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National Bank of Canada Q1 2023 earnings

National Bank seeing fewer delinquencies in Quebec vs. other regions

A better-than-national unemployment rate in Quebec is translating to fewer delinquencies in National Bank of Canada’s mortgage portfolio for that province.

While National Bank didn’t provide a provincial breakdown, just 0.11% of its residential mortgage portfolio is classified as a gross impaired loan, up marginally from 0.10% in the previous quarter and a year ago.

“Delinquency rates remain well below pre-pandemic [levels],” Bill Bonnell, National Bank’s Chief Risk Officer, said on the bank’s earnings call earlier this month. “This is particularly the case in our Quebec portfolio, as the province is benefiting from better-than-national average rates of unemployment and savings. This resilience is translating into mortgage delinquencies increasing at a slower rate in Quebec than in other regions of our Canadian portfolio.”

As of February, Canada’s unemployment rate held steady at 5%, while Quebec’s unemployment rate ticked up to 4.1% from just 3.9% in January. In terms of regional distribution, Quebec continues to make up the bulk of National Bank’s mortgage portfolio at nearly 53%. That’s followed by Ontario at 29%, Alberta at 7% and B.C. at 6%.

The bank saw a moderation in the growth of its mortgage portfolio, which slowed to under 5% year-over-year.

“We are definitely seeing the impact of the monetary policy, the impact on mortgages, commercial loans,” said President and CEO Laurent Ferreira. “So, we’re clearly seeing normalization in terms of growth versus what we saw in 2021 and throughout 2022.”

Normalization of credit portfolios happening at varying speeds

The normalization with respect to increasing impaired loans is taking place at different speeds depending on the portfolio, explained Ferreira.

“I think the story in our retail credit portfolios is one of normalization, and it’s happening at different speeds…the products that are normalizing most quickly would be the consumer unsecured,” he said, pointing to credit cards. “When you look at 30-day delinquencies, it’s back pretty close to pre-pandemic levels, and a little bit below the pre pandemic levels in Quebec.”

Ferriera said the bank is seeing a return to above pre-pandemic delinquency levels in its insured variable-rate portfolio. “Those are the higher LTVs, of course, and we are seeing an increase to above pre-pandemic levels for that. And in the other variable rate and the fixed rate mortgages, it’s largely a geographic dispersion, so again, for the whole portfolio, well below pre-pandemic levels, however, normalizing a little bit more quickly outside Quebec.”

Here are some quick facts on National Bank’s variable-rate portfolio:

  • 33% of its mortgage portfolio has variable rates
  • For National Bank’s variable rates, the monthly payments are adjusted to reflect rate increases, “allowing borrowers to progressively adapt their budget and avoid a higher payment shock at renewal.”
  • The bank said clients with variable rates “show a better risk profile,” such as a higher income / net value and lower historical delinquency.

The loan-to-value of the bank’s uninsured mortgage portfolio increased substantially in the quarter, rising from 53% to 57%, due to the bank’s recalculation of home prices.

“When there is a change in the market, like we have seen with a significant decline in house prices, we don’t wait until the end of the year to reflect that,” Bonnell said. “So, we did reflect the house price decline in our models for RESL capital – credit capital, and that was the main driver of the migration [to a higher loan-to-value].”

NBC earnings highlights

Q1 net income (adjusted): $905 million (-2% Y/Y)
Earnings per share: $2.56

Q1 2023Q4 2022Q1 2021
Residential mortgage portfolio$89B$88.8B$84.9B
HELOC portfolio$29.5B$29.5B$27.1B
Percentage of mortgage portfolio uninsured38%38%36%
Avg. loan-to-value (LTV) of uninsured book57%53%54%
Fixed-rate mortgages renewing in the next 12 mos11%11%NA
Portfolio mix: percentage with variable rates33%33%NA
90+ days past due (uninsured portfolio)0.08%0.08%0.12%
Canadian banking net interest margin (NIM)2.35%2.25%2.05%
Percentage of the Canadian RESL portfolio comprised of investor mortgages11%11%NA

Source: National Bank Q1 Investor Presentation

Conference Call

  • While our outlook remains positive, we are seeing a slowdown in retail and commercial loan growth with higher interest rates impacting client demand,” said President and CEO Laurent Ferreira. “That being said, we are pleased with the sustained momentum on the customer acquisition and satisfaction fronts with strong digital onboarding and engagement, key drivers to client experience and efficiency.”
  • Adjusted expenses grew by approximately $100 million or 8% year-over-year, “largely driven by talent acquisition and inflation in 2022 as well as higher technology expenses related to fast and new investments, supporting continued growth across the bank,” said Marie Chantal Gingras, Chief Financial Officer.
  • “We’ve maintained our fiscal year 2023 guidance on impaired PCLs at 15 to 25 basis points and currently expect to be in the bottom end of that range,” said Bill Bonnell, NBC’s Chief Risk Officer. “Current underlying conditions, particularly the strong level of employment and consumer savings are supporting a slower rate of normalization of impaired PCLs than we had expected.”
  • National Bank’s geographic and product mix remained stable with Quebec accounting for 54% and insured mortgages accounting for 29% of total RESL.

Source: NBC Conference Call

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