CIBC’s mortgage slowdown predictions come true as 3-year streak of outpacing rivals ends

Canadian Imperial Bank of Commerce’s prediction of a mortgage slowdown has come true.

Mortgage balances rose 2.5 per cent to $208.5 billion (US$160 billion) in the fiscal third quarter from a year earlier, the Toronto-based bank said Thursday in announcing earnings that beat analysts’ estimates.

That’s the slowest in more than four years and about one-fifth the pace of a year ago. The deceleration ends CIBC’s three-year streak of outpacing Canada’s other large lenders on mortgage growth. Royal Bank of Canada said this week that mortgage balances were 5.9 per cent higher than a year earlier.

CIBC executives said in May that domestic loan growth would “moderate” in the second half of the year, with Canadian banking head Christina Kramer estimating that it would fall to “low-single-digits” by year-end. Her forecast was less than Canada’s other big lenders, which have maintained “mid-single-digit” growth expectations for the year.

CIBC has the greatest relative exposure to Canada’s housing market, with a higher percentage of earnings coming from domestic personal and commercial banking than its bigger rivals. CIBC’s growth has cooled since it stopped expanding its team of mobile-mortgage advisers that fuelled a surge in home-loan balances, with year-over-year growth peaking last year at around 12 per cent. Government measures to slow Canada’s heated housing market, including tougher mortgage-qualification rules imposed in January, have also affected demand.

Profit Climbs

Net income for the quarter rose 25 per cent to $1.37 billion, or $3.01 a share, from $1.1 billion, or $2.60, a year earlier, CIBC said in a statement. Adjusted profit, which excludes some items, was $3.08 a share, compared with the $2.93 average estimate of 14 analysts surveyed by Bloomberg. The bank increased its quarterly dividend 2.3 per cent to $1.36 a share.

On Wednesday, Royal Bank posted third-quarter profit that beat analysts’ estimates on gains in wealth management, capital markets and personal-and-commercial banking. Bank of Nova Scotia and Bank of Montreal are scheduled to report results on Aug. 28, followed by National Bank of Canada on Aug. 29 and Toronto-Dominion Bank on Aug. 30.

Here’s a summary of CIBC’s results:

Revenue rose 11 per cent to $4.55 billion from a year earlier, while non-interest expenses increased 4.9 per cent to $2.57 billion.

The bank set aside $241 million for soured loans, up 15 per cent from a year earlier due mainly to higher losses in its CIBC FirstCaribbean bank.

Earnings from Canadian personal and small business banking climbed 14 per cent to $639 million.

Canadian commercial banking and wealth management profit rose 20 per cent to $350 million.

U.S. commercial banking and wealth, including contributions from its PrivateBank takeover, were $162 million, compared with $41 million a year ago.

Capital markets earnings increased 5.2 per cent to $265 million.

Banks in better shape to absorb losses from possible housing crisis: Moody’s

Surging house prices and increased mortgage lending by Canada’s biggest banks — particularly in hot regions around Vancouver and Toronto — have boosted potential losses in the event of a U.S.-style housing crisis, according to the latest stress test by Moody’s Investors Service.

But steps taken by governments and regulators, and by the financial institutions themselves, mean the banks are in a stronger position to absorb such losses than they were in 2016.

“Banks are in better shape than two years ago,” said Jason Mercer, a senior analyst at Moody’s and lead author of the ratings agency’s report released Wednesday.

“Our stress results indicate banks would experience higher losses… because house prices have continued to increase and mortgage loans have grown,” Mercer said. “However, the banks have increased their capital buffers during that time and are now in a stronger financial position to weather such losses.”

Aggregate potential mortgage losses for the seven largest Canadian mortgage lenders, which include the country’s Big Five banks, have climbed to $14.3 billion in the Moody’s stress test, up from $12.1 billion in 2016. A “shift in portfolio mix” in favour of Ontario and British Columbia contributed to higher assumed loss rates, as did an increasing proportion of uninsured mortgages, which have higher losses in default, Moody’s said.

In the two years since the credit ratings agency’s last stress test, all the banks have amassed larger capital buffers that would absorb the additional losses and leave the financial institutions in a stronger position.

The potential losses would consume about 70 basis points of the banks’ CET1 capital, the protective buffer that is closely watched by regulators. While the potential impact is up from 60 basis points in the 2016 stress test performed by Moody’s, the ratings agency notes that the starting point CET1 capital “is now materially higher, more than offsetting the increased losses.”

Canadian Imperial Bank of Commerce remains the lender that would have the lowest “post-stress” capital — with a CET1 ratio of 10 per cent — due to its large domestic franchise, according to Moody’s.

Canada’s biggest banks have increased their lending to home buyers in recent years as house prices have climbed. Between 2014 and 2017, the average house price in the country grew by almost 10 per cent a year, according to Moody’s. During the same period, residential mortgage debt increased at a compound annual growth rate of six per cent, reaching almost $1.8 trillion.

Roughly 50 per cent of domestic baking assets are residential mortgages, according to Moody’s.

But the report noted several changes that ease consumer debt concerns and bank exposure. For example, home equity lines of credit, or HELOCS, are still growing, but they are shrinking as a proportion of mortgage-related debt, standing at about 16 per cent.

A higher amount of consumer debt in HELOCs is a concern because the interest-only unamortized loans use the home as collateral. This gives consumers an easier path to carry debt, which can leave them exposed to external circumstances such as an increase in interest rates or a steep decline in house values.

As Moody’s notes in the report, HELOCs “increase consumer vulnerability because they extract home equity and shrink borrowers’ buffer against a (potential) rapid house price correction.”

HELOCs can also be called at any time, though Mercer says this is unlikely to occur if borrowers are making their monthly payments.

Moody’s notes that unemployment has remained historically low since its last stress test, which is positive for residential credit quality. In addition, government and regulatory intervention appears to be taking some of the wind out of home price growth, while high consumer debt relative to income also appears to be moderating with the strong labour market helping to raise incomes.

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Royal Bank raises prime rate to 3.7 per cent following Bank of Canada rate hike

TORONTO — The Royal Bank has raised its prime lending rate after the Bank of Canada increased its overnight lending rate to financial institutions.

RBC says it will increase its prime rate by a quarter of a percentage point to 3.70 per cent, effective Thursday.

The rate has been set at 3.45 per cent.

The increase will raise the cost of borrowing for customers with loans linked to the prime rate such as variable rate mortgages and lines of credit.

The Bank of Canada raised its target for the overnight rate to 1.5 per cent today.

It was the central bank’s fourth rate increase in the last 12 months.


HSBC undercuts BMO, TD on variable rates as mortgage fight escalates

HSBC Canada cut its five-year variable mortgage rate to 2.39 per cent as banks compete for customers amid a slump in home sales.

The Canadian division of London-based HSBC Holdings Plc also cut its five-year fixed rate for some mortgages to 3.09 per cent, the lender said in an emailed statement. Both rates, effective May 17, undercut mortgage offered by Canada’s six-biggest banks, which have been adjusting rates during a spring buying season that’s started out soggy.

Bank of Montreal last week cut its five-year variable rate to 2.45 per cent — a 1 percentage point discount from the lender’s prime rate — in a mortgage special that runs until the end of May. Toronto-Dominion Bank followed on May 15, matching the 2.45 per cent rate in a special available until May 31. HSBC has been undercutting the largest domestic banks on mortgages for about a year.

Home sales nationwide fell to the lowest in more than five years in April , as bond yields and tougher mortgage qualification rules imposed in January helped cool the market.

Canada’s banks are witnessing “a more pronounced” slowdown in mortgage growth in the second quarter, with a 0.19 percent growth since the start of the year, Scotia Capital analyst Sumit Malhotra said Wednesday in a note to clients. That’s the slowest in four years.

The February-to-April period has “traditionally marked the slowest period of the year for domestic residential real estate loan growth, and our review of recent data clearly indicates that the seasonal deceleration will be more pronounced” in the banks’ second quarter results which begin next week, he said.

Home Capital predicts record surge in mortgage renewals as it reports drop in profit

The head of Home Capital Group Inc. predicted Wednesday the company will enjoy a rush of mortgage renewals, a forecast that followed a lower first-quarter profit for the lender and the introduction of tighter underwriting regulations for Canada’s housing market.

Yousry Bissada, president and chief executive of the Toronto-based mortgage lender, said he expects the company’s own efforts and the new underwriting rules to contribute to strong renewal rates.

“We think we will have better renewals than at any time, not just last year, but any time in the 30-year history of this company,” Bissada said on a conference call with analysts.

Home Capital is not the only one predicting a higher-than-normal rate of renewals, and uninsured loans are now subject to a new “stress test” that borrowers could face if they turn to a different federally regulated financial institution. A report from CIBC Capital Markets last month estimated 47 per cent of existing mortgages in Canada will need to be refinanced in 2018, more than the 25-35 per cent of loans that are usually up for renewal in a year.

The expectation of rising renewals came after Home Capital reported $34.6 million in net income for the quarter ended March 31, which was up 13 per cent compared to the quarter that preceded it, but down 40.4 per cent from last year’s $58 million.

Home Capital also reported total originations of $1.16 billion for its first quarter, again, up nearly 33 per cent compared with the fourth quarter, but down more than 50 per cent from a year ago. 

Home Capital Group’s Toronto offices.

The company has been on the rebound after being hit with accusations last year that it misled investors, which triggered a run on deposits that was stemmed with help from a high-profile investment from Warren Buffet’s Berkshire Hathaway Inc. Home Capital also agreed to pay $29.5 million to settle a class action lawsuit and a proceeding before Ontario’s securities regulator tied to those allegations.

“I’m very pleased to say Home is back in every aspect of our business,” said Bissada, whose company lends to borrowers who cannot qualify for mortgages at the big banks.

But Home Capital and other lenders are now dealing with new government regulations introduced to try to tame housing markets. They include new rules for residential mortgage underwriting, known as the B-20 guideline, which came into effect at the start of this year and include the new stress test that Home Capital expects will boost the rate of loan renewals with existing lenders.

Bissada said Home Capital had “very good success” with renewals in its first quarter, although it wasn’t able to determine how much of those effects were driven by the new regulations, as renewals were offered in the preceding quarter. 

“We haven’t been able to isolate how much of the renewal book is because of B-20,” he said. “No doubt, though, we think it will help retain some of the book because some of these mortgagors may not be able to qualify elsewhere.” 

The company is also seeing cooler housing markets in Canada. Home Capital noted in its management’s discussion and analysis that sales volume in the Greater Toronto Area and Greater Vancouver Area “declined significantly” during the first quarter compared to the same period last year.

“It is too early to determine whether this activity is indicative of a sustained trend due to impending further rate increases by the Bank of Canada and the uncertainties around the new B-20 rules,” said Home Capital’s MD&A. 

The company’s stock price rose Wednesday, with shares up about 5 per cent at midday. 

National Bank Financial analyst Jaeme Gloyn said Home Capital’s quarter supported his firm’s “cautious stance” on mortgage lenders.

“We continue to recommend investors await better visibility on macro-related risks as well as HCG’s deposit-gathering capabilities, profitability, growth, and credit performance,” Gloyn added in a note.

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Home Capital anticipates record surge in mortgage renewals as it reports steep profit drop

TORONTO — Home Capital Group Inc. is anticipating the highest mortgage renewal rate ever in the alternative lender’s history, in the wake of new regulations and company initiatives to stay competitive.

Home Capital CEO Yousry Bissada says the Toronto-based mortgage lender is “back in all aspects of our business” despite reporting a 40 per cent year-over-year drop in net income in the latest quarter, compared to a year ago.

It reported fiscal first quarter net income of $34.6 million, beating analyst expectations but falling short of the $58 million earned a year ago before the lender was hit with allegations of misleading investors and faced a run on its deposits.

Bissada says Home Capital expects higher levels of mortgage renewals going forward to give the company a boost, as borrowers who stick with their current lenders can avoid a new stress test for uninsured mortgages that make it harder for homebuyers to qualify.

He told analysts on a conference call that the new mortgage guidelines, introduced this year, combined with new company initiatives will produce the highest mortgage renewal rates in Home Capital’s 30-year history.

He adds that Home Capital is also offering more competitive mortgage rates as it faces competition from private lenders and other institutions which are not federally-regulated, and not required to apply the new stress test.

For the 3.4 million Canadians with subprime loans, Poloz can’t go slowly enough on rate hikes

For many Canadians, higher interest rates are reason to grumble. But for the country’s 3.4 million subprime borrowers, they could spell disaster.

Borrowers with impaired credit histories may have limited access to emergency funds compared with their prime counterparts, giving them less wiggle room when debt servicing costs rise. That puts them on the frontline of the Bank of Canada’s recent interest rate increases.

Jason Wang, vice president of risk analytics at Progressa, an alternative lender that services mostly subprime clients, hasn’t yet seen evidence that higher borrowing costs are leading to more missed payments, but that could change, he says. Of 28.4 million “credit-active” Canadian consumers, 11.9 per cent fall into the subprime category, according to estimates from TransUnion, one of the country’s two credit-reporting agencies.

Progressa’s loss rate, which measures the number of clients 90 days past due on their payments, is a lagging indicator. “I am curious to see if, in a few months, the Bank of Canada raises the rate again, if that would be trickling into our data,” Wang said in a telephone interview.

The next opportunity to gauge the impact of higher rates will come with the firm’s next quarterly risk report in July, Wang said. Depending on the results, the lender would decide what action to take and that may include adjusting its risk profile for acquiring new clients, he said.

After the Bank of Canada’s three 25-basis-point hikes since July, Wang calculates, someone with a $60,000 (US$46,000) variable-rate loan would need to pay an extra $37.50 in interest every month. And with rates bound to go higher, those costs will mount.

Implied odds from swaps trading show about a 33 per cent chance of another hike at the bank’s May 30 meeting, and a 95 per cent chance of two increases by the end of the year. The Bank of Canada last lifted its benchmark rate to 1.25 per cent in January.

“A non-subprime person might say, ‘Well, what does that mean? That’s one dinner I could do less in a month,’” he said. “For subprime, and we see this every day, when they are budgeting down to every $10, this is a lot.”

So far, they’ve been able to absorb the higher interest costs because the economy is doing well, and “increased income and employment prospects” are probably balancing things out, he said. “It might take another couple of rate hikes for us to see anything.”

“I would urge the Bank of Canada to be really careful with future rate movements,” Wang said.