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Quarterly lender earnings

EQB sees impaired loans double in Q2, but expects improvement ahead

Alternative mortgage lender EQB saw a rise in gross impaired loans in the second quarter compared to a year ago, but highlighted recent improvements and expects losses to stabilize going forward.

EQB saw gross impaired loans double to 0.98% of its portfolio in the quarter, up from 0.49% a year earlier, but down from 0.99% in Q1.

President and CEO Andrew Moor said that equates to roughly 200 loans, predominantly among larger loans in Ontario and the Prairies, but that it expects losses to flatline in the coming quarters.

“The good news is almost 30% of the impaireds we are reporting in this book have actually cleaned up since quarter end,” Moor said during EQB’s second-quarter earnings call. “So, we are seeing good activity in resolving some of these issues.”

He added that the outlook for the coming quarters is for impairements to remain “flattish,” and that the lender doesn’t expect to have to increase loan-loss provisions from its current level of $22.2 million.

“There probably is going to be more liquidity in the housing market once we start to see the [Bank of Canada] move to an easing trend, and that will help…but we’re not expecting that to drop dramatically,” he added.

Given that its alternative mortgage portfolio has an average term length of just two years, EQB reports that nearly 90% of its uninsured singe-family residential portfolio has already renewed since interest rates started to rise.

“While other banks may face a so-called mortgage renewal cliff…our borrowers have already adjusted,” Moor noted.

Looking forward, Moor said anticipated interest rate cuts by the Bank of Canada in the coming weeks or months will be “helpful to Canadian users of credit and for lenders [as it] would re-energize mortgage demand in the back half of 2024 and beyond.”

“We certainly have the view that a stronger market for new originations in our mortgage businesses is around the corner given pent-up demand in the housing market, he noted.

Highlights from the Q2 earnings report

Q2 2024
Net income (adjusted)$111 million (+9% YoY)
Earnings per share (adjusted)$2.81 (+7% YoY)
Loans under management$65.5B (+13% YoY)
Single-family alternative portfolio$19.9B (+0.5% QoQ)
Insured multi-unit portfolio$22.6B (+35%)
Net interest margin2.11% (+19 bps YoY)
Gross impaired loans ratio0.98% (+49 bps YoY)
Reverse mortgage loan portfolio$1.7B (+57% YoY)
Avg. LTV of Equitable’s uninsured residential portfolio71% (unchanged YoY)
Provisions for credit losses (PCLs)$22.2M (+6.7M QoQ)
CET1 ratio14.1% (-0.10 YoY)
Source: EQB Q2 earnings report

Notables from its earnings call

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

On the slowing pace of impaired loans:

  • “In the Personal Loan book, the rate at which we added impaireds declined quarter-over-quarter…We have a high degree of confidence that losses will be minimal in the single-family book and that we’re well reserved. Our real stats in the personal book have also declined in the 30- and 60-plus day periods.”

On the outlook for mortgage loan growth:

  • Higher renewal rates, lower unscheduled payments and growth in high-quality portfolios led to a 13% or $7.3 billion increase in loans under management over the past year, keeping us on pace with gross guidance.”

On reverse mortgage loan growth:

  • “A combination of insurance lending and reverse mortgage loans are up 57% year-over-year and 20% since November to over $1.7 billion. EQB was one of two banks in the reverse mortgage business with a compelling offering and effective marketing. We believe we’ve substantially increased our share of both the broker channel and the consumer-direct market. The growing of Canadian society and the need to access equity to fund retirement provides a solid backdrop for this business.”

On higher prepayment income:

  • “When interest rates jump dramatically and you’ve got relatively low mortgages, clearly, the prepayment income drops meaningfully. It’s a hard one for us to predict. It depends on consumer behaviour. But [with] those mortgages resetting to higher rates, I would expect that that income would be prevailing at a slightly higher rate. I have to say I was positively surprised by this number.”

On the impact falling rates have on prepayments:

  • [As mortgage rates fall] we should see more [prepayment income] because you would see people presumably liquidate any mortgages prior to maturity with a higher propensity because they would have refinance opportunities…I would say it’s not necessarily a good news story. So yes, we’ve got the higher prepayment income, but obviously we lose the assets. So, it creates income upfront but it’s not necessarily a good thing to see that higher liquidation rate.”

Chadwick Westlake, Chief Financial Officer, also commented on the following:

On funding growth:

  • “In the second quarter, we generated great success in the evolution of our wholesale programs with over $1 billion in new funding from the completion of a $300 million deposit note issuance with the largest ever number of investors and the fantastic outcome of a EUR 500 million Covered Bond issuance in Europe, which represented Equitable Bank’s largest ever Covered Bond offering and the first-ever issuance of a social Covered Bond by a Canadian bank.”
  • “On the EQ Bank front, deposit growth of 4% in Q2 reflected our best sequential growth in two years.”
  • “Combined with expert treasury management, our long-term efforts to diversify and strengthen sources of low-cost funding are a differentiator for EQB.”

On continued growth potential for the reverse mortgage portfolio:

  • “We think this market has huge growth potential for where it is. Even if you look at the size of it today, it’s still a 5x, 6x ex-growth market over the next many years in Canada. So…we’re growing in the right places and providing an important service to Canadians here.”

Source: EQB Q2 earnings call

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