Despite moderately raising its loan loss provisions, Equitable Bank says borrowers have so far been resilient in the face of rising interest rates.
In its fourth-quarter earnings release, Canada’s seventh-largest independent bank reported a 40% year-over-year increase in net income.
The bank also saw continued strong growth of its reverse mortgage portfolio, which climbed 249% to $860 million as of Q4. Reverse mortgage assets are up 68% since Q3 alone, thanks in part to expanding market share, Equitable Bank said.
The lender also raised its provisions for credit losses by an adjusted $7.8 million in the quarter, up moderately from $5.3 million in the third quarter. Separately, there was a one-time provision for credit losses of $19 million related to the bank’s acquisition of Concentra Bank.
“While delinquencies are stable, there is broad deterioration in macroeconomic variable forecasts compared to forecasts at the end of Q3, including unemployment, GDP, HPI [home price index] and the commercial price index,” said Chief Financial Officer Chad Westlake.
The annualized realized loss rate for Q4 was 3 bps of total loan assets, or $3.2 million, up slightly from 2 bps a year ago, or $1.8 million.
“What EQB demonstrated in Q4 is solid margin expansion year-over-year and very low realized loan losses,” said President and CEO Andrew Moor. “Based on our consistent and effective risk management processes and practices, we should emerge from this period of central bank tightening without unusual credit losses.”
The executive team explained that provisions are in part being pushed higher by loans that may have a total debt service ratio above 50%, despite offsetting factors such as a high Beacon score, modest loan-to-value or a strong payment history.
Moor added that Total Debt Service and Gross Debt Service ratios don’t factor in assets outside of the home, such as money in an RSP savings account, for example.
“I think many of the ways we think about these metrics don’t reflect the complexity of what really happens when people take a mortgage,” he elaborated. That includes a variety of family support channels, including teenagers going out and finding part-time work to contribute to the mortgage, he said.
“These are family enterprises to maintain the family and home, right? So that’s certainly how we think about it and that’s what we observed in our loan book.”
But Moor said that’s not to say the “almost unexpected” increase in rates seen over the past year hasn’t put stress on the bank’s borrowers.
“We have lots of empathy for our customers, obviously…but many of them have the intellectual resources to sort of figure out how to work their way through this,” he said.
Highlights from the Q4 earnings report
- Net interest income: $218.8 million (+40% YoY)
- Assets under management and administration: $103 billion
- Conventional loans: $30.3 billion (+43%)
- Single-family alternative portfolio: $19.2 billion (+34%)
- Net interest margin: 1.87% (+6 bps)
- Reverse mortgage loans: $860 million (+249%)
- Net impaired loans: 0.28% of total assets (+1 bp)
- Avg. LTV of Equitable’s uninsured single-family residential portfolio: 65%
Notables from its call
CEO Andrew Moor commented on the following topics during the company’s earnings call:
- On the Concentra Bank acquisition: “…the acquisition added complementary asset growth diversifying our sources of revenue and funding and providing greater distribution capabilities across Canada…With the substantially increased scale and our integration plans taking flight, we are on track to realize the synergies we projected.”
- On Equitable’s recent launch in Quebec: “What we know about the Quebec market is [that it’s] particularly more inclined than the rest of Canada around sort of digital solutions and we are making good progress…Just to be clear, in order to deliver great service, we launched with a slightly more limited product set…and now we are going to be rolling out the full product suite in Quebec, but that’s going to take much of the year.”
Chief Risk Officer Ron Tratch also commented in more detail about Equitable’s loan loss provisions:
- Asked about how mortgages renewing at higher rates may drive higher provisions, Tratch said: “…we have seen it for many, many quarters [that] the quality of our book, the strength is evidenced by LTVs, the Beacon scores, etc., etc., and so it’s actually a relatively small number of loans. But you would be in to areas of total debt service that are exceeding say 50%, [but] those loans also have very, very strong payment history today. So, when you take all that in context in terms of the number of loans, the quality of the book where our risk appetite is played…we are designed to go through cycles and the book is positioned to take you through a cycle.”
- On the outlook for credit provisions, Tratch added: “I am quite confident that the provisions that you see today are reflected in what would be in the next six months the renewal cycle, and it’s reflected in that we have taken nominally or marginally higher reserves incrementally as the economic outlook has changed. So, I certainly would not expect to see any increase in provisions specifically for that factor over and above what we have in the books today.”
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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Last modified: February 24, 2023
