Q2 2016 Bank Earnings – Mortgage Morsels

Canada’s Big 6 banks have wrapped up another earnings season, raking in more than $8.5 billion in the second quarter.

Among the highlights:

• Most of the banks anticipated losses from the Fort McMurray wildfire, but nothing headline-making.
• Scotia and TD both reported small declines in their residential mortgage portfolios.
• Net interest margins dropped almost across the board.

In keeping with CMT’s quarterly ritual, we’ve sifted through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related goodies. We have to admit though, this quarter was really kind of dull. Whatever was notable is in blue.

Bank of Montreal

Q2 net income: $973 million (-3% Y/Y)
Earnings per share: $1.45

• BMO’s total Canadian residential mortgage portfolio rose to $98.3, up from $97.6 billion in Q1. (Source)
• Mortgage loan growth was up 5% from a year ago. (Source)
• 59% of BMO’s portfolio is insured, unchanged from the previous quarter. (Source)
• The loan-to-value on the uninsured portfolio is 57%, unchanged from Q1. (Source)
• 71% of the portfolio has an effective remaining amortization of 25 years or less. (Source)
• The condo mortgage portfolio stands at $14.2 billion (up from $14.1 billion in Q1) with 51% insured (unchanged). (Source)
• Loss rates for the trailing four-quarter period were less than 1 bp and the 90-day delinquency dropped to 26 bps, from 28 bps in Q1. (Source)
• BMO’s mortgage portfolio is distributed geographically as follows: 41% in Ontario; 19% in B.C. (up from 18% last quarter); 16% in Alberta, 15% in Quebec, 5% in Atlantic Canada and 4% in all other parts. (Source)
• Alberta consumer loans represent 6% of total bank loans of which over 80% are Real Estate Secured (RESL). About 60% of Alberta RESL is insured with a 57% LTV on the uninsured portion. (Source)
• NIM was down 4 bps from the previous quarter due to “the low interest rate environment and narrower spreads on variable rate lending products.” (Source)

Conference Call

• Regarding the Fort McMurray wildfire, Bill Downe, President and CEO, said this: “In economic terms, while there is likely to be a short-term impact on GDP from the temporary curtailment of production, over time we expect to see an increase in investment to rebuild communities.” (Source)
• “We continue to see negative migration in our oil and gas portfolio and as I have said previously, we expect to see elevated formations and losses,” Downe said. “In Alberta, consumer delinquencies increased modestly quarter-over-quarter, although, total Canadian consumer delinquencies were down. Looking at our total allowances, they remain in excess of $2 billion, which is equivalent to 57 basis points of loss. This loss coverage is about twice the loss rate I expect for the next four quarters and well above our long-term historical PCL rate of 41 basis points. I feel comfortable that our total allowances are appropriate.” (Source)

CIBC

Q2 net income: $941 million (+3.3% Y/Y)
Earnings per share: $2.35

• CIBC’s residential mortgage portfolio rose to $169 billion in Q1, up from $166 billion in the previous quarter. Condos comprise $19 billion of those loans (unchanged from Q1). (Source)
• Mortgage loans are up 9% from Q2 2015. (Source)
• 61% of the bank’s residential mortgage portfolio is insured (unchanged from Q1). The uninsured portfolio has an average LTV of 59% (down from 61% in Q1). (Source)
• Condo mortgages account for roughly 11% of the mortgage portfolio. (Source)
• Net interest margin in Q2 was 250 bps, down from 251 bps in Q1, and 251 bps in Q2 2015. (Source)
• The bank has $39 billion of indirect exposure to oil provinces Alberta, Saskatchewan and Newfoundland, or $18 billion excluding insured mortgages (unchanged from Q1). Alberta accounts for $31 billion, or 78%. (Source)

Conference Call

• “As it relates to our exposure in Fort McMurray, we have about $1.6 billion of drawn exposure with mortgages representing $1.4 billion of the total. At this point, we do not anticipate any significant losses from this portfolio,” said Laura Attanasio, Chief Risk Officer. (Source)
• Regarding increased delinquencies in oil-producing provinces, Attanasio said: “As discussed last quarter, we are seeing some delinquency increases across various of our retail products, particularly credit cards and unsecured lending. We are actively monitoring our portfolios which continue to perform as expected.” (Source)
• “We do have a lot of regulatory changes headed our way. As you know a lot of them are in the form of consultative documents today, and so not yet finalized. And so, there will be impacts to all other banks over the next few years. More importantly, I would say in the short-term, so if we’re thinking just the next few quarters, we don’t expect to see any big changes as it relates to [regulatory capital] floors. Probably, the one coming up in the shortest term really relates to some of the OFSI mortgage proposals…There will be some [floor] increases, I’d say that our mortgages already have a loss given default that’s higher than what the proposed OFSI floor is. So we’re not expecting a lot of impact and I’d say that when we look at how we think risk-weighted assets will increase, our expectation at this time is: it would be below the $500 million mark.” – Laura Attanasio, Chief Risk Officer (Source)

National Bank of Canada

Q2 net income: $210 million (-48% Y/Y)
Earnings per share: $0.52 a share

• The bank’s residential mortgage and HELOC portfolio rose to $55 billion in Q2, up from $54.8 billion in Q1. (Source)
• Residential mortgage volume was up about 4% from Q1 2015. (Source)
• “Consumer loans increased by 3%, primarily due to home equity lines of credit and personal loans.” (Source)
• The portfolio is 42% insured (vs. 41.7% in Q1), 24% uninsured (down from 24.3% in Q1) and 34% HELOCs (unchanged from Q1). (Source)
• The average loan-to-value on the HELOC and uninsured mortgage portfolio was 58%, down from 59% in Q1. (Source)
• Quebec represented 62% of the mortgage book in Q2, down from 63% in Q1. Ontario was 23% (unchanged) and Alberta represented 6% (unchanged). (Source)
• Net interest margin in Q2 was 2.20%, down from 2.24% in Q2 2015 and 2.22% in Q1 2016, “due to the narrower prime rate cost of funds spread.” (Source)
• “The credit quality of the overall loan portfolio, excluding the oil and gas producer and service company loan portfolio, remains within expectations,” CEO Louis Vachon said in a statement. (Source)

Conference Call

• “Our exposure in the oil regions accounts for 9.4%, our largest portion of which is in residential mortgages, two-thirds of which are insured, and HELOCs,” said William Bonnell, EVP, Risk Management. (Source)

Royal Bank of Canada

Q2 net income: $2.57 billion (+3% Y/Y)
Earnings per share: $1.66

• Residential mortgage volume rose to $214 billion, up 0.7% from last quarter and 7.4% from a year ago. (Source)
• The bank also holds $41 billion worth of HELOCs. (Source)
• 54% of its mortgages are uninsured, unchanged from last quarter. The uninsured portfolio has a loan-to-value ratio of 54% nationally and 59% in Alberta. (Source)
• 16% of the bank’s retail loans portfolio is in Alberta, with 88% secured. (Source)
• The bank noted an “increase in delinquencies in oil-exposed provinces.” (Source)
• 30-day delinquencies in the residential mortgage portfolio remained unchanged from Q2 2015 at 0.23%. (Source)
• RBC’s condo exposure is 9.9% of its mortgage portfolio (unchanged from Q1). (Source)
• Gross impaired loans increased $30 million from the previous quarter “largely due to higher impaired loans in our residential mortgages and personal loans portfolios.” (Source)
• Average FICO scores of 781 “remain high indicating strong customer credit quality.”  The bank also said Alberta’s average FICO is “consistent with the national average.” (Source)
• Average remaining amortization on mortgages is 17 years. (Source)
• Net interest margin was 2.64%, flat from last year and up from 2.62%, last quarter. (Source)

Conference Call

• On the bank’s exposure to the Fort McMurray fire, Mark Hughes, Chief Risk Officer, said: “While it’s too early for us to determine the full impact, our early assessment indicates that the impact will not be material as 55% of our $1.3 billion of mortgages are insured. We require property insurance on all mortgages at the time of origination and we reinsure our risk in our insurance portfolio. As discussed last quarter, higher unemployment rates in Alberta and other oil exposed regions are driving higher write-offs in our credit card portfolio. We are also seeing a slight uptick in provisions in our personal and small business loans in these regions. However, I would stress these portfolios are very small relative to the size of our Canadian retail portfolio.” (Source)
• He added: “Outside of the oil effected regions, we are not seeing any signs of contagion. Particularly, our national mortgage portfolio continues to perform well [with a] provision of 1 basis point this quarter, reflecting our strong underwriting practices including no second lien mortgages and broad geographic diversification.” (Source)

Scotiabank

Q2 net income: $1.86 billion (+3.9% Y/Y)
Earnings per share: $1.46

• The total portfolio of residential retail mortgages fell to $189 billion in Q2, down from $190 billion in the previous quarter. The portfolio was comprised of $168 billion in freehold properties (down from $169 billion in Q1) and $21 billion in condos (unchanged from Q1). (Source)
• 62% of the residential mortgage portfolio was insured in Q1, up from 48% in Q1. This jump was due to “new portfolio insurance transactions that converted $26.5 billion of uninsured to insured mortgages.” The uninsured portfolio has an average loan-to-value ratio of approximately 51%, down from 53% in the previous quarter. (Source)
• The bank had $30 billion in mortgages in Alberta in the quarter, down from $30.1 billion in Q1. (Source)
• Net interest margin was 2.38% in the quarter, up 12 bps year-over-year primarily due to “margin expansion in deposits, acquisition impact as well as the runoff of low spread Tangerine mortgages.” (Source)

Conference Call

• “We’re a little concerned about housing prices in the greater Vancouver area and Toronto,” Scotiabank Chief Executive Brian Porter told Bloomberg TV Canada. “We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto.” (Source)
• Asked why the bank did a bulk mortgage reinsurance deal, Porter replied: “That was really mostly around giving us some flexibility for balance sheet management, provides us (with) … liquidity, more liquid assets, (and) some flexibility around funding…So overall, it was just balance sheet optimization, small capital benefits, but again it was really around balance sheet flexibility.” Porter added that the capital benefit was “around” 5 bps. (Source)

TD Bank

Q2 net income: $2.05 billion (+10.2% Y/Y)
Earnings per share: $1.07

• TD’s residential mortgage portfolio fell to $185.7 billion in Q2, down from $185.9 billion in Q1. (Source)
• The bank’s HELOC portfolio rose to $62 billion from $61.2 billion in Q1. (Source)
• 53% of the portfolio is insured, down from 55% in the previous quarter. The loan-to-value of the uninsured portfolio is 58%, down from 59% in Q1. (Source)
• “Deterioration in the consumer credit portfolio in the oil impacted provinces continues to be offset by strong performance across the rest of the country.” (Source)
• Net interest margin was 2.77%, down from 2.80% in Q1, and 2.84% in Q4. (Source)

Conference Call

• “Of note, in the quarter, we had record mortgage retention rates or renewals…” said CEO Bharat Masrani. (Source)
• Regarding the impact of the Fort McMurray wildfire, Chief Financial Officer Riaz Ahmed said, “We expect we will experience some losses in our banking businesses and higher claims in our insurance businesses in the third quarter. However, as a result of our smaller footprint in Alberta and because of mitigants including reinsurance in our general insurance business, mortgage insurance in our personal banking, and third-party insurance held by our commercial banking customers, we do not expect the impact to be material.” (Source)
• Explaining declining net interest margin in the quarter, Teri Currie, Group Head, Canadian Personal Banking, said, “We would continue to project modest downward pressure to margins, again impacted by the interest rate environment, product mix and competitive factors.” (Source)

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Paul Stevenson
Managing Partner / Mortgage Agent Referral Mortgages.com
613-263-4543
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