Q2 2021 Bank Earnings – Profits Soar as Loss Provisions Plunge
The Big 6 banks saw profits soar in the second quarter thanks to strong mortgage growth and massive loan-loss provision reductions.
Three of the banks saw net income more than double, while CIBC posted 320% year-over-year growth.
Executives weighed in on a variety of topics, including current market conditions that have seen home prices soar over 38% in the past year, falling loan-loss provisions and the recent tightening of the stress tests for insured and uninsured mortgages.
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.
“Performance was supported by continued strong mortgage growth and a resumption of commercial lending growth,” said President and CEO Darryl White.
Asked about revenue from mortgage prepayments, Ernie Johannson, Group Head, North American Personal and Business Banking, said this: “Consumers are taking advantage of a lower interest rate environment to refinance…this will be a phenomena that continues as we have low interest rates. Do I anticipate it to diminish? I think over the coming months, you will see that…consumers…who were interested in taking advantage of making payments have done so. And then also as we go forward, we’re going to see increased spend…“
“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. “…we’ll watch it carefully as we go, but so far we’re seeing pretty good signs.”
Asked about the impact of rapidly rising home prices from a credit risk standpoint, Cronin said, “With existing homeowners, that has the effect of actually improving LTV, so that’s a credit positive. We are looking, though, very carefully at existing originations. The elevated home prices may exaggerate LTVs and so…through the cycle, as prices change, we adjust our practices.“
Cronin added: “And, we’re routing more mortgages to manual adjudication, particularly where we’re looking at areas where we’ve seen rapid house price appreciation, just to make sure that we’re comfortable, but ultimately, our mortgages and loans are to the borrower’s ability to pay, not the house price. And so to the extent we’re satisfied with that, then we’re comfortable from a risk perspective.”
Asked about the more stringent stress test, Johannson said, “The impact will be, probably about 5% to 10%, max, from the perspective of impacted borrowers. That said, there are ways in which they can obviously find a lower priced house, being able to either, find more equity somewhere from parents and gifting and all those sorts of good things…but we can assume…that there will be some moderation. That would be our expectation over the next little while, but it will still remain a fairly robust mortgage market in Canada for sure over the next little while.”
Part of CIBC’s volume growth was attributed to the bank’s focus on “acquiring new clients, deepening relationships with existing clients, adding mobile mortgage advisors in key markets and enhancing our cards value proposition,” said Victor Dodig, President and CEO.
“…on mortgages, as you’ve seen, growth continues to be strong…we have a good pipeline of activity. So that gives us confidence that we’re going to continue to have good momentum in the back half of 2021,” said Laura Dottori-Attanasio, Senior EVP and Chief Risk Officer.
Asked about the impact of the stricter stress test on insured and uninsured mortgages, Dottori-Attanasio said “the impact could be 5%, maybe 10% on originations.”
“Nearly 2/3 of our outstanding loans are to consumers, the majority of which are mortgages,” said Shawn Beber, Chief Risk Officer.
“While our models indicated a larger reversal in performing provisions, we continue to exercise judgment in offsetting a portion of those reductions, reflecting ongoing uncertainty,” Beber added.
“The real estate market continues to be strong, which gives us good momentum in mortgage growth with volumes up 9% year-over-year,” said Louis Vachon, President and CEO. “More than half of our originations are still in Quebec where fundamentals continue to be very strong.”
Asked about the impact of inflation on the bank’s mortgage portfolio, Ghislain Parent, Chief Financial Officer, said,“If we have a moderate increase in inflation, I think that’s quite good for the Canadian economy, I think that would be quite good for the banking industry generally. So that’s how we would approach it. Now, a large increase in inflation, which would bring a large increase in interest rates [and] would bring probably a different outcome. But right now I think we still perceive that as a low probability event or scenario.”
In his opening remarks, President and CEO David McKay said, “With respect to Canadian housing, we continue to monitor supply demand imbalances across Canada, and we support recent actions taken by regulators to adjust mortgage stress tests to take some pressure off the demand side of the equation. While we encourage policymakers to also address the problems of limited supply, which are exacerbating house price inflation.”
McKay added, “we manage risk through a cycle, and the credit metrics of our most recent mortgage originations remain strong and are consistent with our existing high-quality portfolio.”
“We made early and continuous investments in our distribution network, and client-facing talent, including mortgage specialists, commercial account managers, and investment advisors.,” McKay said. “The combination of these investments over a number of years is driving better outcomes for our clients, strong volume growth, deeper client relationships and increasing scale and profitability.”
On client loyalty, McKay had this to say: “65% of our Canadian banking clients have more than just a transaction account with us, many of which also end up getting a credit card, a mutual fund, or a mortgage. Our mortgage relationships have higher retention rates for these multi-product clients, with mortgage profitability up roughly two times higher when a client is retained for a second term.“
RBC noted it had “higher-than-average mortgage prepayment revenue.”
“We are seeing positive trends in many of our three key credit indicators,” said Graeme Hepworth, Chief Risk Officer. “Watch lists are declining, upgrades are overcoming downgrades, and delinquency trends are stable.”
Asked if RBC is intentionally “tapping the breaks” on mortgage growth, Neil McLaughlin, Group Head, Personal and Commercial Banking, said “we’ve been growing the mortgage business in double digits for over a year now and still consider it to have tremendous momentum…We have zero concern…in terms of our ability to continue to grow share in the mortgage business.“