in secured lending and in commercial banking are favourable in the current economic environment.”
Asked if the partnership with M3 that was announced recently is expected to accelerate mortgage growth, Lucie Blanchet, Co-Head of Personal and Commercial Banking, said: “with the partnership with M3 for 2019, we will start, let’s say, slowly, put the model into place, learn from it and see from that what we can leverage in terms of growth. But for 2019, the partnership will be quite small into the overall mortgage growth that is planned.”
Asked about the bank’s previous exit from the broker channel on the grounds that it’s an expensive channel to do business in and delivers little cross-sell, Vachon replied: “If I had a time machine, there are a lot of things I would do differently. One of the things we would do differently is, I think, our positioning versus the broker market outside of Quebec. I think, the decision we took two or three years ago was absolutely the right one. We were not getting the margins we were expecting and we were not getting the cross-sell numbers that we were hoping for. With the benefit of hindsight, however, when we look at the business we were originating in Quebec from third-party brokers, that was not the case. We actually had much better cross-sells. And that’s why we’re not changing the policy, we’re nuancing the policy…because our physical network is much bigger in Quebec, the chances of onboarding these clients with products more than the mortgage is actually far better. And our track record is actually much better in Quebec than it is outside of Québec. So that’s why we’re making a very targeted geographical change to our policy.”
Vachon continued: “The second thing, which is very important, is the back office—these loans three years ago used to be done the old-fashioned way with a pretty manual paper back office. The agreement with M3 that we’re talking about is going to be completely straight-through processing involving the SAP mortgage platform that we put in place over the last four or five years. So, it’s a targeted market with much better track record and new technology.”
Asked whether NBC is concerned about the control and confidence it has in its philosophy for underwriting given its new partnership, Blanchet answered: “when we exited the mortgage broker channel, it represented at the time about 40% of our origination. So, with the partnership with Paradigm Quest and M3, if we add M3 to that, we don’t expect to go above 25%, 30% of our origination with the broker channel. And the second thing is that through the usage of our internal SAP platform processing those loans, we get the broker channel underwriting and standards at the same level—absolutely at the same level than what we have in our own proprietary channel.”
On the competitive landscape, Blanchet said: “[Mortgage spreads in the quarter] tightened, for sure. Market competitiveness on mortgage is there. Last year, everyone was fighting for the market share. It’s been a little less pressured, but it’s still there, for sure.”
Q1 net income: $3.17 billion (5% Y/Y) Earnings per share: $2.15
RBC’s residential mortgage portfolio rose this quarter to $246 billion, up from $233 billion a year ago.
The bank’s HELOC portfolio fell to $39.6 billion, down from $40.5 billion a year ago.
62% of its mortgages are uninsured, up from 56% a year ago. The average LTV on the uninsured portion is 51%, unchanged from a year ago. RBC cited a “strong underlying quality” of its uninsured portfolio.
90+ day delinquencies in the overall residential mortgage portfolio rose to 0.21%, up from 0.20% a year ago. For the uninsured portion, delinquencies were steady at 0.17%.
The bank’s uninsured mortgage portfolio has an average FICO score of 796, up from 793 a year ago.
The average remaining amortization of RBC’s residential mortgages is 18 years.
Condo exposure remains about 10% of the bank’s residential lending portfolio.
Net interest margin was 2.79%, up from 2.77% in Q4 and 2.68% in Q1 2018.
Graeme Hepworth, Chief Risk Officer, noted that in Alberta, “we have seen a slight increase in impairments in our residential mortgage portfolio as the region continues to recover from the oil downturn and elevated unemployment levels of 6.8%. The balance of our portfolio in this province was stable. For our retail portfolios overall, credit trends have generally remained stable and signs of stress have been isolated to manageable.”
Neil McLaughlin, Group Head, Personal and Commercial Banking, added: “we are not pulling back from Alberta at this point at all. We think we could actually do better in the mortgage business there. It hasn’t been an updraft market, obviously, we’re seeing prices come off, but our share there isn’t one of our strongest and our momentum could improve somewhat.”
Asked about a year-over-year decline in the bank’s HELOC portfolio given strong growth in HELOCs elsewhere in the industry, McLaughlin replied: “what’s driving our numbers is, when we started to see interest rates going up, we saw clients move balances from the HELOC at the revolving portion of that product into the fixed portion, the traditional mortgage segment of the product. It’s good advice for the customer, takes down interest rate risk for them, provide some certainty. So that started – it was a little bit higher when interest rates started to go up, but we’re seeing it level off, but that’s the swap of where those loan balances are going.”
He continued: “In terms of our HELOC book versus our competitors, one of our competitors, in particular, really hasn’t brought that product to market in the way we have. We’ve had this product in the market for I think about 14 years or 15 years. So, our customers have been offered the product for more than a decade and some of the competitors are just getting around are really growing it. We’ve enjoyed what we believe is higher retention rates and renewal rates because of the product construct and I think those are the two real drivers of that trend.”
Q1 net income: $2.25 billion (-4% Y/Y) Earnings per share: $1.71
The total portfolio of residential retail mortgages rose to $216 billion in Q1, up from $208 billion in Q1 2018.
The portfolio comprised $188 billion in freehold properties (up from $181 billion a year ago) and $28 billion in condos (up from $27 billion a year ago).
Residential mortgages grew 3% year-over-year.
58% of the residential mortgage portfolio was uninsured in Q1, up from 52% in Q1 2018.
The average LTV of the uninsured portfolio was 55%, up from 53% in Q1 2018.
The bank saw new originations in the quarter amounting to $9.3 billion, down from $10.3 billion a year ago. Meanwhile, the LTV of new originations in the quarter was 64%, up from 63% last quarter.
Net interest margin rose to 2.44%, up from 2.41% in Q1 2018, “primarily driven by the impact of prior rate increases,” the bank said.
90+ day delinquencies in the residential mortgage portfolio rose to 0.21%, up from 0.20% a year ago.
56% of the bank’s uninsured portfolio has a FICO score of 788 or greater (down from 57% last quarter). The average score is 787 nationwide, and 789 (down from 790) in the GTA and 791 (up from 790) in the GVA.
Summarizing the bank’s mortgage portfolio performance, CEO Brian Porter said, “We saw some signs of moderation in mortgage growth, in line with the low end of our guidance range, given the pull forward of demand in the same period last year, due to the B20 guidelines. The competitive environment remains strong and mortgage spreads were very tight during the quarter.”
Commenting on forecasted mortgage growth for 2019, James O’Sullivan, Head, Canadian Banking, said: “Our goal would continue to be 4% or so mortgage growth for the full year. And as we said before, we feel much better about Canada’s housing markets today than we did 24 months ago. We continue to believe that we’re getting the soft landing that many of us have encouraged.”
O’Sullivan added: “Home sales are down 4% year-over-year, but the home price index is up 1%. So we look at the market and we see strong housing demand fundamentals. So that’s low unemployment, tight labour markets pretty much across the country, aging millennials and strong immigration. So, we think fundamentals can and will drive the market forward…”
Chief Financial Officer Raj Viswanathan spoke about the net interest margin, which was down 1 bp from Q4 and up 4 bps year-over-year. “…we picked up 6 points in deposit margin sequentially. We lost 7 basis points in asset margin and the bulk of that would have been in the mortgage book. Q1 was a highly unusual quarter in the mortgage market. There were a bunch of things going on associated with those months of November and December that we’ve described as months of peak volatility.”
He added that, going forward, “I think when you look in particular at our strong deposit growth, which we expect to continue and our rates outlook, which now would include, say, one hike in the back half of the year… you’re going to get…a basis point or so of improvement from here for the balance of the year.”
Speaking about TD’s technological advancements in the quarter, CEO Bharat Masrani said: “…we continued to strengthen our omnichannel distribution strategy, complementing TD’s expanded team of frontline advisors and specialists with new digital capabilities. The TD homeowners’ journey went fully digital this quarter, enabling customers to complete the entire mortgage application process on their phone or tablet, if they wish.”
Commenting on NIM, Teri Currie, Group Head, Personal Banking, said: “for the full year ‘19, we do expect higher NIM than full year ‘18. We obviously, in the earlier part of 2019, are experiencing a tailwind from the rate increase that happened in 2018. If there were not to be additional rate increases throughout the year, we could see some compression in the fourth quarter. So, from a NIM perspective, TD economics is still projecting one more interest rate increase this year.”