10 Mar

Canada’s big banks defied expectations for first-quarter earnings, still think your bank has your best interest in mind?


Posted by: K.C. Scherpenberg

How is your bank doing? From today’s Canadian mortgage Trends Magizine.

Q1 2015 Bank Earnings – Mortgage Morsels

March 9, 2015  Robert McLister  1k 

Canada’s big banks defied expectations for first-quarter earnings, despite the collapse in oil prices and its spinoff effects on consumer credit.

In their conference calls, the banks addressed concerns about their exposure to Alberta’s housing market. They reassured analysts that they are actively stress-testing their portfolios given the possibility for sustained low oil prices and increasing unemployment in the province. “We have determined that the potential losses would still be manageable and within our risk appetite,” said one executive at RBC, which has 19% of its portfolio in Alberta.

RBC was also in the hot seat for leading the banks in only partially dropping prime rate. In January, RBC was the first to lower its prime rate by only 15 basis points following the Bank of Canada’s 25-basis-point rate cut. President and CEO David McKay answers to that below.

As we do every quarter, CMT has dug through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls, and pulled together these mortgage tidbits. The most notable observations are in blue.


Bank of Montreal

Q1 net income: $1 billion
(-6% Y/Y)
Earnings per share: $1.46

  • BMO’s total Canadian residential mortgage portfolio stands at $93.1 billion, up slightly from $93.0 billion in the previous quarter. (Source)
  • 62% of BMO’s portfolio is insured, down from 63% in the previous quarter. (Source)
  • The loan-to-value on the uninsured portfolio is 58%, unchanged from Q4. (Source)
  • The condo mortgage portfolio stands at $13.3 billion (unchanged from Q4) with 53% insured (down from 54% in Q4). (Source)
  • 6% of the bank’s mortgage portfolio is in Alberta. (Source)
  • Asked about the 3 bps rise in delinquencies in Q1, Surjit Rajpal, Chief Risk Officer, said: “You have to look at it in the context of where they’ve been in the past. If you look at it on a year-over-year basis I think they’ve come down 3 points. Look at the trend. It’s very much in the range that one would expect right now. So I wouldn’t consider that seasonality. Nor would I consider this anything indicative of where the losses are. You’re not seeing any losses increase either at this point.” (Source)
  • “On the NIM side, we are down three points on the quarter, that’s a little bit of pressure on the personal lending spreads specifically in direct auto and mortgage needs,” said Cam Fowler, Group Head, Canadian Personal and Commercial Banking. “I expect that we’ll get much of that, if not most of that back in the second quarter, and I think through the balance of the year, the reason I think it will [be] stable to up modestly is that [we] will have the combined benefit of improved spreads on…variable loans.” (Source)
  • Questioned about a reference in BMO’s report regarding a potential application of Basel III for risk weighted assets (RWA), Tom Flynn, Chief Financial Officer, said it was an acknowledgment of discussions that are going on among regulators globally “related to the extent to which risk-weighted assets are model based versus standardized factor based and the extent which you use floors when using models,” he said. “On the mortgages specifically, I guess the only thing I could add is, as you know, the majority of the Canadian portfolio is government insured and I would say that we have no reason to think that the risk-weighting related to government-insured product will change and so we are totally comfortable with that.” (Source)



Q1 net income: $923 million
-22% Y/Y
Earnings per share: $2.28

  • CIBC’s residential mortgage portfolio rose to $153 billion in Q1, up from $152 billion in the previous quarter. (Source)
  • Regarding its indirect exposure to oil and gas in Alberta, CIBC said it had $16.9 billion of insured mortgages in Alberta (LTV of 65%), $6.6 billion in uninsured mortgages (LTV of 62%) and $2.8 billion in HELOCS (LTV of 57%). (Source)
  • “The bulk of this exposure (in Alberta) is to borrowers with strong credit profiles, and to date we have not seen any stress in this portfolio and there have not been any notable increases in delinquencies or write-off,” said Laura Dottori-Attanasio, Chief Risk Officer. (Source)
  • Overall, the bank’s residential mortgage portfolio was 67% insured (unchanged from Q4), and 33% uninsured with an LTV of 60%. (Source)
  • Condo mortgages account for roughly 11% of CIBC’s residential portfolio and the loan-to-value of the uninsured portion of this portfolio is 62%. (Source)
  • CIBC brand mortgages grew 14%. (Source)
  • 87% of the bank’s insurance in the quarter was provided by CMHC, down from 90% in the previous quarter and 94% a year earlier. (Source)
  • “We’re investing in the mobile sales force, we continue to do that and it’s resulting in mortgage growth that’s double the industry average, and the CIBC name even, excluding the impact of conversions from FirstLine,” said David Williamson, Senior EVP and Group Head, Retail and Business Banking. (Source)


National Bank of Canada

Q1 net income: $415 million
(+2% Y/Y)
Earnings per share: $1.16 a share

  • Residential mortgages rose to $40 billion in Q1, up from $37.1 billion a year earlier. HELOCS totalled $17.3 billion. (Source)
  • National Bank’s mortgage portfolio is 43% insured, 23% uninsured and 34% HELOCs. (Source)
  • The average loan-to-value on the HELOC and uninsured mortgage portfolio was about 59%. (Source)
  • The net interest margin was 2.20% in the first quarter of 2015 versus 2.21% the preceding quarter and 2.25% in the first quarter of 2014. (Source)
  • Quebec and Ontario represented 65% and 22% of the mortgage book, respectively, in Q1, with 5% in Alberta. (Source)
  • Asked about increased competition in Quebec and the downside risk to loan growth, Diane Giard, EVP, P&C Banking, said: “…What we don’t want to do is to be competitive with Desjardins on pricing…Where really the main pricing pressure is coming from is on the mortgage side with Desjardins…This is where you would see in fact [Desjardins’] growth being somewhat more significant than ours…I really want to make sure that my troops are well disciplined in maintaining the proper balance between growth and NIM.” (Source)
  • Giard: “…Our three main channels for mortgage origination…works well for us…” (Source)
  • Following its earnings, National Bank announced a new $6 fee on its All-in-One line of credit, which takes effect on all new and existing customers on May 4, 2015. There was previously no fee on a client’s first All-in-One account. (In CMT’s expectation, there will be enough broker and client backlash that this move will adversely impact the bank’s broker-originated All-in-One volumes.)


Royal Bank of Canada

Q1 net income: $2.5 billion
(+17% Y/Y)
Earnings per share: $1.65

  • RBC’s residential mortgage portfolio rose to $194 billion in Q1, up from $192 billion in Q4. (Source)
  • 60% of its mortgages are uninsured while 40% are insured, unchanged from the previous quarter. (Source)
  • 19% of the bank’s portfolio is in Alberta. (Source)
  • “Beyond active monitoring, we have stress tested both our wholesale and retail portfolios given the $45 oil price for a sustained period of time, a significant increase in Canadian unemployment and interest rates, and a national downturn in the real estate market as well as a recession in Alberta,” said Mark Hughes, Chief Risk Officer. “Under this very extreme scenario, we have determined that the potential losses would still be manageable and within our risk appetite.” (Source)
  • RBC’s condo exposure is 9.6% of its mortgage portfolio (up from 9.5%), representing approximately $3.8 billion. (Source)
  • Asked about the bank’s decision to lead on dropping prime rate only partially following the BOC’s rate reduction, David McKay, President and CEO, said this: “We took a number of factors into consideration obviously when we moved prime down…by 15 basis points a few months ago…We looked at our funding costs, we looked at the environment, we looked at the structure of our business and that was the appropriate decision at that time, and we take the same variables into consideration for any future prime decrease.” (Source)
  • McKay on the partial cut offsetting some pressure that otherwise may have come up if they had moved in line with the BOC: “Looking at our historic margins in our variable rate mortgage book and if you’re looking at our funding costs, and all those go into it and we’re able to manage it somewhat, not offset completely the impact, but certainly manage it, if it does stimulate demand, you have increased volumes in demand to offset that from a revenue perspective. We are very happy with our volume growth and our revenue growth and our margins in a difficult operating environment around competition and lower rates. So I think it’s good performance by the business.” (Source)
  • McKay on early signs of deterioration in the market: “Certainly if you looked at the last recession, the first portfolio that showed signs of stress was actually the auto secured portfolio, then the credit card portfolio, the auto secured could show stress in a three- to six-month timeframe, the card book could start to show stress in a six to 12, and actually [stress in] the mortgage book was more in the 12- to 24-month lag [timeframe] to economic deterioration…(It’s) not necessarily the unsecured that always goes first, some of the secured higher-risk portfolios go first. So I think there is a mix there that we watch very carefully. And as we talked about a number of times, we’ve got proprietary lending systems that allowed us to perform the way we did through the last cycle. And we continue to use very advanced monitoring capability around with our customers to watch for signs of stress and deterioration and act proactively to manage that account.” (Source)



Q1 net income: $1.73 billion
(+1% Y/Y)
Earnings per share: $1.35

  • The total portfolio of residential retail mortgages was unchanged at $189 billion in the quarter. The portfolio was comprised of $169 billion in freehold properties and $20 billion in condos. (Source)
  • 52% of the residential mortgage portfolio was insured in the first quarter, unchanged from Q4. The uninsured portfolio has an average loan-to-value ratio of approximately 55%, up from 54% in the previous quarter. (Source)
  • The bulk of the bank’s mortgage activity is in Ontario, with $93 billion in mortgages vs. $96 billion in the rest of Canada combined. (Source)
  • Net interest margin rose 4 basis points year-over-year. (Source)
  • “Loan volumes increased 4% year-over-year, with double-digit growth in personal loans and credit cards, as well as commercial lending balances. This growth was probably offset by the Tangerine mortgage run off. Adjusting for the mortgage run off, loan growth was good at 6%.” (Source)


TD Bank

Q1 net income: $2.06 billion
(+5% Y/Y)
Earnings per share: $1.09

  • TD’s residential mortgage portfolio rose to $175 billion, up from $173 billion in the previous quarter and $165 billion in Q1 2014. (Source)
  • The bank reported real estate secured lending growth of 4% YoY, matching the previous quarter. (Source)
  • Net interest margins fell to 2.88%, down 4 bps from the previous quarter and 6 bps from Q1 2014. (Source)
  • 61% of the portfolio is insured, down from 62% in the previous quarter. The loan-to-value of the uninsured portfolio is 60%, down from 61% in Q3. (Source)
  • 71% of the bank’s condo mortgages are insured, down from 72% in the previous quarter. (Source)

Note: Transcripts are provided by a third-party (Seeking Alpha). Their accuracy cannot be 100% assured.

Steve Huebl & Rob McLister, CMT