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RBC CEO Dave McKay
Steve Russell/Toronto Star via Getty Images

Q1 Earnings Mortgage Morsels: RBC

When RBC kicked off the first-quarter earnings season recently, it did so with a bang, announcing earnings of $4.1 billion, its second-highest result on record.

The bank’s mortgage book also saw substantial growth, rising over 10% to $338.2 billion.

Despite the “concerning” level of inflation, imminent rate hikes heading into the year, and an acceleration of the Bank of Canada’s quantitative tightening program, RBC President and CEO Dave McKay said the bank is “well-positioned to benefit from rising interest rates.”

Here’s a run-down of RBC’s mortgage portfolio performance in the quarter…

Q1 net income: $4.1 billion (+6% Y/Y)
Earnings per share: $2.84

  • RBC’s residential mortgage portfolio rose this quarter to $338.2 billion, up from $305 billion a year ago.
  • The bank’s HELOC portfolio fell to $35.2 billion from $35.8 billion a year ago.
  • 73% of its mortgages are uninsured, up from 68% a year ago. The average LTV on the uninsured portion is 48%, down from 50% a year ago.
  • 90+ day delinquencies in the residential mortgage portfolio fell to 0.13% from 0.15% a year ago.
  • RBC raised provisions for credit losses (PCL) in the quarter, setting aside an additional $129 million after releasing $208 from its provisions last quarter.
  • 52% of the bank’s uninsured mortgage portfolio has an average FICO score of at least 800., down from 53% a year ago.
  • Condos make up 11.5% of balances in the bank’s outstanding residential lending portfolio, up half a percent from a year ago.
  • Canadian Banking net interest margin was 2.41%, down from 2.42% in Q4 and 2.54% in Q1 2021.

Source: RBC Q1 Investor Presentation

Conference Call

  • RBC’s first-quarter mortgage volume was up 11% year-over-year, adding about $9 billion worth of mortgage loans to its books.
  • “We expect strong Canadian mortgage growth to continue in the high single-digit range, driven by renewed levels of immigration, pent-up demand meant by increased supply and our continued investment in expanding our mortgage sales force to capture this opportunity,” said President and CEO Dave McKay.
  • RBC reported an “exceptionally strong” mortgage retention rate of 90%.
  • McKay said that over the past two years, RBC has gained “nearly 50 basis points of market share in mortgages.”
  • “While the impact of low interest rates continued to persist, we started to see a stabilization of net interest margins in our banking franchises on both sides of the border,” McKay said. “We continue to see lower benefits from mortgage prepayment revenue, a trend we expect to moderate going forward.”
  • On rising interest rates, McKay said: “Going forward, we are well-positioned to benefit from the likely scenario of rising interest rates. We estimate that a 25-basis-point increase in short-term interest rates could result in over $175 million of additional revenue over 12 months in our Canadian Banking and U.S. Wealth Management businesses.”
  • Asked about the bank’s outlook following a relatively “bullish” fourth-quarter earnings report, McKay said this: “When we look at the stage of the economic cycle, you’d say commercial utilization and even monetary policy would be early cycle, but capacity left in the economy would be late-cycle. And the balance of where the consumer is, where the economy is, is solid mid-cycle, which could mean, and we expect, there’s a good, solid couple of years of growth here, or more…the risk factors are…geopolitical risk, inflation risk.”
  • McKay added, “And one of the top risk factors is the lack of labour capacity in the workforce. And, does the liquidity that’s sitting on consumer balance sheets lead to inflation, or does it lead to growth?”
  • Chief Risk Officer Graeme Hepworth was asked, “at what point does inflation become a problem?” Here’s his reply: “I think you combine the fact that we’ve had very strong underwriting and very persistent underwriting standards for a long time that are mindful of an operating environment of higher rates and higher inflation.”
  • Specifically on mortgage clients, Hepworth said, “Clients both have a lot of capacity there, and there is a time-frame there before you would see clients turning over and having to refinance into a higher rate, higher-cost environment.”

Source: RBC Conference Call


Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Feature image: Steve Russell/Toronto Star via Getty Images