Q2 2020 Bank Earnings – All About Provisions and Mortgage Deferrals
For the second-quarter earnings season, all eyes were on the Big 6 banks’ credit loss provisions and mortgage payment deferral programs.
With the onslaught of COVID-19, the banks granted payment deferrals to more than 700,000 Canadians to help prevent a wave of defaults. In their second-quarter earnings calls, the banks provided all additional details about their deferral programs, along with their forecasts for how they see the eventual recovery playing out.
All of the banks also set aside record credit provisions, with the expectations that credit losses will increase in the coming quarters. RBC’s provisions for credit losses, for example, skyrocketed 564% compared to Q2 2019 levels.
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.
Q2 net income: $689 million (-54% Y/Y) Earnings per share: $1.00
BMO’s residential mortgage portfolio rose to $114.5 billion from $108.9 billion a year earlier.
The HELOC portfolio—61% of which is amortizing—rose to $34.6 billion from $32.3 billion.
Mortgage growth through proprietary channels, including amortizing HELOCs, was up 7% year-over-year.
41% of BMO’s residential mortgage portfolio is insured, down from 44% a year ago.
The loan-to-value on the uninsured portfolio is 51%, unchanged from a year ago.
79% of the portfolio has an effective remaining amortization of 25 years or less, up from 70% a year ago.
Net interest margin (NIM) in the quarter was 2.58%, down from 2.68% in Q1 and 2.62% a year ago, “primarily due to lower loan spreads as a result of a narrowing of the Prime to BA relationship,” noted CFO Thomas Flynn. “While projections are difficult, the net interest margin is likely to drift somewhat lower over the balance of the year due to the impact of lower interest rates.”
Deferrals & Provisions
BMO offered payment deferrals to more than 200,000 customers in Canada and the U.S.
“Of the deferred Canadian RESL balances, the large majority are mortgages, of which 33% are insured,” said Flynn. “The credit quality of consumer deferrals varies by product, but the average bureau score weighted by deferred balances is approximately 750 in Canada.”
The 90-day delinquency rate for Real Estate Secured Lending (RESL) portfolio was 22 bps, down from 24 bps in Q2 2019, while the loss rate for the trailing four-quarter period was less than 1 bp.
The bank’s overall provision for credit losses rose 6 bps quarter-over-quarter to 35 bps, or $1.11 billion, up 531% from $176 million in the same quarter last year. “Based on our estimates, we see approximately 1/3 of the impaired provisions being related to COVID-19 impacts in the quarter,” noted CFO Thomas Flynn.
“In terms of outlook, given the historic level of economic stress due to COVID-19, we would not expect to see a reduction in impaired loan losses over the next few quarters,” Flynn added. “And depending on the length of the crisis and the impact on specific industry sectors, we could see further increases in impaired loan loss rates.”
White added: “…we’re in dramatically uncertain times. And so, that forecast could be different. But I think about loss rates as from 35 basis points where we are today, they’re likely to drift up higher, I think, likely into the 40s. The other end of that bookend would probably be at the 70 basis point range, which would be closer to what you saw during the GFC.“
We mobilized quickly to transition 90% of our non-branch employees to work remotely.
“While the scope and the scale of the economic and social impact of the pandemic remains uncertain, our strong liquidity and capital provide the strength and stability to withstand a period of prolonged economic recovery,” said CEO Darryl White.
Commenting on the bank’s positive outlook for house prices, Erminia Johannson, Group Head, North American Personal Banking, replied, “what we’re seeing now is some stabilization in certain sectors in certain geographies. And so I would say, right now, our position would be that we’re going to be remaining quite flat on the housing prices. Obviously, in oil-affected regions, et cetera, we’re going to see some nuances there. But for now, that’s what our indicators are suggesting.”
Q2 net income: $392 million (-70% Y/Y) Earnings per share: $0.94
CIBC’s residential mortgage portfolio rose to $204 billion in Q2, up from $201 billion in Q2 2019.
Of the portfolio, $27 billion is from the Greater Vancouver Area (unchanged a year earlier), and $64 billion is from the Greater Toronto Area (up from $63 billion a year ago).
Of the uninsured portfolio, the LTV was 53%, down from 65%.
The bank reported $9 billion in originations in the quarter, up from $6 billion a year ago.
The bank’s HELOC portfolio ended the quarter at $20.3 billion, down from $21.8 billion a year ago.
Net interest margin in Q2 was 244 bps, down 3 bps from Q2 2019, “due to the impact of prime BA compression and COVID-related interest relief this quarter,” CEO Victor Dodig said.
Of the bank’s uninsured residential mortgage portfolio, 0.32% are in arrears by 90+ days, up from 0.30% in Q1 and 0.27% in Q2 2019. “We do not expect the increase in mortgage delinquencies to translate into material losses,” noted Chief Risk Officer Shawn Beber.
Deferrals & Provisions
The bank’s set-asides for loans that could go bad rose more than five-fold from the previous quarter, with provisions reaching $1.41 billion, compared to $261 million in the fiscal first quarter.
The bank provided payment deferrals for 108,000 mortgages, representing 18% of the bank’s overall mortgages outstanding, according to Laura Dottori-Attanasio.
CEO Victor Dodig noted that since mid-March, CIBC has enabled over 75% of its employees to work remotely.
Dodig drew attention to a J.D. Power report earlier in the year that ranked CIBC as third of Canada’s big banks for customer satisfaction (behind BMO and RBC).
“Notwithstanding the macro challenges, we continue to see improving trends and volume growth across our core products, including mortgages and deposits,” Dodig said.
“Nearly two-thirds of our outstanding loans are to consumers, the majority of which are mortgages, with our uninsured mortgages having an average loan-to-value of 53%,” noted Chief Risk Officer Shawn Beber.
Explaining the bank’s forecast for Canada’s economic recovery, Beber said: “I’d say our base case is more reflective of a U-shape pattern, so a big contraction in GDP and rise in unemployment fairly quickly. Then as the economy reopens, recovery begins and it’s sort of quickly at first, but then we’re sort of forecasting a more gradual emergence from there where GDP doesn’t get back to say end of 2019 levels until sort of late 2021, early 2022 with unemployment coming back after that.”
Beber added: “From a house price perspective, we’ve modelled in … a little more than 6%, 6% to 7% price drops over the next two years, and then some recovery in the following year.”
“On the mortgage side, pre-crisis, I’d say we were feeling good in that, as you’ve probably seen we reversed that declining growth trend, and are now in a positive trajectory,” said Dottori-Attanasio. “That said, still not good enough in terms of where we’d like to be. But we were trending in the right direction. I’d tell you sort of post-quarter end we are seeing some of those applications drop off, which I think is normal, given the circumstances.”
Q2 net income: $379 million (-32% Y/Y) Earnings per share: $1.01 a share
The bank’s residential mortgage and HELOC portfolio rose to $72.4 billion in Q2, up from $67.9 billion a year ago.
The bank’s residential mortgage portfolio is 39% insured, down from 42% a year ago.
The average LTV on the uninsured mortgage portfolio was 60%, while the average LTV on the HELOC portfolio was 57%.
Quebec represented 55% of the mortgage book (up from 54% from a year ago), while Ontario made up 26% (unchanged) and Alberta 8% (unchanged).
Net interest margin was 2.22% in Q2, down from 2.23% a year earlier.
Overall gross impaired loans rose to 48 bps ($780 million) in the quarter, up from 43 bps in Q1.
Uninsured mortgages and HELOCs in the GTA and GTV represented 10% (unchanged from Q2 2019) and 2% (unchanged) of the portfolio, respectively, and have an average LTV of 51% (down from 52%) and 51% (up from 50%), respectively.
Of the bank’s uninsured residential mortgage portfolio, 0.23% are in arrears by 90+ days.
Deferrals & Provisions
Provisions amounted to $504 million, up from the $84 million in the same quarter last year.
“We would expect performing provisions to be much lower in the coming quarter,” said Bill Bonnell, Chief Risk Officer.
At the end of the second quarter, National agreed to allow customers to defer payments on about 114,000 mortgage loans, personal loans, student loans and credit cards.
Loan deferrals: ~39,000 mortgages and ~27,000 other loans; no “interest on the interest” to eligible clients. That amounted to approximately $8.6 billion worth of loans, or 12% of the bank’s total portfolio.
The new reality has also acted as a catalyst, spurring increase in digital adoption and effectively accelerating our digital transformation,” said CEO Louis Vachon.
“Based on everything we see today and the earnings power of the bank, I am also confident in our ability to maintain the current level of dividends to our shareholders,” Vachon added.
In the last week of May “we’ve seen positive signs of recovery in loan activities, where we see a slowdown, not collapses,” said Lucie Blanchet, Co-Head Personal and Commercial Banking.
In early April, Blanchet said the bank “faced rock-bottom in terms of activity,” with mortgage originations down 80% year-over-year. “We have seen significant improvement since then,” with originations down just 5% from last year.
Q2 net income: $1.48 billion (-54% Y/Y) Earnings per share: $2.26
RBC’s residential mortgage portfolio rose this quarter to $274 billion, up from $248 billion a year ago.
Mortgage volume was up 9% year-over-year, “however…we’re seeing a material slowdown in housing activity and this is reflected in much lower mortgage application volumes since April 30,” said Rod Bolger, Chief Risk Officer. “We expect mortgage growth to slow to the mid single digits by year-end.”
The bank’s HELOC portfolio fell to $37.7 billion from $39.6 billion a year ago.
71% of its mortgages are uninsured, up from 63% a year ago. The average LTV on the uninsured portion is 52%, unchanged from a year ago.
90+ day delinquencies in the overall residential mortgage portfolio fell to 0.17% from 0.19% a year ago. Overall gross impaired loans rose to 0.52% ($3.5 billion) from 0.45% ($2.9 billion) in Q1.
The bank’s uninsured mortgage portfolio has an average FICO score of 783, down from 798 in Q2 2019.
Net interest margin was 2.70%, down from 2.80% in Q2 2019.
Mortgage Deferrals & Provisions
Mortgage deferrals accounted for 14% of all approved deferrals from RBC, representing $47 billion worth of loans outstanding.
Globally, the bank approved 492,500 deferral requests representing $76 billion worth of outstanding loans.
$2.83 billion in provisions in the quarter (up 564% from $426 million in Q2 2019). “With this significant increase, we now have $5.9 billion in total allowances to absorb future loan losses,” Bolger said. “This represents 0.84% of all loans outstanding and 4.2x our net write-offs over the last 12 months.”
“…in the quarter of significant external stresses, we generated pre-tax, pre provision earnings of $4.6 billion, the second highest in our 150-year history,” said CEO David McKay.
“Our stress tests suggest that even under a severe pandemic scenario, our capital levels remain above current regulatory minimum levels and we remain well-positioned to continue paying our dividend,” McKay added.
On Canadian housing outlook, McKay said, “any recovery in the housing market will be gradual at first, we believe the risk of a sharp near-term price decline is low.”
“The crisis is changing client behaviour and we’ve seen an accelerated shift towards digital engagement,” said Rod Bolger, Chief Risk Officer. “We would expect to see opportunities for cost savings going forward, assuming client preferences continue to trend towards digital interactions.”
Commenting on what the bank has seen in terms of mortgage origination volumes, McKay said the following: “Originations for the first quarter were exceptionally strong, so that was really fuelling the early growth. As soon as we really saw the impacts of COVID, obviously you can’t show a home and transactions just dried up. So right through till really the end of April, we were at annual lows for origination. We’ve since seen that come up a little bit, probably about a third from sort of peak to trough in May. But right now, on an annual basis, we’re probably looking at an outlook for originations of about 80% to 85% of last year.”
On forecasts for house prices, Graeme Hepworth, Chief Risk Officer, said, “overall, in our forecasting, we built a 7% decline in house prices with a kind of recovery period ticking over about 2 years. Underneath the hood, that would split by different geographies and different property types.”
Q2 net income: $1.32 billion (-39% Y/Y) Earnings per share: $1.04
The total portfolio of residential retail mortgages rose to $217.8 billion in Q2, up from $205 billion in Q2 2019.
Residential mortgages grew 6% year-over-year.
Net interest margin fell to 2.33%, down 3 bps from Q1 and 7 bps compared to Q2 2019, “driven by the rate environment, competitive pressures and interest rate cuts from the Bank of Canada, the bank said.
90+ day delinquencies in the residential mortgage portfolio remained stable at 0.21% compared to a year ago, while gross impaired loans (GILs) rose 7% quarter-over-quarter, but fell 11 bps compared to last year.
Deferrals & Provisions
Total provisions for credit losses reached $1.85 billion, compared to $926 million in the previous quarter.
“We continue to provision early and conservatively. Our asset quality remains strong with high levels of secured and investment grade assets,” said CEO Brian Porter said. “We are also highly diversified by product, by sector and by geography. Our exposure to sectors most impacted by COVID-19 is limited at 4.7% of total loans reflecting substantial de-risking efforts in prior years.“
Mortgage payment deferrals were granted to 134,000 accounts representing $38 billion in loans outstanding.
“We see our Canadian household balance sheets being strong and in fact being stronger as a result of the many deferral and relief measures that have been provided,” said Chief Risk Officer Daniel Moore. “Our customers, frankly, are being fiscally responsible. You’ll see in the disclosures that our card balances are down 8% globally and 12% in Canada (and) we haven’t seen material change in our HELOC balances.“
“The impact on payment amounts on average for mortgages would be about $60 per payment as the deferred amount is capitalized and amortized over the remaining term of the mortgage,” Moore added.
“Digital banking has emerged as the preferred channel for our customers,” Porter added, noting that over 40% of the bank’s payment deferral requests in have been processed online.
Raj Viswanathan, Executive Vice President and Chief Financial Officer, said: “Mortgage rates are being negotiated pretty heavily around the marketplace in Canada. That’s the primary driver of the margin compression, although our deposit margin actually contributed to improving this margin.”
Scotia CEO Brian Porter said over 80% of the bank’s employees, excluding branch staff, shifted “quickly and smoothly” to remote work environments since the start of the pandemic.
“We are well-positioned from a capital and liquidity perspective and we are appropriately reserved for potential credit losses,” Porter said.
In April, Scotiabank attracted media headlines when it stopped allowing borrowers to use HELOCs for down payments on investment properties. Asked if the bank has made or plans to make any additional changes, Dan Rees, head of Canadian Banking, said this: “It is the only material change we’ve made in terms of mortgage origination standards. We do anticipate that notwithstanding our strong mortgage growth in the quarter, reflecting a healthy pipeline in Q1, that that could well moderate a little bit from here. And we don’t plan on any additional origination changes in that portfolio at this time.”