Dreyer Group Mortgage Brokers

If there’s one recurring mortgage theme from the Big 6 banks’ recent earnings announcements, it is “stress testing.” That’s where a bank simulates extremely adverse economic scenarios in a statistical model and then watches how its mortgages perform.

Stress testing has been a buzzword of late. Banks have been talking up their stress tests to show investors that things will remain under control if the floor drops out in the housing market.

Among other trends this quarter:

• Homeowners are increasingly renewing into fixed rate mortgages, which are more profitable for the banks
• Most banks are posting decreases in their insured mortgage portfolios (not surprising given last year’s insured mortgage rule tightening)

These and other observations can be found in the compilation that follows. It’s the fruit of pouring through quarterly earnings reports, presentations and conference calls. If you’re time-pressed, some of the focal points are highlighted, with our comments in italics. 

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Bank of Montreal
Q2 net income: $975 million (-5.3% Y/Y)
Earnings per share: $1.42

• BMO’s total Canadian residential mortgage portfolio stood at $81B. (Source)
• BMO said mortgage balances are up 13.7% Y/Y, with balances up 1.9% Q/Q, “reflecting (a) softer market.” (Source)
• 62% of the bank’s residential mortgage portfolio is insured, down from 70% in Q2’12. (Source)
• Average loan-to-value (LTV) on the uninsured portfolio is 59%. (Source)
• 64% of BMO’s portfolio has an effective remaining amortization of 25 years or less. (Source)
• Loss Rates for the trailing 4 quarter period were less than 1 basis point. (Source)
• 90-day delinquency rates have improved, dropping quarter-over-quarter and year-over-year. (Source)
• BMO’s condo mortgage portfolio is $11B with 56% insured. (Source)
• “…we’ve gained share in mortgages by bringing in new customers and encouraging them to borrow smartly with shorter amortization periods, and we’ve executed on cross-sell,” said William Downe, President and CEO. (Source)
• BMO said, “Tighter mortgage rules have restrained activity in the housing market, while weak global demand is holding back exports.” It added that “Strength in business loan growth should partly offset a slowing in consumer loans and residential mortgages.” (Source)
• BMO on regulatory changes: “In 2012 new residential real estate lending rules were introduced for federally regulated lenders in Canada including restrictions on loan-to-value (LTV) for revolving HELOCs, waiver of confirmation of income, debt service ratio maximums, as well as maximum amortization of 25 years and maximum home value of $1 million for high ratio insured mortgages (LTV greater than 80%). The regulatory changes resulted in some adjustments to loan underwriting practices including reducing the maximum LTV on revolving HELOCs to 65% from 80% previously.” (Source)
• BMO on stress testing:  “Residential mortgage and home equity line of credit (HELOC) exposures are areas of interest in the current environment. BMO regularly performs stress testing on its mortgage and HELOC portfolios to evaluate the potential impact of tail events. These stress tests incorporate moderate to severe adverse scenarios. The resulting credit losses vary depending on the severity of the scenario and are considered to be manageable.” (Source)
• “With respect to stress testing our portfolios, in a scenario that could be adverse, when we say that we are able to manage, it’s a combination of things. Firstly, I think even if our losses from that particular segment were to go up – and I’m not talking about the Consumer segment in total, because strangely but logically the losses really do not come out of the residential mortgages or from the HELOCs; they actually are felt more acutely in the Personal lines of credit as well as in credit cards,” Surjit Rajpal, EVP and Chief Risk Officer. (Source)
• Asked about BMO’s systemic problems in the U.S. with product origination, and issues surrounding incompetence around documentation, and whether BMO sees any systemic issues in Canada, Rajpal said: “Not that I can see, but if it was proven that systematically valuations were being done erroneously by somebody, then it could become an issue, but I don’t think that’s the case here; and so, it’s hard to see.” (Source)

CIBC
Q2 net income: $876 million (+8% Y/Y)
Earnings per share: $2.12 a share

• Residential mortgages were down $1.3 billion to $143.7 billion, “primarily due to attrition in our FirstLine mortgage business, partially offset by new mortgage originations through CIBC channels.” This follows a $1.1 billion decline in Q1. (Source)
  (We’ll evaluate CIBC’s mortgage market share losses in an upcoming story.)
• FirstLine mortgages stood at $37.1 billion, down from $48.2 billion a year ago. (Source)
• “Our exit from the FirstLine mortgage broker business continued to progress well, with both conversion volumes and spreads well exceeding our stated targets. The CIBC brand mortgage portfolio grew 12% year-over-year, which represented the 14th consecutive quarter of outperformance versus the industry,” said Kevin A. Glass, Chief Financial Officer and Senior Executive Vice President. (Source)
• 74% of CIBC’s Canadian residential mortgage portfolio is insured, with over 90% of this insurance being provided by CMHC. (Source)
• The average loan to value of its uninsured mortgage portfolio, based on March house price estimates, is 54%. (Source)
• Of CIBC’s $143-billion residential mortgage portfolio, approximately 46% is originated in Ontario, followed by B.C. at 20% and Alberta at 16%. (Source)
• “The credit quality of this portfolio continues to be high, with a net credit loss rate of approximately 1 basis point per annum,” said Thomas D. Woods, Chief Risk Officer and Senior Executive Vice President. (Source)
• Condos account for approximately 12% of the bank’s total mortgage portfolio, with about 72% of those in Ontario and B.C. (Source)
• 75% of the condo sub-portfolio is insured, and the uninsured portfolio has an average loan to value of 54%. (Source)
• David Williamson, Senior Executive Vice President and Group Head of Retail & Business Banking: “…With the runoff of the FirstLine book and a move to our branded products, happening in mortgages…the mix is moving more to profitable areas. And that’s where we get this kind of tailwind we’ve got, which is the impact of moving out of FirstLine and having a desire to get 25% of that into the higher-margin branded products. As I mentioned, we’re running quite a bit higher retention than the 25% and that’s having quite a positive impact. That’s one of the things that’s helping our NIMs, and frankly, offsetting the headwind, which everyone has, which is a slow interest rate environment.” (Source)

National Bank of Canada
Q2 net income: $434 million (-22% Y/Y)
Earnings per share: $2.49 a share

• Total revenues on personal banking were up $15 million or 2%, mainly due to higher consumer and mortgage loan volumes. (Source)
• Residential mortgages rose 4% Q/Q and 13% Y/Y to $34.8 billion in Q2. (Source)
• The loan-to-value for HELOCs and uninsured mortgages was approximately 59% and 55%, respectively.
• Mortgages in Toronto and Vancouver represented only 11% and 2% of National Bank’s books, respectively. 67.9% of National’s mortgage portfolio is in Quebec. (Source)
• During the six months ended April 30, 2013, the Bank acquired a portfolio of residential mortgage loans with a higher credit risk profile for a total amount of $328 million. (Source) “It’s one of three or four small portfolios that we purchased typically from banks that were exiting the Canadian market,” said William Bonnell – EVP, Risk Management. (Source)
•  The Bank does not have any significant direct position in residential and commercial mortgage-backed securities that are not insured by CMHC. (Source)
• “…the risk of economic slowdown is real and could adversely affect the profitability of the mortgage portfolio. In stress test analyses, the Bank considers a variety of scenarios to measure the impact of adverse market conditions. In such circumstances, our analyses show higher loan losses, which would decrease profitability and reduce the Bank’s regulatory capital ratios. To counteract the negative impact of an economic slowdown, the Bank has acted preventively by defining a contingency plan to guide its response in such an event.” (Source)

Royal Bank of Canada
Q2 net income: $1.94 billion (+26% Y/Y)
Earnings per share: $1.27

• Residential mortgage volume rose to $177 billion in Q2, up 5% Y/Y from $169 billion. Average LTV was unchanged at 47%. (Source)
• 42% of RBC’s residential mortgage portfolio was insured in the quarter, up from 40% in Q1. (Source)
• RBC repeated its wording from previous quarters, saying it has a “well-diversified mortgage portfolio across Canada” and that it continues to conduct “Ongoing stress testing for numerous scenarios including unemployment, interest rates, housing prices.” (Source)
• RBC states it has “Strong underwriting practices with all mortgages originated through our proprietary channels.” (Source)
• “We continue to see stable performance in our retail portfolios with provisions on residential mortgages of 2 basis points and 279 basis points for (credit) cards,” said Morten N. Friis, Chief Risk Officer. (Source)
• Peter Routledge from National Bank Financial asked this question: “Is there any reason to think that there is a systemic issue with appraisals that might rebound on the banks in the form of the CMHC refusing claims…How likely an outcome is that?” 
  
  Gordon M. Nixon – President and CEO, responded:  “…Most of the banks, including ourselves, use the emili appraisals service, which is CMHC’s own appraisal…They would do their own due diligence with emili. So, I don’t think it would be the nature of the appraisal service. I think where operational risk evolves is the representation of the fact. So, if they were to go back to the loan application and find that the facts on income or on rental versus cost, other costs are different than what was presented during the adjudication process, then I think you have technically an opportunity to negate the claim. But I don’t think it’s just on how you use appraisal. It’s really the adjudication process that would create most of the operating risk, which is why our bank, including I’m assuming most others, are very careful about our facts that are being submitted and how we put those applications together.”
  
  Morten N. Friis – Chief Risk Officer, added:  “…In terms of the use of emili…it is one of several tools that we use, depending on the property, we have full appraisal…So emili is a supplemental tool that we use in the appraisal process. To reiterate Dave’s point, the risk around refusal on the insurance all relates to the accuracy of the documentation that we provide. We have ongoing audits and reviews with CMHC and our track record with them is extremely strong. So, the point on the risk put-back (of claims to the bank), first of all, would be completely inconsistent with our historical experience with them, and as Gord was saying,I think it’s an extreme tail risk…They obviously as an insurer have some ability to dispute claims, but I think our track record on accurate documentation is pretty strong.” (Source)

Scotiabank
Q2 net income: $1.6 billion (+9.6% Y/Y)
Earnings per share: $1.23

• The bank’s residential mortgage portfolio totalled $188 billion in Q2, a 27% increase year-over year (or 7% increase excluding ING). Of this total, $169 billion is related to freehold properties and $19 billion is related to condominiums. (Source)
• Of Scotia’s residential mortgage portfolio, 58% is insured, unchanged from Q1. (Source)
• The uninsured portion has an average loan-to-value ratio of approximately 55%. (Source)
• “The credit risk in the Canadian residential mortgage portfolio remains benign and delinquencies are continuing to decline,” said Robert H. Pitfield, Group Head and CRO. (Source)
• Pitfield added: “The Canadian Housing market generally remains balanced between supply and demand. Reasonable economic performance has allowed consumers to manage debt levels well. However, we do expect some softness in the Canadian Housing market in the short-term.” (Source)
• “Credit quality and performance of the residential portfolio remains strong, a disciplined and consistent underwriting standards have resulted in extremely low loan losses and again have been stressed under a series of severe tests which confirm the appropriateness of our risk appetite,” Pitfield continued. (Source)
• Sean McGuckin, EVP and CFO, said, “In the last nine months on the mortgage portfolio you’ve seen that the customers who are renewing their mortgages or came in on a variable basis are now taking fixed term mortgages, which are giving also additional better margins.” (Source)

TD Bank
Q2 net income: $1.72 billion (+1.8% Y/Y)
Earnings per share: $1.78

• TD’s residential mortgage portfolio was up slightly to $156 billion in Q2, up from $155 billion in the previous quarter and $145 billion in Q2 2012. (Source)
• TD says its real estate secured lending (RESL) volume increased 4% Y/Y (Source)
• The bank’s 3% Y/Y growth in personal lending reflects “a slowing housing market and continued consumer deleveraging.” (Source)
• TD adds its RESL portfolio, including securitized mortgages, benefits from the fact that 68% of the portfolio is government insured, and 73% of HELOCs are in first lien position (down from 75% in Q1) and a further 23% are in second to a TD first (up from 20%). (Source)
• When asked about the substantial decrease in TD’s insured portfolio and increase in its uninsured portfolio, Tim Hockey, Group Head, Canadian Banking, Auto Finance, and Credit Cards, responded: “We’ve been quite concerned about the overall growth rate of real estate secured lending for the last number of years. And so the regulatory changes that have actually been taking place over a number of years, quite prudently implemented over a long period of time, are actually having almost precisely the effect that we would have expected, which is a slow landing.” (Source)
• He added: “…Because of the changes around the high ratio mortgage versus conventional, all the mortgage originations are down year-over-year, but conventional are down less. So in other words, what you would ascribe to be first-time home buyers have actually had more of an impact, which you could say is probably bang-on what the regulatory changes would have expected.” (Source)
• “We’re clearly seeing that even notwithstanding a low interest rate environment, and obviously there’s been lots of conversation about that rate, that consumers are not backing up the truck and actually creating a frothy housing market as low interest rates are usually incenting them to do.”
• “In terms of channel originations, all channels are down year-over-year. In our particular case, our broker channel is down less, but that I would ascribe much more to service improvements and changes we’ve made in our own channels as opposed to an industry phenomenon,” Hockey continued. (Source)
  (TD’s broker channel has seemed to get more competitive this year.)
• “I would say pricing is aggressive, but not unduly so for a spring market. And clearly it was a cold spring, so that does have an effect on the activity… There’s some speculation [on], is there going to be a resurgence? But if you talk to Craig Alexander at TD Economics, he would say our expectation is still for having a fairly tepid spring mortgage market.” (Source)
• “Every time we do [stress tests], and we’ve become quite expert at doing stress tests, it continues to show that in Canada, given the nature of this business, given the government guarantees and the insurance portfolio, that we continue to make money in Canadian banking overall – we don’t go into the negative.”
• “…Three or four years into the (mortgage rule) changes, [the market is] moderating exactly as expected. But if we’re wrong, at whatever percentage of likelihood that is, then we still feel good about the stress test(s).” (Source)
• “On the stress tests, it’s really not the mortgage portfolio that you’re worried about…If you paint that type of scenario where you have such a reduction in house prices across the country, it’s really your other credit portfolios that would be more of a concern – the unsecured credit portfolios, then your commercial portfolio. So we stress that as well, and really to the deepest scenario that we can paint, the Canadian operations remain profitable. It’s not a good picture but it’s a profitable picture,” said Mark Chauvin, Group Head & Chief Risk Officer. (Source)

Note: Transcripts are provided by third parties like Morningstar. Their accuracy cannot be 100% assured.

By Steve Huebl & Rob McLister, Editor,

CanadianMortgageTrends.com