While RBC says most of its clients remain resilient despite higher interest rates and rising payments, the bank acknowledges ‘pockets of stress’ among select borrowers.
RBC’s 90+ day mortgage delinquencies ticked up to 0.20% in Q2, up from 0.19% in Q1 and 0.12% the same time last year.
Chief Risk Officer Graeme Hepworth noted that one sign of stress among consumers is the continued depletion of savings that many Canadians had built up during the pandemic.
“One of the reasons the Canadian consumer has been quite resilient is they built up a lot of savings and buffer starting from the pandemic. We have seen that, in aggregate, draw down over the last few years,” he said.
Hepworth alluded to greater challenges facing the bank’s variable-rate mortgage consumers who have had to proactively increase payments in order to cover rising interest costs.
RBC, like TD, BMO and CIBC, offers fixed-payment variable-rate mortgages. While their monthly payment doesn’t change, rising interest rates have meant a larger percentage of that payment now go towards the interest portion, while a smaller percentage goes towards paying down the principal balance.
For some, it has meant they’ve hit their trigger rate, where they are no longer paying down their balance unless they take proactive action to increase their payments.
“This goes back to the mortgage clients that have faced payment triggers and don’t have the same resilience,” Hepworth said. “We see those cash buffers and reserves start to draw down. Overall, we still see a pretty healthy Canadian consumer, but the pockets of stress are the ones we’ve identified, and we are increasing our allowance and reserves accordingly.”
Overall, the bank raised its provisions for credit losses—which are funds banks must keep on hand to cover potential future losses—to $920 million in the quarter, more than analysts had expected. That’s up from $813 million in Q1 and $600 million in Q2 2023.
Still, RBC managed to outperform its peers this quarter, with adjusted net income of $4 billion, up 11% from last year.
HSBC Canada client retention
This quarter’s results are the first to include figures from HSBC Canada, following RBC’s $5-billion acquisition that was finalized on March 28.
“We’re excited to welcome 780,000 clients from HSBC Canada, which added approximately $75 billion of both loans and relation-based deposits to our balance sheet,” said President and CEO Dave McKay.
During the latest earnings call, an analyst asked about the bank’s client retention strategy, particularly for the roughly 130,000 mortgage clients RBC acquired. HSBC Canada was known as a market leader in mortgage pricing for select products, offering competitive rates and flexible options that attracted a significant number of mortgage clients.
“So, [HSBC] did have a tactic that was to lead with an aggressive price, but they really did not discount once they started the conversation with the client,” noted Neil McLaughlin, Group Head, Personal & Commercial Banking. “We’re happy with the spreads in the mortgage book and we’ve been, I can say, going at it quite aggressively to retain that business.”
He added that in the first month, RBC has reported a renewal rate “a little bit above” that of its existing mortgage portfolio. “We feel quite good about that, so I’d say definitely put that in the opportunity category,” McLaughlin added.
Impact of Bank of Canada rate cut
When asked about the timeframe for Bank of Canada rate cuts to have a “meaningful impact” on the bank’s loan losses, Chief Risk Officer Graeme Hepworth stated that it will largely depend on the overall performance of Canada’s economy.
“It’s going to be much more driven by what’s happening with unemployment [and] what’s happening with house prices,” he said.
“Certainly, in our base case forecast in Canada, we do expect…100 basis points of rate cuts by the end of this year and then another 100 in the next year,” he added.
He noted that the situation is likely to be more challenging with the bank’s U.S. business, given that they currently only expect one quarter-point rate cut by the Federal Reserve this year and just another 50 bps worth in 2025.
RBC residential mortgage portfolio by remaining amortization period
| Q2 2023 | Q1 2024 | Q2 2024 | |
|---|---|---|---|
| Under 25 years | 57% | 58% | 58% |
| 25-29 years | 17% | 21% | 21% |
| 30-34 years | 1% | 1% | 2% |
| 35+ years | 25% | 20% | 19% |
RBC earnings highlights
Q2 net income (adjusted): $4.2 billion (+11% Y/Y)
Earnings per share: $2.92
| Q2 2023 | Q1 2024 | Q2 2024 | |
| Residential mortgage portfolio | $356B | $366B | $401B |
| HELOC portfolio | $35B | $35B | $37B |
| Percentage of mortgage portfolio uninsured | 76% | 78% | 78% |
| Avg. loan-to-value (LTV) of uninsured book | 71% | 71% | 71% |
| Portfolio mix: percentage with variable rates | 32% | 27% | 29% |
| Average remaining amortization | 26 yrs | 24 yrs | 24 yrs |
| 90+ days past due | 0.12% | 0.19% | 0.20% |
| Mortgage portfolio gross impaired loans | 0.10% | 0.16% | 0.18% |
| Canadian banking net interest margin (NIM) | 2.73% | 2.72% | 2.76% |
| Provisions for credit losses | $600M | $813M | $920M |
| CET1 Ratio | 13.7% | 14.9% | 14.5% |
Conference Call
- Residential mortgage volumes were up 6% year-over-year and 3.2% quarter-over-quarter.
- “…net interest margins were impacted by a shift in deposit mix towards term products and more intense competition for mortgages and deposits than we’d initially assumed,” McKay said.
- “Moving forward, credit outcomes will continue to be dependent on the magnitude and change in unemployment rates, direction and magnitude of changes in interest rates, and residential and commercial real estate prices,” said Chief Risk Officer Graeme Hepworth.
- On the completion of the HSBC Canada acquisition in March:
- “This was a pivotal milestone as we continued to focus on driving premium long-term ROE and growth. We’re excited to welcome 780,000 clients from HSBC Canada, which added approximately $75 billion of both loans and relation-based deposits to our balance sheet,” said McKay.
- A significant percentage of the acquired retail accounts are affluent clients. Through HSBC Canada, we also acquired a well-established premier commercial bank with a leading trade finance value proposition and one which skews to a larger client segment than we have historically competed.”
- “We continue to expect approximately $740 million of expense synergies within the two-year timeline we provided last quarter,” he added.
Source: RBC Q2 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 by Richard Lautens/Toronto Star via Getty Images
bank amortizations bank earnings big bank earnings Dave McKay earnings earnings calls financial stress Graeme Hepworth hsbc HSBC acquisition HSBC Canada Lender Calls Neil McLaughlin rbc RBC and HSBC RBC earnings RBC earnings call
Last modified: June 17, 2024
