Q3 2020 Bank Earnings – An Update on Big Bank Deferrals
The country’s Big Six banks provided an update on the state of their mortgage deferrals, with each reporting varying results in terms of getting those borrowers back to making regular payments.
Both RBC and National Bank of Canada saw their mortgages under deferral drop substantially from Q2 to Q3. RBC said 12% of its loan portfolio remains in deferral (vs. 18% in Q2), while NBC’s deferrals are down to 5% of its loan portfolio (vs. 11.9% in Q2).
Others are seeing a slower transition. TD said its mortgage deferrals fell to 12% of the portfolio from 14% in the previous quarter, while deferrals actually rose at Scotiabank from 17% of its portfolio in Q2 to 18% in Q3.
All of the big banks, however, expressed confidence in the ability of the far majority of those mortgagors to get back on schedule, with several offering insight into the financial strength of some of those clients.
“If we look at the LTVs and the FICO scores on the uninsured book, I think that’s the place we take a lot of comfort in, in terms of the underlying risk,” said Neil McLaughlin, Group Head, Personal and Commercial Banking at RBC. “LTVs in the mid-50%…and then average FICO at 758. I mean, these are strong credit clients with a lot of absorption capability.”
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.
“We have been pleased with our credit experience so far during this crisis, with credit migration, payment deferral expiry and impaired loan loss provisions well within expectations and utilization rates back to normal levels,” said Pat Cronin, Chief Risk Officer. “With that said, we do expect to see our impaired loan loss rate rise in the coming quarters and would guide to a rate in the 40s in terms of basis points for the next few quarters.”
“We would expect the bulk of the consumer deferrals to roll off in Q4. We wouldn’t anticipate giving out additional deferrals there,” Cronin added. “We think we will move much more just simply to a case by case with our consumer customers after that.”
“Overall, we have seen good performance on deferrals that have matured reflecting the quality of the clients and the collateral,” Cronin said.
Q3 net income: $1.17 billion (-16% Y/Y) Earnings per share: $2.55
CIBC’s residential mortgage portfolio rose to $207 billion in Q3, up from $201 billion in Q3 2019.
Of the portfolio, $27 billion is from the Greater Vancouver Area (unchanged a year earlier), and $65 billion is from the Greater Toronto Area (up from $63 billion a year ago).
Of the uninsured portfolio, the LTV was 52%, unchanged from a year ago.
The bank reported $11 billion in originations in the quarter, up from $9 billion last quarter.
The bank’s HELOC portfolio ended the quarter at $19.5 billion, down from $21.6 billion a year ago.
Net interest margin in Q3 was 238 bps, down from 254 bps in Q3 2019.
Deferrals & Provisions
CIBC reported $33.3 billion worth of mortgage balances still in deferral in Q3, down slightly from $35.5 billion reported in Q2.
Of the bank’s uninsured residential mortgage portfolio, 0.36% are in arrears by 90+ days, up from 0.32% in Q2 and 0.27% in Q3 2019.
CIBC says this is “due to the stopping of collection efforts during the peak COVID period. Delinquencies are expected to trend lower in Q4/20.“
“We experienced a small increase in gross impaired balances,” said Shawn Beber, Chief Risk Officer. “However, given the moderate average loan-to-value ratio of this portfolio, we do not expect this increase to translate into material losses.“
Provisions for credit losses were $525 million for the period ended July 31, up from $291 million a year ago, but down from $1.41 billion in the second quarter.
“Provisions on impaired loans were lower this quarter than the second quarter,” he added. “However, we do expect to see impaired provisions trend higher over time, as relief programs come to an end and flow write-offs and insolvencies increase.“
“The overall Canadian consumer late-stage delinquency rate was up this quarter, with a higher rate in residential mortgages and a lower rate in credit cards and personal lending,” Beber added.
“We drove year-over-year growth in mortgage balances of 3% on a spot basis as the real estate market started to recover in June and July,” said CEO Victor Dodig. “And while our performance is not yet where we want it to be, our recent growth has returned closer to market levels, supported by additions to our more mobile advisor team and a streamlined application process. We continue to see very high levels of digital engagement with digital banking sessions and transactions up approximately 25% from pre-pandemic levels.”
“Since Q2, the value of retail loans on the deferrals is down 60%,” said CEO Louis Vachon. “In addition, the vast majority of clients are resuming payments as scheduled as they exit deferral programs.“
“On mortgages…we offered up to six months [payment deferral], but we approached it to work proactively with our customers for a first three-month period, and then proceed with another three months at their request based on each individual need for hardship,” said Lucie Blanchet, VP Personal Banking and Marketing.
“So, there were a couple of reasons why we did that. First, we wanted to be proactive and work with our customers quicker than in six months to better understand their situation and find proactive solution,” she said. “But we also understood that there was a cost for them to defer their payments. And we wanted to limit that impact as much as possible. And obviously, it gave us some insights on the restraints before six months.“
“Our e-signature solution is helping our mortgage specialists in the field and our clients are benefiting from investments we made in digital tools to allow for self serve renewals,” said CEO Dave McKay. “While it’s too early to comment on the sustainability of these trends, we will continue to help Canadian homeowners while supporting balanced growth in the market.”
“Many clients took deferrals as a precaution, and we expect most to resume payments when deferrals expire,” McKay added.
“We’re reaching out to these clients,” said Neil McLaughlin, Group Head, Personal and Commercial Banking. “I think we’re quite encouraged by the feedback we’re getting from clients and their ability to resume these payments.“
In terms of geographic breakdown of RBC’s mortgage deferrals, Graeme Hepworth, Chief Risk Officer, said this: “…the highest deferral rates would be in Alberta, consistent with… the kind of dual impact that Alberta is facing, both with the pandemic and the impact on the oil and gas environment. GTA would be next highest there. And again, that’s a reflection of two things, I would say. One is kind of a lot of the service economy that comes out of Toronto, but also kind of the higher level of home prices. And then, on the lower side, you’d see Quebec and some of the other parts of Ontario outside of the GTA.”
Commenting on the makeup of its deferral clients, McLaughlin said this: “if we look at the LTVs and the FICO scores on the uninsured book, I think that’s the place we take a lot of comfort in, in terms of the underlying risk. LTVs in the sort of the mid-50%…and then average FICO at 758. I mean, these are strong credit clients with a lot of absorption capability.“
Of the mortgage holders still in deferral, their average credit score is 750 and higher, “close to those that are not in deferral,” noted Dan Rees, VP of Canadian Banking.
“We have identified in June…the customers we would qualify or characterize as vulnerable, through the course of July and into August we will have contacted all of those mortgage customers two months ahead of their scheduled prepayment and are working with them on a case-by-case basis and we are encouraged by what we saw through the month of August,” said Rees.
Asked what proportion of those would be considered “vulnerable,” Rees replied, “Less than 10% of those that are still in deferral.”
“We continue to operate through challenging and uncertain conditions given the unprecedented impact from the COVID-19 pandemic and have added allowances for credit losses accordingly,” said Chief Risk Officer Ajai Bambawale. “I’m satisfied with the bank’s allowance coverage, which reflects our current economic outlook and our portfolio and geographic mix.”
In terms of sequential volume growth, TD was third among its competitors, noted Theresa Currie, Group Head, Personal Banking. “If I think about the quarter, we were competing in some sense with one arm tied behind our back,” she said. “As of August 24, we have fewer branches open than three of our four top competitors, and I think we’ve been somewhat more conservative with our safe reopening.”
Still, Currie added: “with the investments we’ve made in distribution, in operations, in automation, in training and with the network open, I feel like we’re well positioned to grow the business. And our retention was very strong at 60 basis points in the quarter.