The country’s key broker channel lenders saw residential mortgage originations jump nearly 10% in the third quarter compared to last year.
That helped the bottom line, with Home Capital and First National both reporting a year-over-year increase in net income of 16% and 20%, respectively, according to their quarterly filings.
First National Chairman and CEO Stephen Smith noted they saw strength in every region across the country, including Alberta, where he said they’ve seen a “turnaround (of) activity.” The strongest growth in originations was seen in Ontario and the Maritimes, both up 10% year-over-year, he added.
More highlights of the conference call transcripts from Home Capital and First National are below.
“Our primary financial metrics, net income, earnings per share and return on equity all showed significant improvement both sequentially and year-over-year,” said President and CEO Yousry Bissada.
Earnings per share was up 63% from last year, and by 76% after adjusting for one-time items associated with Home’s technology investment, Bissada noted. “Our line of businesses are continuing to see benefits from the progress of our IT transformation,” he said.
Bradley Kotush, EVP and Chief Financial Officer, spoke about Home’s placement of the A-tranche of its RMBS issue at the end of the quarter, which he said was important for several reasons. “It is the first private cross-border Canadian RMBS transaction. It provides us with another funding option to give us greater flexibility, effectively replacing $425 million that we would otherwise have to raise in the competitive GIC market,” he said, adding that two ratings agencies provided AAA ratings. “We are innovators and, coming to market with this RMBS issue, we believe we have contributed to building the private RMBS market in Canada. The response to our issue gives us the confidence to plan for subsequent RMBS issues.”
The biggest driver of Home’s earnings growth in the quarter was an expansion of its net interest income margin from 2.03% in Q3 of 2018 to 2.22% in Q3 2019, Kotush said. “This increase is due to the expansion in asset yields outpacing slightly higher funding costs.”
Asked about competition on the Alt-A side from some prime lenders and banks, Bissada said this: “The competition on Alt-A is steady. There are a few people that are in the Alt-A game, some playing at the higher beacon, some playing across the board as we are…I think we’re competing more on service than we are on price.”
Asked about the potential for acquisitions by Home given the strong levels of growth, Bissada said, “We are focusing on building our business. We’re focusing on the digital age and the upgrades in our system project… Now, having said that, if opportunistically something came along, we wouldn’t not look at it depending on what it is, but we’re really more focused on building ourselves to organically grow.”
On renewals, Kotush said this: “If you compare to previous periods, we’ve seen a slight reduction in that, but we do think we’re going to be above our historical rate of renewals pre B-20. And on renewals, we can get up to 50 bps higher in terms of rate—net rate,” he said. “So, focusing on renewals has been one of the focuses of our underwriting team and we’ll continue to do that.”
Commenting on First National’s 8% year-over-year growth in single-family originations, Chairman and CEO Stephen Smith said: “This growth is broad based. Every First National office experienced higher volumes. This marks a turnaround (of) activity in Alberta, a region that has experienced economic hardships over the past few years.”
Ontario and the Maritimes were the growth leaders, with origination volumes up 10% compared to last year. “In Ontario, we continue to benefit from the Excalibur program,” Smith said. “It has been successful in meeting the needs of borrowers that are just outside the traditional parameters of our prime mortgages.”
Rob Inglis, Chief Financial Officer, commented on a change in funding mix, saying First National increased the amount of mortgages placed with institutional investors by $1.6 billion—or ~40%—compared to the previous year. “A portion of this expansion was due to overall growth in origination, but the majority represented a shift between funding sources,” he said. “The shift has the effects of accelerating the recognition of our earnings. Along with higher MUA and wider spreads, this was a driving force in third quarter performance.”
First National’s employee headcount has surpassed 1,000 people across the country.
Moray Tawse, Executive Vice President, said residential and commercial MUA will finish the year at record levels, but added, “Before we celebrate, I should note that we continue to face uncertainty with our securitization margins. As you may have noticed, mortgage spreads have been volatile in the past 12 months and in fact tighten towards the end of the quarter compared to where they were at the start of the quarter.”
One of the questions posed to Smith was about his and Tawse’s current ownership level of First National—currently about 74% of the stock, generating roughly $3.5 million in dividend payments a month—and how they see their investment level going forward. Smith replied: “We’re pretty comfortable with our investment. And we have been, because in 13 years we’ve sold very limited amounts…That being said, we’ve both been at it for 30 years. So, to a certain point, there’s always the issue of whether we have to consider some type of diversification. But that’s an ongoing conversation I think we’ve had for 13 years. And we had that conversation 2006, how much should we sell? And we have that conversations at various points, but certainly we like the model here. We like the fact that vast majority mortgages are insured. There’s a limit of credit exposure, and it provides a steady, ongoing, reliable source of dividends.” Referencing the $3.5 million in dividends, Smith added, “Not too many investments give you that type of cash a month.”