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BMO earnings 2023
Logo of the Bank of Montreal, a Canadian multinational investment bank and financial services company seen in South Edmonton. On Sunday, 12 September 2021, in Edmonton, Alberta, Canada. (Photo by Artur Widak/NurPhoto via Getty Images)

“Performance has been stellar” on mortgage renewals so far: BMO

Despite facing mortgage payment increases of roughly 10% to 20%, BMO says the majority of its mortgage clients are having no issues with their renewals.

The comments were made by Chief Risk Officer Piyush Agrawal during the bank’s third-quarter earnings call, where he spoke about the high quality of the bank’s Canadian residential secured lending portfolio.

He noted that the bank is seeing about 10% of its mortgages come up for renewal each year, and that the bank has so far had “significant success in those renewals.”

“They are at about a 10% to 20% increase as they come up for renewal, and all of them have successfully renewed and the performance has been stellar,” he said. “Customers renewing are able to absorb the impact of the higher interest rates.”

Agrawal added that BMO has reached out to about 40% of its mortgage customers who have hit their trigger rates, where their monthly payments are no longer covering interest costs.

This has been an issue for banks that offer static-payment variable-rate mortgages—like BMO, RBC, TD and CIBC—where monthly payments remain the same even as prime rate increases.

As rates have risen, however, a larger percentage of that payment has gone towards the interest portion, while the portion going towards paying down the principal balance decreases, resulting in a temporarily longer amortization period.

BMO has seen the share of its mortgages with a remaining amortization above 30 years swell to nearly a third of its portfolio as of Q2. That’s up from zero a year ago.

Remaining amortizations for BMO residential mortgages

Q3 2022Q2 2023Q3 2023
16-20 years14.2%13.5%13.4%
21-25 years35.9%31.8%31.6%
26-30 years15.3%14.3%15.8%
30 years and more25%31%29.8%
Remaining amortization is based on current balance, interest rate, customer payment amount and payment frequency.

However, like the other banks, amortization periods are slowly starting to decrease as banks proactively reach out to those clients and as many choose to either make lump-sum payments or increase their monthly payments.

“So voluntarily, customers have come up and either topped up payments if they’re in a negative amortization [situation] or increase their payments as they’re going forward,” Agrawal said.

While the bulk of mortgage maturities won’t come until 2025 and 2026, Agrawal says the bank has seen “early success” from its outreach efforts, which gives the bank a “very high level of confidence.”

BMO earnings highlights

Q3 net income (adjusted): $2 billion (-4.5% Y/Y)
Earnings per share (adjusted): $2.78

Q3 2022Q2 2023Q3 2023
Residential mortgage portfolio$135.5B$143.8B$135.5B
HELOC portfolio$46.7B$48.1B$48.5B
Percentage of mortgage portfolio uninsured69%70%71%
Avg. loan-to-value (LTV) of uninsured book49%55%55%
Portfolio mix: percentage with variable rates42%43%39%
Mortgages renewing in the next 12 months$19B $23B$21B
% of portfolio with an effective amz of <25 yrs60%55%54%
90-day delinquency rate0.11%0.14%0.14%
Canadian banking net interest margin (NIM)2.72%2.70%2.77%
Provisions for credit losses$136M$1.02B$492M
Source: BMO Q3 Investor Presentation

Conference Call

  • “Credit performance is normalizing in line with our expectations with higher provisions this quarter compared with historically low levels,” said President and CEO Darryl White. “Our balance sheet remains strong, reflecting our long-standing track record of superior risk management.”
  • “NIM increased by 7 basis points, driven by wider deposit margins as well as higher loan margins and favourable change in our loan and deposit mix…Although we may see some NIM tightening in Canada over the next couple of quarters based on strong pricing competition in loans and deposits,” said Chief Financial Officer Tayfun Tuzun.
  • “Impaired provisions for the quarter were $333 million or 21 basis points up 5 basis points from prior quarter, consistent with the expected normalization in loss rates,” noted Chief Risk Officer Piyush Agrawal.

Source: BMO Q3 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: Artur Widak/NurPhoto via Getty Images