Q2 Lender Earnings: Strong Results and a Positive Outlook for H2
Some of the country’s key mortgage lenders benefited from strong housing activity seen over the first half of the year, according to second-quarter earnings.
While results were strong across the board, part of that was a function of weak Q2 2020 comparisons, which magnified gains this quarter.
As First National President and COO Jason Ellis noted, growth rates in the first six months of 2021 “reflected a 2020 comparative period highlighted by significant economic uncertainty and financial disruption. In the remaining six months of 2021, comparisons will be made to the last two quarters of 2020 that featured an exceptionally strong housing market.”
However, executives remain optimistic about the second half of the year, given tailwinds such as high consumer savings, continued low interest rates and an eventual return to pre-pandemic immigration levels.
Highlights from the conference call transcripts from First National, Home Capital and Equitable Bank follow below. Key comments are highlighted in blue.
This marked the 60th consecutive quarter of growth in mortgages under administration since First National went public in 2006, which CEO Stephen Smith said is, “a testament to our vision 15 years ago and reflects the effectiveness of our business model.”
The company’s employee count is up 40% from last year to over 1,500 people.
Speaking to First National’s record-setting growth in single-family originations, Smith said, “We continue to benefit from a strong share of the mortgage broker distribution channel, which is our exclusive source for single-family production. Technology-enabled service through Merlin [First National’s deal management system for brokers] continues to be a differentiator. Not only is Merlin a long-time driver of our brokerage partnerships, it has been the foundation of our strong results during the pandemic.”
“While prime mortgages are our core offering in single-family, we continue to build our all-day presence with the originations for our Excalibur program,” Smith added. “Growth in the B.C. market now complements our activities in Ontario, where the majority of production takes place.“
First National said its biggest driver of revenue growth was the 82%, or $17.3 million, increase in net interest from securitized mortgages, but noted that the year-over-year comparison was magnified due to last year’s period of “financial turmoil.”
“As a result of the substantial amount of liquidity in the financial system, there continues to be strong mortgage demand from institutional investors,” said Jason Ellis, President and COO. “And as you saw from Q2 results, securitization markets are robust and continue to provide consistent and reliable funding for First National.”
From a housing market perspective, Ellis noted that the reopening of the border to immigration will likely serve as a tailwind. “However, we share the Central Bank’s view that the housing market activity is likely to ease back from historic highs,” he said. “With the strong results of the second quarter, our outlook remains positive for the remainder of 2021.“
Loans under administration: $22.82 billion (-0.3%)
Net interest margin: 2.61% (vs. 2.61% in Q1 and 2.40% in Q2 2020)
Net non-performing loans as a % of gross loans: 0.24% (vs. 0.38% in Q1 and 0.42% in Q2 2020)
Net write-offs as % of gross loans: 0.00% (vs. 0.02% in Q2 2020)
Notables from its call:
“Following a successful Q1, we saw continued strong growth in single-family originations this past quarter, both in Alt-A and A mortgages,” said President and CEO Yousry Bissada. Single-family originations totalled $1.84 billion in the quarter, a 63% jump from last year. “We grew our volumes by delivering responsive service and industry expertise through evolving market conditions and risk parameters.”
“In June, we closed the second successful cross-border RMBS [residential mortgage-backed securities] offering,” Bissada said. “Compared to our inaugural issue in the fall of 2019, we saw increased investor interest and increased participation from U.S. investors. Based on the investor demand for our last offering, we expect to be back in the market later this year subject to market conditions.”
Sales under Home’s whole loan sales program totalled $431 million, up from $37 million in Q1. “Whole loan sales enhance Home’s capacity to offer insured mortgage products to our brokerage channel,” Bissada said, noting that whole loan sales take mortgages off balance sheet, “recognizing a gain on sale while collecting servicing income over the life of the loans.”
On his outlook for market conditions, Bissada said this: “We believe that current conditions, namely low interest rates, high consumer savings and changing housing needs in line with evolving working conditions, all support a robust housing market. We see improvements in employment and immigration providing additional support to the medium and contributing to demand for mortgages in both prime and alternative space.“
This quarter, Home Capital terminated its $500-million standby credit facility, which will reduce its funding cost by 5 bps, said Brad Kotush, Chief Financial Officer.
On credit provisions, total releases amounted to $30.9 million year-to-date vs. provisions of $48.8 million in 2020. Kotush noted that net write-offs have been less than 1 bp, or $0.2 million vs. $2.3 million in the first half of 2020.
Loans under administration (retail): $35.4 billion (+9%)
Net interest margin: 1.81% (+17 bps)
Notables from its call:
“Our growth in Q2 was particularly strong (for both) conventional and insured, led by alternative single-family,” said President and CEO Andrew Moor. “This gives us added confidence in our ambitious guidance for the year, with positive implications for earnings growth beyond 2021. As you know, it’s the growth of our conventional loan assets that really fuels earnings.“
“After putting the brakes on loan growth, particularly in single-family through much of last year and what could now be called an overreaction to the pandemic, we had to restore our standing with the broker community,” Moor added. “We got things rolling in January and with great support from our broker partners, delivered excellent growth in Q2 with even more momentum as we speak.“
Single-family alternative generated record originations of $1.8 billion in Q2, three times the volume in Q2 2020. “We are well on our way to achieving our growth target of 12% to 15% for all of 2021,” Moor said.
Looking at real estate trends post-pandemic, Moor said that despite the Bank of Canada’s forecast for housing activity to ease from its historical highs, “we almost note that low interest rates, a free passage for newcomers to Canada and the widespread undersupply of single-family and multi-unit properties [serve as] a tailwind that will not diminish in the short run, and in some cases, for the foreseeable future.”
He added that with more workers returning to their regular places of employment, “we expect the pandemic preferences that favoured home purchasing activity in smaller towns and rural regions will dissipate. A revision to the norm will once again benefit real estate in Canada’s large cities, where Equitable has very strong franchises and a constructed view of risk.”
Equitable Bank’s reverse mortgage book grew 273% year-over-year. “We believe low interest rates, high house prices and the opportunity to fund retirement lifestyle choices through home equity are proving to be strong catalysts for reverse mortgages, as is the trend of aging in place,” Moor said. “We aim to continue to expand our market share with product innovations, targeted marketing and broad distribution to tackle this under-served market.“
EQ Bank deposits grew 99% over 2020 to a record $6.5 billion as of June 30.
Gross impaired loans were down 20% year-over-year and up 15% in the quarter.
Asked if the changes to the mortgage stress test had any material impact on mortgage originations, Moor said this: “We didn’t see that. Of course, we’re already dealing with fairly active housing markets when those changes went in, but it certainly feels like that was a bit of a non-event from the perspective of the housing market itself and mortgage demand.”
Asked about Equitable Bank’s Mortgage Marketplace, which allows consumers to shop from over 2,000 mortgage products from a variety of broker lenders, Moor said that while they’ve seen a “fair number” of applications, “we’re seeing the low conversion rates.” He added: “this may be a learning exercise on our part on how to improve those conversion rates…I would say still modest conversion at this point, but quite a lot of interest and activity on the part of our customer base.”
Asked about details on future product launches that Equitable is working on, Moor said, “we are working on partnerships. I would say the next bigger product launch and I kind of alluded to in my comments, it would be around payments and how we’re going to be bringing payment solutions to the EQ Bank customer.”
Chadwick Westlake, Chief Financial Officer, added they would be deepening and expanding service capabilities, such as launching an integrated e-transfer experience and automated chat support. “There are a lot of things to deepen the attraction and experience for existing customers,” he said.
Speaking to Equitable’s 6% growth in its alternative single-family business, and full-year guidance for 12% to 15% growth, Moor said, “…we really made the adjustments in November last year that we need to do to be more proactive in the market and it’s just unfolding as we speak…We believe based on the data we’ve seen more recently that [we’ve] reasserted ourselves as the leading originator of alternative mortgage business in the country.“