Canada’s largest bank saw a 40% decline in mortgage originations in the first quarter, it revealed in its first-quarter earnings call.

“While mortgage origination activity has slowed from recent highs, it remained in line with pre-pandemic levels,” said President and CEO Dave McKay. He noted that the slowdown in activity was offset by retention rates of approximately 90% and midterm attrition rates at 5-year lows. “Looking forward, we continue to expect annual mortgage growth to slow to the mid-single digits, given deteriorating affordability.”

And among the transactions it did handle, just 15% of mortgage borrowers chose a variable rate, according to the bank.

“Not surprisingly, we’re seeing the percentage of [variable-rate mortgage] originations really drop, really getting down to kind of 15% of originations,” said Neil McLaughlin, Group Head, Personal and Commercial Banking.

Overall, roughly a third of RBC’s $365-billion mortgage portfolio is a variable-rate product.

“We’re seeing a very dramatic shift there,” McLaughlin added, saying the change in mortgage product preference is most pronounced among first-time buyers. “You can imagine, [variable rate is] not a product that first-time homebuyers are going to take on.”

He also commented on variable-rate mortgage holders who continued to reach their trigger rates following the latest Bank of Canada rate increase in January. The trigger rate is the point where a borrower’s monthly payment is no longer covering rising interest costs, and applies specifically to static-payment variable-rate mortgages.

“We have seen a good portion of that variable-rate portfolio go through that process around trigger rates,” McLaughlin noted. “The earlier cohorts that went through it saw bigger increases. The ones that have been more recent have had smaller increases.”

And while delinquency rates among borrowers with a variable rate were lower compared to those with fixed-rate mortgages, RBC is now starting to see those delinquencies rise.

“We’re starting to see them move up to the average,” McLaughlin said, adding that RBC continues to reach out to those clients.

New formations of impaired residential loans more than doubled in Q1

The formation of impaired loans in RBC’s residential mortgage portfolio more than doubled in the quarter to $64 million, “primarily due to variable-rate borrowers who have seen payments increase after hitting their trigger rate,” said Graeme Hepworth, Chief Risk Officer. “As you’d expect, delinquency rates on triggered variable-rate mortgages increased during the quarter.”

Overall, mortgages that are more than 90 days past due ticked up to 0.12% of the portfolio. That percentage is even lower among uninsured mortgages, at 0.09%.

“We remain very comfortable with our residential mortgage exposure,” Hepworth said. “Clients continue to have excess savings and liquidity with deposit levels remaining elevated compared to pre-pandemic levels. High risk loans, which we consider as uninsured loans with the FICO score below 680 and a current loan to value over 80%, account for less than 1% of uninsured balances.”

The bank said it has “prudently provisioned” for the expected increase in losses, having increased its reserves for performing mortgages by over 30% since Q2 of last year.

While RBC is keeping a watchful eye on debt servicing costs, Hepworth noted the big factor that would lead to a rise in delinquencies is a rise in the unemployment rate, which has so far proven resilient.

“We’re at exceedingly low levels, but we do expect the unemployment [rate] to graduate up to kind of more in that 6.5% to 7% range at the tail end of this year before kind of coming back to more historical norms,” Hepworth said. “We’ve continually been surprised by the strength of the job market in Canada and the U.S….we have seen insolvency start to tick up a little bit, but they’re still well below pre-pandemic norms. And so until we really start to see that kind of…labour move, it’s going to continue to be a near-term benefit to the overall credit outcomes.”

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

RBC earnings highlights

Q1 net income: $3.2 billion (-22% Y/Y)
Earnings per share: $2.29

	Q1 2023	Q4 2022	Q1 2022
Residential mortgage portfolio	$365.8B	$362B	$338B
HELOC portfolio	$35B	$36B	$35.2B
Percentage of mortgage portfolio uninsured	76%	76%	73%
Avg. loan-to-value (LTV) of uninsured book	50%	48%	49%
Portfolio mix: percentage with variable rates	33%	34%	NA
Average remaining amortization	21 yrs	20 yrs	NA
90+ days past due	0.12%	0.11%	0.13%
Mortgage portfolio gross impaired loans	0.11%	0.10%	0.12%
Canadian banking net interest margin (NIM)	2.73%	2.70%	2.41%

Source: RBC Q1 investor presentation

Conference Call

• RBC added $28 billion of mortgages to its portfolio over the last 12 months, up 8% from last year.
• “Our outlook for the mortgage business for the full year would be mid-single digits,” said Neil McLaughlin, Group Head, Personal and Commercial Banking. “But there isn’t anything…based on what we are seeing, where negative growth in the quarter would be something we would expect.”
• “While interest rates may be peaking, they may remain higher for longer as tight labour markets and other supply imbalances keep inflation high and constrained economic and market activity,” said President and CEO Dave McKay. “Furthermore, the global economy remains susceptible to geopolitical shocks and regional political deadlocks. Overall, evaluating all the moving parts, we do forecast the softer landing characterized by a modest recession, largely underpinned by the impact of rising debt service costs on the consumer.”
• “On the whole, we believe the probability of a more severe inflation and interest rate environment has started to reduce,” said Graeme Hepworth, Chief Risk Officer. “However…we continue to expect a moderate recession in 2023.”

Source: RBC Q1 conference call

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