Some of the country’s key mortgage lenders unveiled their first-quarter results, which were positive across the board.
The lenders were able to take advantage of a hot housing market, alongside improving economic conditions and reduced loss provisions.
One highlight was Home Capital addressing its continued use of pandemic underwriting guidelines, given that many of its competitors have since re-adopted their pre-pandemic guidelines.
“Our pandemic underwriting guidelines are still in place, but are currently under review,” Home Capital President and CEO Yousry Bissada said on the earnings call. “We will determine as to when to relax these standards in stages to get back to our normal guidelines over time, commencing this year.”
More highlights from the conference call transcripts from First National, Home Capital and Equitable Bank follow below. Key comments are highlighted in blue.
“First-quarter performance did not display the typical fixed-market seasonality as borrowers continue to finance loan purchases at a record pace to take advantage of lower interest rates,” said co-founder and CEO Stephen Smith. “I think the fact that many Canadians also accumulated savings during the lockdown and deployed it into housing was another factor that played in favour of the very active first quarter market.”
Smithe noted that single-family originations increased 58%. “Once again, double-digit growth was generated by every first national office across Canada,” he said.
On OSFI’s proposal for a stricter uninsured mortgage stress test and the federal government’s budget announcement of a non-resident buyer’s tax on vacant housing, Smith said, “I don’t believe these measures will have much impact on demand. We are certainly of the view that lack of supply has and continues to be an ongoing issue, particularly in Vancouver and Toronto. The creation of additional housing stock is the real solution to the supply issue…”
“The past year has been a busy one for the First National team with substantial growth in originations leading to record mortgages under administration in every quarter, this one included,” said President and COO Jason Ellis. “Our scalable model has been critical to our success during this time. Operating leverage is not a concept often associated with mortgage lenders, but technology, including automation, has definitely provided that kind of leverage by allowing us to be productive as well as efficient as we put more business on the books.”
Over the past year, First National has added 276 people, a 26% year-over-year increase.
“Since the first quarter of 2020, the housing market has been extraordinarily strong,” Ellis said. “We expect this trend to continue in support of our optimism for increased residential origination in 2021.”
Asked for his near-term outlook, Smith said this: “I think it will be a case of things slowing down quite a bit and I don’t necessarily see prices dropping. It’ll just probably go sideways for quite a while as income catches up, but…certainly the lack of supply is a big issue. And it’s a big issue in Toronto in particular.”
Loans under administration: $22.77 billion (+1.1%)
Net interest margin: 2.61% (vs. 2.55% in Q4 and 2.38% in Q1 2020)
Provisions as % of gross loans: 0.28% (vs. 0.18% in Q4 and 0.70% in Q1 2020)
Net write-offs as % of gross loans: 0.01% (vs. 0.01% in Q4 and 0.03% in Q1 2020)
Notables from its call:
“Our pandemic underwriting guidelines are still in place, but are currently under review,” said President and CEO Yousry Bissada. Those guidelines involved Home changing its risk appetite, including reducing the maximum loan-to-value criteria in certain geographic areas, while in some areas “we stopped underwriting altogether,” Bissada said. Home is also using extra due diligence when it comes to income verification for small business customers working in “location-based people gathering” industries. “We will determine as to when to relax these standards in stages to get back to our normal guidelines over time, commencing this year.“
“…we continue to manage the fast rise of home values with prudent guidelines around maximum loan-to-value,” Bissada added.
Asked what trigger Home would be looking for before easing those tightened underwriting criteria, Bissada said this: “To just answer the big picture first, it’s the right economic conditions, which all the signals are, things are getting better, vaccines are working, there are indications that employment is going to go up, so we’re seeing all the signals that it’s getting better…we wouldn’t go from pandemic restrictions to exactly where we were overnight. We’ll ease into it. So, we’d increase loan-to-values in certain areas slowly and then eventually get back to our normal levels.”
“We’re reversing some of the earlier provisions we took against future credit losses as the expectations arising from our third-party economic models continue to improve,” said Bissada. “We continue to see our loan book as well-secured and well-provisioned. We continue to be conservative in our provisioning.”
Asked about potential broker frustration over Home’s ongoing tighter guidelines, while other lenders have essentially returned to normal conditions, Bissada said, “We deal with a subsection [of brokers] that really understand Alt-A. I think they understand. They would, of course, like us to relax our underwriting more because they think there’s value to placing mortgages with Home, but they understand…”
“The largest contribution [to Q1 net income performance] came from the relevant change in credit provisions,” said Chief Financial Officer Brad Kotush. “We took substantial credit provisions in the first quarter of 2020 at the onset of the pandemic.”
“We expect our net interest margin to stay [in its current] range for the balance of 2021 based on our current expectations of the interest rate environment,” Kotush said.
Home’s total single-family originations were up by 27%, which was “particularly gratifying,” Kotush said. “The fact that we grew our classic originations while operating under a more restrictive risk appetite gives us confidence in the opportunity for growth in the rest of this year as those restrictions are relaxed.”
Asked about a forecast for Q2 performance, Bissada said this: “The market continues to be very active. Still, supply is a little low. Still, homes are going quickly…But in the core, mortgage is still very good. Nothing worries us. We’re just adding a lot more prudence in terms of, if we get an application of a home that sold 15% or more than listing, we have a team that looks at that a lot closer.”
Asked about a potential net benefit to Home in the event of further borrowing restrictions on prime mortgages, Bissada replied, “Historically…when there have been prudential measures on A mortgages, it has helped the Alt-A. So, generally speaking, I think you’re right, but it also depends what it is…”
Loans under administration (retail): $36.7 billion(+16.5%)
Net interest margin: 1.77% (+6 bps)
Notables from its call:
EQ Bank deposits were up by $1.2 billion since year-end, with a customer base that now tops 202,000.
“Record-setting earnings for Q1 and characteristically high ROE of 17.1% are evidence that our bank is deploying capital efficiently for our shareholders,” said President and CEO Andrew Moor.
“We are poised to build on our growth momentum in upcoming quarters. We published our annual outlook in February. This doesn’t typically change. This year, it has, and for the better, as we are increasing our growth expectation for assets in 2021, taking into account strong Q1 results,” Moor added. “We’d like to particularly draw your attention to the expected growth of 15% to 20% on our conventional and insured portfolio. Conventional is the earnings engine for our bank, making this upgrade very welcome news.”
Specific to the bank’s $11.3-billion single-family alternative mortgage portfolio, EQ Bank is now forecasting growth of 12% to 15% in 2021.
On the bank’s reverse mortgage portfolio, Moor said demand is “accelerating primarily due to the work our team has done in delivering fantastic service and building distribution with key brokers in the market. Our rising market share provides the proof. The increasing product rights we have, low interest rates and a more marked preference raging in place as a result of pandemic are also critical catalysts.”
Asked about whether the bank can maintain its momentum in growing its reverse mortgage portfolio, Chief Financial Officer Chadwick Westlake said, “The answer is yes…Are we really increasing our market dominance and competition versus the other peer out there? Absolutely…So we feel pretty good about our positioning in this business and the products that Mahima’s team has put on the shelf and our relationships that we’re forming.”
On EQ Bank’s Mortgage Marketplace launch (more on that here), Mahima Poddar, Group Head, Personal Banking, said the move “keeps us at the forefront of innovation and opens the door to collaborations with the best and brightest in the world of fintech.” Poddar added that the bank has partnered with nesto, which “uses an innovative algorithm to analyze the entire Canadian landscape of 2,000-plus broker available mortgage products to recommend the best mortgage product to our customers.”
Asked whether the bank is concerned about opening up its marketplace to its peers and potentially losing some deals to other lenders, Moor said this: “In general terms, if the mortgage is insurable, they’re going to be very competitive and the engine will point the loan in our direction. We have really great break fees, good rates. There’s no reason why somebody shouldn’t deal with us.”
For the prime uninsured market, Moor said: “We’re unable to compete in that with our current balance sheet funding and particularly using standardized risk weights. And that’s true with all smaller institutions, nothing particularly Equitable-related. So, we might as well service our customers in that need. And if that means funding another bank’s balance sheet, so be it. I think it’s better than losing the opportunity altogether. With the home mortgage marketplace, it’s really trying to drive that origination experience to be something much more like what people expect for EQ Bank rather than traditional banking approaches.”