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16 Sep

September 15, 2013 Q3 2013 Bank Reports – Mortgage Morsels.


Posted by: K.C. Scherpenberg

From CMT.


September 15, 2013

Q3 2013 Bank Reports – Mortgage Morsels

Big-6-BanksDespite expectations for a more subdued quarter, Canada’s Big 6 Banks pulled off another impressive earnings season. And while many were expecting a slowdown in the housing market, most banks’ mortgage portfolios showed resilience.

The tidbits that follow come from the Big 6 Banks’ quarterly earnings reports, presentations and conference calls. There’s some good stuff in there (CIBC’s discussion of how it deals with price-sensitive mortgage customers is particularly interesting.)

If you’re time-pressed, the focal points are highlighted


BMOBank of Montreal
Q3 net income: $1.14 billion (+17% Y/Y)
Earnings per share: $1.53

  • BMO’s total Canadian residential mortgage portfolio stood at $85.5 billion, up from $81 billion in Q2. (Source)
  • 59% of the bank’s residential mortgage portfolio is insured, down from 62% in Q2 and 65% in Q3’12. (Source)
  • Average loan-to-value (LTV) on the uninsured portfolio is 59%, unchanged from Q2. (Source)
  • Loss Rates for the trailing 4-quarter period were less than 1 basis point. (Source)
  • “As expected, there were decreases in certain loan portfolios and in our personal loan balances, due in part to the effects of our continued practice of selling most mortgage originations in the secondary market and active loan portfolio management.” (Source)
  • “We’re doing the right things to generate sustainable revenue growth, with a focus on adding high quality earning assets, including secured mortgages and auto loans,” said Bill Downe, president and CEO of BMO. (Source)
  • Asked about the 4.5% quarterly increase in residential mortgage balance and whether that may be due to customers acting ahead of a perceived move in mortgage rates, Frank Techar, President and CEO, Personal and Commercial Banking Canada, BMO, said this:  

“…I think a couple of things. One is seasonality definitely plays a role. So, I know our growth over the last few quarters has been strong. Part of that’s because of the time of the year. I do think there’s been a little bit of bring-forward with respect to the perception that rates are going up. So, there might have been a little bit of a flush of activity as a result of that. It’s very hard to put your finger on, though. It’s more anecdotal than anything. My expectation is that, overall market growth moving forward is likely to slow a bit. I think in particular if rates do move up a bit more, we’re going to see a little bit more slowing. From my perspective, we’ve been able to grow faster than the market as it is now and our objective is to grow faster under that scenario as well. But I would say there is a bit of a bias for a slowdown, no doubt in particular staring at the possibility of rates going up.” (Source)

  • 66% of BMO’s portfolio has an effective remaining amortization of 25 years or less, up from 64% in Q2. (Source)
  • BMO’s condo mortgage portfolio is $11.8B (up from $11B in Q2) with 53% insured (down from 56% in Q2). (Source)
  • “Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages,” said the bank’s quarterly report. (Source)
  • BMO notes: “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)


Q3 net income: $890 million (+8% Y/Y)
Earnings per share: $2.16 a share

  • CIBC’s residential mortgage portfolio stood at $144 billion in Q3, up from $143.7 billion in the previous quarter. (Source) Of that, approximately 46% is in Ontario, 20% is in British Columbia, and 16% is in Alberta. (Source)
  • “The credit quality of this portfolio continues to be high, with a net credit loss rate of about 1 basis point per annum,” said Laura Dottori-Attanasio, Chief Risk Officer and Senior Executive Vice-President. (Source)
  • The bank’s residential mortgage portfolio was 72% insured, of that 90% was provided by CMHC. Of the uninsured portfolio, the average LTV was 54%. (Source)
  • Condos account for approximately 12% (or $16.6 billion) worth of the bank’s total mortgage portfolio, and 74% of that is insured. Another 2% (or $2.9 billion) is related to condo developers, with 32% drawn and 68% undrawn. (Source)
  • The bank noted, “Residential mortgages were down $693 million, primarily due to attrition in our FirstLine mortgage broker business, largely offset by new mortgage originations through CIBC channels.” (Source)
  • CIBC noted, “Other revenue was down $50 million mainly due to lower Treasury allocations and lower revenue in our exited FirstLine mortgage broker business.” (Source)
  • “Our exit from the FirstLine mortgage broker business continued to progress well, with both conversion volumes and spreads well exceeding our targets,” said Kevin Glass, Chief Financial Officer and Senior Executive Vice President. (Source)
  • Glass added: “The CIBC brand mortgage portfolio grew 13% year-over-year, which represented the 15th consecutive quarter of outperformance versus the industry.” (Source)
  • “Our core net interest margin, or NIM, was 263 basis points for the quarter,” Glass continued. “This was down 1 basis point from the prior quarter, but up 6 basis points from the prior year. NIMs have been helped by the improvement in our business mix, driven by growth in higher-margin CIBC-branded products, and this was offset by lower margins in our deposit portfolio. We expect the level of NIM to remain relatively stable, with improvements in business mix helping to offset the ongoing negative impact of lower interest rates that have been felt throughout industry.” (Source)
  • Regarding CIBC’s mortgage business, David Williamson, Group Head of Retail & Business Banking and Senior Executive Vice President, said this: “Our mortgage business is running quite well. We don’t lead on price. You’ll see that in the markets. We haven’t been doing that, and we don’t intend to. But our mortgage growth is up 13% year-over-year. So we haven’t broken out how much of that is a tailwind from FirstLine. But even if you adjust out FirstLine, I’d say we are still running at market-leading growth in our brand, and we’re doing it through our brand. We’re not buying broker-originated mortgages, which maybe supports the growth in certain industry players. This is through our own channels. So probably worth talking about how that’s occurring if it’s not price. There are 3 things that we’re doing. One is investing in our branch network… We’re also investing in our mobile adviser channel. We were underrepresented in that space and we’re adjusting that, and that’s giving us some lift in the year-over-year stats… One of our priorities is (to) improve our sales and service capabilities. And I think we’ve spoken about our breakaway initiative, which has been rolled out across our branches, at least most of the branches at this point, and some nationwide intake programs and so forth. And we’re seeing a very significant lift in sales activities through both those intake programs and breakaway. And then thirdly, we introduced Home Power Plan, the integrated HELOC and mortgage product. Now it came out the same time as regulatory constraints on HELOC at 65%, but it’s still been a very well-received program.”
  • Williamson:  “If I speak a bit just about FirstLine, that’s gone particularly well, and that has supported the growth, so campaign-to-date retentions at about 45%. This quarter, we’re retaining about 50% of what’s coming off, and that’s relative to the target retention that we’ve set at the beginning of this initiative, 25%. So our retention levels are well exceeding, like, doubling the initial target, and we’re still maintaining margins. So again, probably good to speak about how that’s happening. We’ve set up a retention team that’s focused on just that, retention. We introduced … somewhat advanced analytics that look at the price sensitivity of clients based on the data we have available to us, and that’s informed things such as when we call clients. So if you’re identified as a price-sensitive client, our retention team calls you earlier, prior to your renewal date. And if you’re less price-sensitive, our thinking is you’re probably not thinking about it, so we’ll call you later. And then on top of that, we’re focused on getting these clients embedded into a deeper relationship with CIBC. So those retention teams have offers and lead programs that are facilitating that. So in aggregate, this quarter, the FirstLine runoff has been, for the first time, eclipsed by growth in the CIBC-branded mortgage space. So recently, the NIM expansion has been offsetting reduced volume. And this quarter, we now have NIM expansion plus volume growth in mortgages… The mortgage space has been one that we’ve made a pretty fundamental shift in, in the last little while.” (Source)

(Ed. Note:  If the above is any indication, and you’re a CIBC mortgage customer, you probably don’t want to be getting your renewal reminder call right before maturity. If you do, take a hard look at the rate you’re being offered.)


National Bank of Canada
Q3 net income: $419 million (+11% Y/Y)
Earnings per share: $2.39 a share

  • Residential mortgages rose 7% Q/Q and 10% Y/Y to $35.9 billion in Q3. (Source)
  • Personal Banking’s total revenues rose $12 million, “mainly due to higher loan volumes, especially consumer and mortgage loans, partly offset by a narrowing of net interest margins.” (Source)
  • “…Loan-to-value for HELOCs and uninsured mortgages was approximately 58% and 55%, respectively.” (Source)
  • “What we’ve experienced in the last quarter is, the volume that we’ve experienced in mortgages have actually not been to what we had last year,” said Helene Baril – Senior Director, IR. (Source)
  • “During the nine months ended July 31, 2013, the Bank acquired a portfolio of residential mortgage loans with a higher credit risk profile for a total amount of $328 million.” (Source)
  • In discussing credit risk, the bank noted: “…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
Q3 net income: $2.3 billion (+3% Y/Y)
Earnings per share: $1.52

  • Residential mortgage volume rose to $179 billion in Q3, up 2% from $177 billion in Q2, and up 5% from $172 billion in Q3 2012. Average LTV was unchanged at 47%. (Source)
  • 42% of RBC’s residential mortgage portfolio was insured in the quarter, down from 43% in Q2. (Source)
  • “Net interest margin continues to be impacted by a low rate environment and competitive pressures.” (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)
  • “(Loss) provisions for our residential mortgage portfolio were consistent with our historical performance at 1 basis point,” said Morten N. Friis, Chief Risk Officer. (Source)
  • From David McKay, Group Head, Personal and Commercial Banking: “We’ve been very disciplined about the volumes that we’re generating. As you know we don’t participate in the broker mortgage business nor do we, as many banks do buy wholesale mortgages from third-party originators at very low margins and spread. So our growth has been through proprietary channels that generate very strong margins for us and has been consistent margins. So I think those are some of the generic drivers of where we are.” (Source)
  • Gordon M. Nixon – President and CEO: “…Certainly there is some volatility in the (mortgage) commitment pipeline and…we make forward rate commitments for up to 120 days as a market practice. We hedged a number of those commitments protecting margins, so we hedge forward at a known cost and we price accordingly. So we’ve got experience in managing in a volatile interest rate environment where swaps are moving around… (Source)


Q3 net income: $1.77 billion (-14% Y/Y)
Earnings per share: $1.39

  • The bank’s residential mortgage portfolio totalled $186 billion in Q3, flat on the quarter and up 24% Y/Y (or 6% excluding ING). (Source)
  • We have…become the leader in…mortgage product,” said CEO Rick Waugh.
  • “…Market share in residential mortgages for Scotiabank has increased nearly 5% to
    22.6% from 17.9%.” (Source)
  • 90% ($170 billion) of Scotia’s portfolio is related to freehold properties and 10% ($19 billion) is in condominiums. (Source)
  • Of Scotia’s residential mortgage portfolio, 56% is insured, down from 58% in Q2. (Source)
  • The average loan-to-value (LTV) ratio of the uninsured portfolio is 56%, down from 57% in Q3 2012. (Source)
  • Net interest income was up 14% from the previous year, aided in part by asset growth, “particularly in Canadian mortgages”. (Source)
  • “While we continue to believe that the Canadian Housing market generally remains stable, there may be some softness in Canadian Housing market prices in the short-term. Credit quality and performance of the residential portfolio remains strong,” noted Robert Pitfield, Group Head and CRO. (Source)
  • “Our disciplined and consistent underwriting standards through all of our origination channels have resulted in extremely low loan losses, and again have been stressed under many severe assumptions, which confirm the appropriateness of our risk appetite,” Pitfield added. (Source)
  • “Asset growth in automotive finance and residential mortgages was strong in Q3 and we see that continuing in Q4,” said Brian Porter, Group Head, International Banking. (Source)
  • “Earnings were driven by the successful acquisition of ING DIRECT and by growth in auto loans and mortgages,” said Rick Waugh, CEO of Scotiabank. (Source)
  • “Net interest income was driven by asset growth in Canadian mortgages, diversified loan growth internationally, and a stable margin,” noted Sean McGuckin, EVP and CFO. (Source)
  • The credit risk in the Canadian residential mortgage portfolio remains benign and customers continue to manage their finances as expected. The loss estimated of the real portfolio impacted by the Alberta flooding is not significant,” said Pitfield. (Source)
  • Jeffery C. Heath – EVP and Group Treasurer: “…On dealing with NHA MBS…We all know what was announced as a short-term measure by CMHC, but without knowing the size of the cap and how it will be allocated in the future, long-term impact is really hard to gauge at this point. My view in the near term is that the impact is not material. NHA MBS is pure funding – it’s relatively modest in our case, I mean, overall scheme of things, and roughly comparable to the cost of covered bonds as another alternative. (Source)
  • Christopher J. Hodgson – Group Head, Global Wealth: “On the creditor’s (life insurance) side, a number of years ago, we were significantly below the industry average in terms of (cross-)selling against our mortgage book. Over the last few years, we’ve increased our penetration through the retail branch channel to industry average. So, we’re now at a rate of about 77%, which is in and around industry. We expect to continue to see that grow over the course of the next few years, even though the mortgage volumes are slowing down…The other thing I’d say on that front is when we bought the Maple book of business a number of years ago, we had very low cross penetration in that in terms of creditor insurance, and we’ve grown that now from 12% about four or five years ago to about 45%. So, we see significant continued growth through that broker channel. (Source)


TD Bank
Q3 net income: $1.53 billion (-11% Y/Y)
Earnings per share: $1.58

  • TD’s residential mortgage portfolio was up slightly to $159 billion in Q3, up from $155 billion in the previous quarter and $149 billion in Q3 2012. (Source)
  • TD says its real estate secured lending (RESL) volume increased 4% Y/Y. (Source)
  • “…We are bottoming out here in terms of rate compression in the United States and I think we are getting closer and closer to bottoming out in Canada as well,” said Ed Clark, President and CEO. (Source)
  • Canadian P&C Gross Impaired Loans decreased $43 million (2 bps) to $437 million due to “resolutions in the residential mortgage portfolio”. (Source)
  • HELOC volume fell to $62 billion in Q3, down from $63 billion in both Q2 and Q3 2012. (Source)

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

Steve Huebl & Rob McLister, CMT

Posted in Quarterly Bank Reports

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Canadian said…

RBC : “So our growth has been through proprietary channels that generate very strong margins for us and has been consistent margins. “

It means : Our clients pay us well over what it costs to us to lend them the money.

The RBC clients are either proud to pay more, or too negligent to negotiate better rates and conditions for themselves.