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Mortgage delinquencies on the rise, says Equifax Canada

Equitable Bank’s mortgage arrears rate triples amid surge in renewals

Equitable Bank saw its mortgage arrears rate triple over the past 12 months now that a majority of its clients have renewed at higher interest rates.

The alternative mortgage lender reported that 0.54% of its residential mortgage portfolio is in arrears as of the first quarter, up from 0.25% two quarters ago and 0.18% in Q1 2023.

It said the rise in missed payments was due to 85% of its uninsured residential mortgage clients having already renewed their terms at higher interest rates. That’s because alternative mortgages generally have shorter terms of one or two years.

However, the bank said the fact that most of its mortgages have already renewed at higher rates demonstrates the resilience of its borrowers, and that it expects arrears to moderate in the coming quarters.

“The fact that most of our customers already had their [mortgage] repriced and are facing that interest rate shock is in a sense a demonstration of how resilient this group is,” President and CEO Andrew Moor said on the bank’s first quarter earnings call. “I think I would be concerned if I was seeing this kind of [arrears] level with repricing yet to come.”

Mortgage losses expected to be minimal

Moor also shed light on the specific client groups facing the greatest challenges in keeping up with their payments, saying it is largely clients with larger homes and larger mortgages.

“So, you think about a larger home with a self-employed borrower whose business might be somewhat impacted by the [economic] conditions as well as that payment shock,” he said.

However, most of those loans have sizeable equity built up, with an average loan-to-value ratio of just 64%. Moor noted that less than 10% of the portfolio has a loan-to-value of over 90%.

“The good news from our perspective is [that these loans are] quite skewed to lower LTV,” he said. “We are fairly confident that the recoveries will be very good, so we’re not expecting much in the way of realized losses over the next couple of quarters.”

Delinquencies expected to trend lower

The bank also said it remains confident that delinquencies will begin to moderate and trend lower throughout the course of the year.

“Recent indicators in Q2 so far are that early delinquencies are moderating and as housing market activity picks up, we expect delinquencies and arrears will continue to trend in a positive direction, particularly in the second half of 2024,” said Chief Financial Officer Chadwick Westlake.

“We are beginning to see our resolution strategies mature and loans resolve,” he added. “Based on our historic and stress scenarios for losses, we believe we are very appropriately reserved.”

Highlights from the Q1 earnings report

Q1 2024
Net income (adjusted)$108 million (+17% YoY)
Earnings per share (adjusted)$2.76 (+12%)
Assets under management and administration$119B (+16%)
Single-family alternative portfolio$30.2B (+4%)
Insured multi-unit portfolio$20B
Net interest margin2.01% (+1 bp)
Net impaired loans (residential loans)0.54% (vs. 0.18% in Q1 2023)
Reverse mortgage loan portfolio$1.6B (+55%)
Avg. LTV of Equitable’s uninsured residential portfolio64%
Provisions for credit losses (PCLs) $15.5M
CET1 ratio14.2%
Source: EQB Q1 earnings release

Notables from its earnings call

CEO Andrew Moor commented on the following topics during the company’s earnings call:

  • On the rise in impaired loans: “We are confident that we are well reserved, and we will maintain our low loss rates. The portfolio remains strong supported by conservative LTV and good credit scores.”
  • On the outlook for mortgage loan growth: “[Our sales team is] feeling pretty confident about our position in the market and how our brokers and distributor partners are thinking about the year ahead.”
  • On the outlook for residential mortgage loans: “We expect to see a stronger market this year for single-family housing, buoyed up by pent-up demand and Bank of Canada easing, which will support our single-family mortgage origination activities. While expanding, we’ve been investing in risk management and compliance to ensure our bank is well prepared for the growth we see in the years ahead.”

Source: EQB Q1 earnings call

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