Canada’s largest bank said about 80,000 of its variable-rate mortgage clients will reach their trigger point with the next “couple of” Bank of Canada rate hikes.
That’s the point where borrowers’ monthly payments are only covering the interest and are no longer paying down any principal.
“We have gone through that analysis over the last couple of months [and] we have about 80,000 mortgages that…we expect with the next couple of rate hikes, we will reach that point,” said Neil McLaughlin, Group Head, Personal and Commercial Banking, during the bank’s earnings conference call.
“The average increase is about $200, and we have less…than 0.5% of customers that we think will even require a phone call,” he added.
Additionally, RBC said the majority of its borrowers won’t be impacted by rising rates until their mortgages renew—and for a majority, that isn’t until after 2025.
Less than a third of RBC’s renewable mortgage balances will mature before 2025, “providing flexibility afforded with time,” the bank noted in its investor presentation.
Those benefits include wage and income inflation, principal amortization and “proactive client outreach,” the bank added.
And despite variable mortgage rates having become a more popular option for borrowers over the past year, RBC says a majority of its mortgage portfolio remains fixed-rate products.
“While variable rate mortgages accounted for a growing volume of our acquisitions through 2021 and 2022, fixed-rate mortgages still account for more than 65% of our portfolio,” said Chief Risk Officer Graeme Hepworth. “In addition, most variable rate mortgages at RBC will not see an increase in payment until they renew…Thus, the impact of higher interest rates is primarily realized at renewal.”
The bank also increased its provisions for credit losses, which now total $340 million for the quarter, compared with a release of provisions for credit losses of $540 million in the same quarter last year.
“Our results also included a prudent reserve build given the range of potential macroeconomic outcomes, including the likelihood of a recession across North America,” said President and CEO Dave McKay. “While we closely monitor early warning indicators, both gross impaired loans and PCL on impaired loans remained low as our clients continue to demonstrate resilience despite rising costs.”
Here’s a run-down of RBC’s mortgage portfolio performance in the quarter…
RBC earnings highlights
Q3 net income: $3.58 billion (-17% Y/Y)
Earnings per share: $2.51
- RBC’s residential mortgage portfolio rose this quarter to $347 billion, up from $314 billion a year ago.
- The bank’s HELOC portfolio rose to $36 billion from $35 billion a year ago.
- 75% of its mortgages are uninsured, up from 71% a year ago. The average LTV on the uninsured portion is 46%, down from 49% a year ago.
- 90+ day delinquencies remain at a near-30-year-low.
- RBC says its mortgage retention ratio is about 90%.
- RBC says about $360 billion in balance will renew over the next five years. Of those, $289 billion are uninsured balances.
- Condos make up 11.7% of balances in the bank’s outstanding residential lending portfolio, up from 11% a year ago.
Source: RBC Q3 Investor Presentation
- RBC “benefited from double-digit volume growth and strong tailwinds from rising interest rates,” said President and CEO Dave McKay. However, he added that “Our market-sensitive businesses reported a challenging set of results against the backdrop of one of the toughest environments for financial markets. This was underpinned by increased uncertainty, heightened volatility, lower asset valuations and widening credit spreads impacting client sentiment and activity.”
- “Although there is high leverage in the system, our clients are entering this cycle with stronger liquidity than in prior ones, including healthy corporate balance sheets and increased personal savings across FICO bands in Canada,” McKay added.
- “In Canadian Banking, we saw double-digit year-over-year growth across mortgages,” McKay said. “Our strong market share in this key product provides us with a strategic advantage to deepen our client relationships and builds a strong base to profitably grow our loan book.”
- On the expectation for further Bank of Canada rate hikes, McKay said this: “Going forward, announced rate hikes are expected to provide incrementally higher revenue in the second year and the benefit from future rate hikes will accumulate further. This, in turn, is expected to drive continued NIM expansion.”
- On renewals, Graeme Hepworth, Chief Risk Officer, said, “only 17% of mortgage balances come up for renewal by the end of 2023. Additionally, the vast majority of our mortgages that are the highest loan-to-value and have the lowest interest rates, those that were generally originated in 2021 and early 2022 don’t renew until 2025 or beyond.”
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.
Featured image: Richard Lautens/Toronto Star via Getty Images
How many of these mortgages are for a term orb1yr, 3yr, 5yr? Which one is the majority?
Is it expected that most renewals are happening this year or are a greater number of renewals anticipated to happen in the next number of years?