Q4 2020 Bank Earnings – The End of Mortgage Deferrals
When 2020 came to an end, so too did the vast majority of mortgage deferral programs offered by the Big 6 banks and other Canadian lenders.
And, despite forecasts from early last year that arrears could skyrocket as a result of the pandemic, all of the big banks have reported that the far majority of mortgage deferral clients have successfully returned to making regular payments.
While a small percentage of loans have indeed become delinquent, so far 90+ day delinquencies from all of the banks remain little changed, and in several cases are lower than they were a year ago.
Despite the challenges of 2020, a number of the Big 6 banks remain generally optimistic about their prospects to grow and gain market share in 2021.
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.
“The vast majority of what’s left on deferral is mortgages, so I don’t expect those delinquency numbers to actually change a whole lot,” said Pat Cronin, Chief Risk Officer. “I mean, we’ll watch it carefully as we go, but so far we’re seeing pretty good signs.”
Q4 net income: $1.02 billion (-15% Y/Y) Earnings per share: $2.20
CIBC’s residential mortgage portfolio rose to $212 billion in Q4, up from $202 billion in Q4 2019.
Of the portfolio, $27 billion is from the Greater Vancouver Area (unchanged a year earlier), and $67 billion is from the Greater Toronto Area (up from $63 billion a year ago).
Of the uninsured portfolio, the LTV was 52%, down from 64% a year ago.
The bank reported $14 billion in originations in the quarter, up from $10 billion a year ago.
The bank’s HELOC portfolio ended the quarter at $19.5 billion, unchanged from the previous quarter and down from $21.2 billion a year ago.
Net interest margin in Q4 was 248 bps, down from 256 bps in Q4 2019.
Deferrals & Delinquencies
CIBC reported $2.7 billion worth of mortgage balances in deferral in Q4, down from $33.3 billion reported in Q3.
“The late-stage delinquencies of residential mortgages are down as we work with our clients who were not part of the deferral programs to bring their accounts current,” said President and CEO Victor Dodig.
Of the bank’s uninsured residential mortgage portfolio, 0.28% are in arrears by 90+ days, unchanged from 0.28% in Q3 and down from 0.29% in Q4 2019.
“Provisions were lower this quarter. However, we do expect to see impaired provisions trend higher and peak in the middle of 2021,” Dodig added.
“We also continue to see positive momentum in our mortgage business in the fourth quarter with year-over-year spot balance growth of 5% and sequential growth of 2%,” said Dodig.
Asked about the bank’s prospects for growing its mortgage market share, Dodig said this: “You’ll recall that we said a year ago that our goal is to get our mortgage growth…performing consistently, and at the very least in line with market. If you look at our numbers quarter-over-quarter (and) sequentially over the course of the year, we are achieving that target. We expect to keep pace with the housing market as the housing market evolves and we certainly expect to keep pace with our competitors in terms of our investments and our mobile mortgage advisors and our product offering.”
Laura Dottori-Attanasio, Senior EVP and Chief Risk Officer, added: “…we’re very focused on the quality of our growth and the anchoring of our new clients. And so that will certainly help us on a go-forward basis…And while I tell you that we haven’t been as successful as I would have liked in terms of retaining some of our past vintage clients when they came up for renewal, I believe we’ve laid the groundwork to ensure that we get not just better retention on a go-forward basis, but better acquisition.”
Dottori-Attanasio acknowledged that the bank lost some market share this quarter compared to last, and is currently in sixth place in terms of market share. “What I would expect, and again, there’s movement from quarter-to-quarter, but that you will see a gradual improvement over the course of 2021,” she noted.
“On the outlook, I would say that we’ve been successful at growing our balance sheet, while being disciplined on pricing and we will maintain that,” said Lucie Blanchet, EVP, Personal Banking and Marketing. “We will also continue to evolve our pricing methodology. Like for example, we introduced AI based modelling in the pricing of the mortgages. So we will continue to refine that and evolve that to other products.”
“…we had an excellent execution on mortgages in 2020. So, we had originations hit historical levels coming from the performance of our distribution channel and we’ve been able to improve the margins,” Blanchet added. “And at the same time, we absorbed more volume while decreasing our operational costs. So we really start 2021 with that strong momentum.”
Looking ahead, Blanchet said this: “We expect we will grow slightly lower than what we’ve achieved in 2020. And I think demand will still continue to be stimulated. However, we expect some slowdown in the resale market due to the slowdown in immigration, but also the concern around the supply potentially across the country.“
Q4 net income: $3.24 billion (+1% Y/Y) Earnings per share: $2.23
RBC’s residential mortgage portfolio rose this quarter to $293 billion, up 10.6% from $265 billion a year ago.
Mortgage volume was up 11% year-over-year.
The bank’s HELOC portfolio fell 5.4% to $78 billion from $81 billion a year ago.
67% of its mortgages are uninsured, up from 65% a year ago. The average LTV on the uninsured portion is 51%, unchanged from 51% a year ago.
90+ day delinquencies in the overall residential mortgage portfolio fell to 0.16% from 0.19% a year ago.
The bank’s uninsured mortgage portfolio has an average FICO score of greater than 804, up from 797 in Q4 2019.
Net interest margin was 2.56%, down from 2.76% in Q4 2019 “due largely to lower interest rates.”
Mortgage Deferrals & Delinquencies
As of Q4, $6.3 billion worth of loans were still being deferred, down from 84% from $39 billion in Q3.
RBC said it expected about 76% of its active deferral balances to roll off their payment arrangement by Dec. 31, 2020, “with a majority of the remainder to roll off by March 2021.”
“Of (RBC’s) active deferrals, less than 2% of the balances are uninsured with a current LTV greater than 80%. And the majority of those balances are in Alberta, which has seen a decline in home prices over the last few years,” said President and CEO Dave McKay. “While we do anticipate retail delinquencies to rise over the coming quarters as all deferrals roll off, at present delinquencies remain lower than our normal rate.“
RBC noted that approximately 2% of its deferrals have become delinquent, although a third were already delinquent prior to the deferral program. “This has resulted in a slight uptick in early stage delinquencies from the Q3 lows, said Graeme Hepworth, RBC’s chief risk officer.
“We continue to gain market share through our 750 strong mortgage specialists driving more new originations and an overall focus on client loyalty where we are seeing retention rates at nearly 92%,” said McKay. “While low interest rates will continue to support buyers, we expect mortgage growth to slow going forward as pent-up housing demand begins to cool.“
“In terms of specifically the mortgage business…we are pleased with our performance in 2020 despite kind of the extreme slowdown as the pandemic hit, we did really slingshot out of that and compete well, said Neil McLaughlin, Group Head, Personal and Commercial Banking.
Asked about the bank’s aggressive growth in recent years and prospects for continued market share growth going forward, McLaughlin said RBC is well-positioned to continue its momentum thanks to two key factors: “One, we have consistently grown our distribution capability. So we are looking for quality mortgage specialists. We set a really high bar. We don’t sort of staff up and then staff down. We are sort of always kind of growing that sales force. And we have over 1,700 mortgage specialists that are out connecting with clients.”
He continued: “The second piece in terms of really driving the growth and the market share is…We have really gone through and often felt we have optimized each part of that business. So from lead generation, lead conversion, how we get through adjudication, right through the fulfillment, we feel we started the year really firing on all cylinders and I think we are really well-positioned to come out of the pandemic and compete well. So that, and then I think good representation with our sales capability in the markets that are really growing in Ontario, B.C. and Quebec, where you are seeing the largest growth. So that’s what I really think is the sort of the fundamentals of our success.”
Q4 net income: $1.9 billion (+18% Y/Y) Earnings per share: $1.45
The total portfolio of residential retail mortgages rose to $245 billion in Q4, up from $227 billion in Q4 2019.
Mortgage volume was up 6% year-over-year.
Net interest margin fell to 2.26%, down 15 bps from Q4 2019.
Scotia noted it added 300 sales professionals to Canadian Banking in advisory, mortgage and commercial to “increase customer service and cross-sell.”
Deferrals & Delinquencies
Mortgage loans that were 90+ days past due fell to 0.15% from 0.20% a year ago.
Scotia reported that just $3 billion in retail loans remains on its deferral balance as of Q1 2021, a decline of 96% from a peak of $74.3 billion in Q2.
“Our deferral exposure is skewed towards secured mortgage lending with low LTV,” said Chief Risk Officer Daniel Moore.
“We see strong deferral payment trends. We’re adequately provided to absorb net write-offs for the second half of 2021,” Moore added. “And we’re seeing our customers return to current status in line with or better than our expectations.”
“In terms of deferral related credit impact, the significant majority of clients that have graduated from deferral programs are current with their payments,” said Chief Risk Officer Ajai Bambawale. “And graduated deferral delinquency rates are elevated relative to our broader portfolios, but remain within expectations.”