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Bank earnings_sq

Q1 bank earnings season came and went with less fanfare than usual, at least on the mortgage front. 

Executives’ mortgage commentary focused primarily on conditions in Canada’s two hottest housing markets and on strong credit quality.

Earnings reports show continued robust mortgage activity at CIBC and National Bank, with both reporting a 12% year-over-year increase in mortgage volumes. We also saw stronger-than-expected mortgage volumes at Scotiabank.

As we do every quarter, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage notables right here. Key tidbits are highlighted in blue.

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Canada’s biggest non-bank lenders have all reported third-quarter earnings. In their earnings calls they outlined how they’re coping with Ottawa’s recent changes to the mortgage qualification and insurance rules.

Per usual, we’ve combed through their transcripts in order to see what they’re telling investors. Here’s a rundown of it all, with highlights in blue.


Street Capital

Notables from its call (source):

  • Street sold a record $2.85 billion in mortgages in Q3 2016 compared to $2.28 billion in the same period last year.
  • Gains as a percentage of mortgages sold were 184 bps in the quarter, above its traditional range of 178 to 182 bps.
  • “We expect the upward trend in renewal volumes to resume with renewal volume expected to exceed 2016 volumes by 30% to 35%, while 2018 renewal volumes are expected to increase by 35% to 40% over a very strong 2017,” said Marissa Lauder, Chief Financial Officer.
  • “…in Q3, our underwriting service returned to normalized levels following the underwriting adjustments we made in Q1 of this year,” said CEO Ed Gettings. “As a result, we generated strong performance during the quarter driven by higher new funded sales lines. We are looking forward to continued strength during Q4 as we target to remain number three or number four in the broker channel. During Q3, we retained our number three position in the channel, with a market share of 9.6%, up 1.2% from Q2.”
  • One of Street Capital’s objectives for 2016 “was to continue to generate renewable volume of 75% to 80% of loans eligible for renewal. Year-to-date, we have renewed $1.07 billion in mortgages, which is close to the 75% of those available for renewal,” said Gettings.
  • “The shifting regulatory environment further validates our long-term strategy to leverage our leading brand into a multi-product multi-channel opportunity,” Gettings added.
  • Street reported a tax loss carry forward balance of $325.9 million in the quarter. “This represents a real and sustainable advantage for the Company,” said Lauder. “We are currently not paying any cash taxes and will not pay cash taxes for many years to come. As a result, the net income after tax measure underestimates the true earnings available to the company.”
  • The serious arrears rate on Street’s mortgage portfolio was 11 bps in the quarter, “well below the CBA performance,” noted Lazaro DaRocha, President. That compares against 14 bps for the same period last year.
  • “In Q3, Street Capital came to an agreement in principle to sell mortgages to two more Canadian Schedule I banks,” said DaRocha. “We completed our first sales with one investor in October and we anticipate completing the first sale with the second investor before the end of the year.”

On Department of Finance Mortgage Changes…

  • “…the recent announcement of new mortgage insurance rules by the Department of Finance will have a modest impact on the business in 2017,” said CEO Ed Gettings. “We expect that this will be more than offset by higher renewal volumes and our transition to Schedule I banking platform.”
  • DaRocha: “…we anticipate 2017 adjusted net income to be between 4% and 7% higher than 2016 for the following reasons: The results of these [DoF] changes are expected to reduce new originations in 2017 by less than 10 percent. We have liquidity options that will mute the impact of reduced insurance availability. The modest reduction in new originations will be more than offset by strong growth in renewals.”
  • DaRocha added: “Utilizing our bank platform, we anticipate launching our uninsured mortgage product before the end of Q1 2017. That said, the risks of government-backed insurance availability continue to increase. Most recently, the Department of Finance issued a consultation paper on the concept of risk sharing. While the final structure that this will take is yet to be determined, we believe that some form of loan loss risk sharing will be implemented.”
  • “In our opinion, this will likely result in increasing costs of capital and, ultimately, rates for consumers. Obviously, this will add even greater pressure to mono-line unregulated mortgage lenders. However at the same time, there are some tailwinds on the horizon. Recently the Government of Canada announced a material increase in immigration targets from 2017…Immigration is a key driver of housing activity in Canada.”
  • DaRocha also noted that one of the reasons Street embarked on applying to become a Schedule I Bank was due to a strategic review conducted four years ago that found the mono-line unregulated lending business model faced limited growth prospects and increasing risks. “We saw not only risks to the availability of insurance, but also risks associated with the declining availability of government-sponsored securitization programs.”
  • “We are confident that the Bank platform will not only allow Street Capital to diversify its funding sources but, more importantly, allow it to raise its own funding for the expansion of products beyond an insured mortgage, thereby diversifying its revenue streams and allowing it to more dynamically address any future disruptions to market conditions be they regulatory or otherwise,” DaRocha said.
  • Asked about low-ratio mortgages that may not be eligible for insurance going forward, DaRocha replied: “…we do anticipate a drop in new insured originations next year. We believe there will be less than 10% from what we originated this year. We are comfortable that we have not only expanded our funders in terms of the numbers, but also in terms of the magnitude of volume they will take. We are in negotiations with a couple of them to get them to take more of the conventional low ratio, that’s always a continuing process for us…”

Home Capital

HCG-LOGONotables from its call (source):

  • Home Capital had total originations of $2.54 billion in the quarter, compared with $2.5 billion, which takes total year-to-date originations to $6.8 billion from $5.9 billion in the first nine months of 2016, up 15% on a year-to-date basis.
  • Net non-performing loans as a percentage of gross loans remained low at 0.31% compared to 0.33% in the second quarter.
  • “…management is disappointed in the growth of revenue, net income and loan balances, which have come in lower than expected,” said Martin Reid, President and CEO. “Operationally, we have made changes in our business that have resulted in expenses increasing at a much faster rate than the growth in revenues. This combined with a more challenging and uncertain business environment, given the regulatory changes, adds greater uncertainty to the growth in revenues going forward. As a result, we will be revising our mid-term targets.”
  • Reid added: “…our future plans to reduce expenses will be over and above our other initiatives focused on revenues that are already in motion, such as improving service levels to mortgage brokers by reducing turnaround times on commitments and approvals, while maintaining strong risk management standards; getting more benefits from our broker loyalty program, Spire, and our broker portal, Loft, and driving initiatives to improve customer retention through improvements in renewal efforts as well as slowing down early redemptions.
  • “The bottom line impact of [the Department of Finance] changes was not significant, particularly in light of the fact that insured mortgage lending is a smaller part of our business, as well as being a low-margin business,” said Reid. “We see the potential impact of these changes to be as much as a 60% drop in originations of our accelerator product. This would reduce after-tax net income by about $4.8 million, or $0.07 per share.”
  • On the changes to the low-ratio insurance program, Reid said this: “The two areas most affected are refinances and rental properties. This business will likely still qualify for a mortgage, but just not for an insured mortgage. They will likely shift from [a] lender’s insured portfolio to their uninsured portfolio. The potential opportunity for Home will be a function of pricing for that product. Although, in theory, pricing should increase, it is still unclear whether competitive pressures will keep pricing low or whether it will rise providing Home with an opportunity under one of our uninsured products, time will tell.”
  • Chief Financial Officer Robert Morten noted that Home Capital has now reviewed all of the customer files and income documentation related to mortgages referred by the 45 suspended brokers. “…there have not been any unusual credit issues on these mortgages. The value of outstanding mortgages originated by these brokers in the loans portfolio at quarter end was $1.14 billion, as compared to $1.3 billion at the end of the second quarter and $1.55 billion at the end of 2015.”
  • Asked about the progress of retention efforts of Home Capital’s traditional portfolio, Pino Decina, Executive Vice President, Residential Mortgage Lending, said: “…as we develop strategies to improve our retention of all of our customers, including our classic book or traditional mortgages, we are looking at the reasons why they are leaving across all fronts. So not just at maturity, where the largest focus obviously is always placed, but mid-term. So we’ve pretty much segmented the strategies into two groups for clients that are within 90 days of maturity and obviously those are renewal strategies, and then outside 90 days more of retention strategies, try to keep them on our books, graduating them on to a program if they are in that position, looking for other products to meet their needs and retain them with Home.”
  • Commenting on some of Home’s analysis in terms of consumer behaviour, Decina explained, “…traditional or classic mortgage customers usually take about 20 to 22 months to graduate. And when we say graduate, that’s going from an alternative A mortgage to an A-mortgageOver the past couple of years, the traditional customer has come to us with a lot higher credit quality and the Beacon scores…These are real near-prime customers and so that life-cycle has really shortened. They are graduating at a much, much faster pace…(but) We know they’re going typically back to their bank of choice, which typically is what happens with our traditional customers.”
  • Asked about progress on efforts to reduce broker turnaround times, Decina provided this update: “We’re getting very close and have actually seen our successes in the past quarter, where our commitments are issued within six hours on approved applications. So we’re very pleased with that documentation review. We want to commit to within eight business hours, so one day, and then likewise with our solicitor partners.”
  • On the broker portal roll-out, Decina said, “we’ve actually just completed a full enhanced training for our staff here in Toronto. We are going to do the same for our branches and then start a more robust roll-out in Q1 of next year to our broker partners. We have made some enhancements to the portal, based on our pilot partners that were put on it. So we want to make sure our staff were up to date on those changes and again, full roll-out starting in Q1 next year.”

First National

Notables from its call:First National NEW

  • Mortgages under Administration increased another 6% year-over-year to a record $98.6 billion.
  • That makes First National Canada’s largest non-bank originator and underwriter of mortgages, and the country’s single largest commercial mortgage lender.
  • “The oil industry downturned and Western Canada continued to manifest itself with a 34% drop in single-family origination volumes out of our Calgary office,” said Stephen Smith, CEO of First National. “We’ve seen a contractionist market each quarter for over a year now. But this is the largest reduction in mortgage demand so far.”
  • “…we saw a decline in single-family originations of between 2% and 5% in other regions of the country in this past quarter,” Smith added. “We believe this is the result of some smaller originators choosing to buy market share with little regard to profitability.”
  • On the Department of Finance’s new mortgage rules announced on October 3, Smith said the most significant change for First National is the new mortgage insurance rules that increase the stress test for borrowers of five-year fixed high-ratio mortgages. “The stress test will have an industry-wide effect for all mortgage lenders, reducing volume of high-ratio mortgages by an estimated 5.8%,” Smith said.
  • Regarding the changes as a whole, Smith outlined the impacts on First National: “We believe these changes will have a disproportionate impact on non-bank lenders that use NHA MBS and CMB securitization as funding sources. First National has used portfolio insurance in the past several years to insure conventional mortgages, which were then securitized or sold to institutional investors.”
  • “What does this mean for First National? First, let’s talk about the impact on originations. First National originates approximately $22 billion of mortgages annually consisting of $13 billion of new single-family, $5 billion of single-family renewals and $4 billion of commercial multi-residential mortgages. Generally, about 50% of the new single-family volume is high-ratio insured, and about 50% of that amount would be affected by the new qualifying rate rules. For high-ratio originations for the nine months ended 30 September, 2016, our analysis would indicate that if we re-underwrote using the new qualifying rate, our origination volume would be reduced by 4.6%, or approximately $300 million on an annualized basis.”
  • “Accordingly, we anticipate a decline in high-ratio single-family mortgage originations going forward of approximately 5% to 8%, which works out to between $300 million and $500 million, or about 1% to 3% of total originations,” Smith said. “In context, this is a negative, but not a significant one. Of note, we do not anticipate any material impact on our other originations and renewals, as a result of these new rules and no impact on commercial lending at all.”
  • “Now let’s look at the impact upon profitability,” Smith continued. “First National earns most of its profit from $73 billion servicing portfolio and $25 billion portfolio securitized mortgages. These portfolios will continue to provide earnings over the life of the mortgages. Due to the economics of new single-family originations for First National, they provide little, if any, earnings in the year they are underwritten. Instead, profits are delivered to shareholders as the company receives service income, and the net interest margin from securitized mortgages. The fact that rule changes will have a negative impact on single-family originations in 2017 and likely in 2018 will have little to no impact on First National’s 2016 or 2017 earnings. Finally, let’s look at the impact on funding. While some conventional mortgages originated in the past would not now be eligible for any NHA MBS securitization, the company has institutional investors and asset-backed commercial paper conduits that can purchase such mortgages without portfolio insurance. In other words, First National has diversified funding sources and continues to participate fully in the market.
  • “Overall, we expect our scale range of single-family and commercial mortgage products, diversified funding sources and proven customer focus approach will allow us to continue to provide solid results going forward, in spite of these rule changes,” Smith said. “First National’s faced challenges in the past, economic, market oriented and legislative, and every time our business model has proven its worth. We expect this set of challenges to be no different.”
  • Looking forward, Moray Tawse, Executive Vice President, said, “We also expect the low interest rate environment to remain with us for the final quarter of 2016, such that mortgage affordability will remain at favourable levels. This provides a catalyst for continued market activity as does a relatively stable employment picture in most regions of the country and ongoing immigration levels, which are another driver of housing demand.”

Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.

By Steve Huebl & Robert McLister


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Bank earnings_sq

Another bank earnings season is in the bag. It was a quarter where Canada’s Big 6 banks addressed analysts about the changing regulatory landscape.

There was also a sharper focus on uninsured mortgage portfolios. National Bank analyst Peter Routledge addressed the issue in a recent note to clients: “With uninsured mortgages driving an increasing portion of overall mortgage and loan growth…the consequences of a decline in housing prices—most notably in the Toronto and Vancouver markets—weighs more heavily with each passing quarter.”

As usual, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related goodies here. Notable tidbits are highlighted in blue.

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Bank earnings_sq

Another bank earnings season has just wrapped up, giving us insight into how Canada’s Big 6 banks are monitoring and reacting to housing market risks, most notably runaway prices in Toronto and Vancouver.

Here’s some of what we learned from Big Banks’ third-quarter reports:

  • While credit card and personal lending delinquencies are rising, particularly in oil-producing provinces, loss rates on uninsured mortgage and HELOCs remain low and stable overall.
  • During the conference calls, a number of analysts openly pondered whether moderating growth in the banks’ mortgage portfolios may actually be prudent, given current market conditions.
  • There are clear signs of an industry-wide move towards a lower ratio of insured mortgages and lower loan-to-values on uninsured mortgages.

In keeping with CMT’s quarterly tradition, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related goodies. Notable tidbits are highlighted in blue.

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Second quarter earnings from Canada’s biggest non-bank lenders are now in the bag.

We learned (no surprise) that improving customer retention rates continues to be a priority for at least two of the lenders, and that Home Capital is making a concerted effort to improve service levels to mortgage brokers.

“Service levels are not where we think they should be for the mortgage broker, with slower turnaround times on commitments and verification of income, however, we are improving the process and momentum is picking up,” CEO Martin Reid said during the conference call.

We’ve pulled all these and many more tidbits from the transcripts of three non-bank leaders, First National, Home Capital and Street Capital. Here’s a rundown of it all, with highlights in blue.


Street Capital

Notables from its call (source):

  • Street sold $2.54 billion of mortgages in Q2 vs. $3 billion last year.
  • Street says it renewed nearly 75% of its mortgages that were available for renewal
  • The company’s market share was at 8.4% in the quarter, making it the fourth largest non-bank lender.
  • As of the end of June, the average beacon score on its portfolio was 749, the average loan-to-value ratio was 81.2% and the average total debt service ratio was 36.1%.
  • “This year we are focused on putting the pieces in place to drive revenue growth starting in 2017,” said CEO Ed Gettings. “We have three primary objectives in 2016. Our first objective is to advance our Schedule I bank application through to completion… Our second objective is to grow mortgages under administration and hold our market share in the mortgage broker channel. Originations were lower than what we would have liked during the quarter, as the underwriting adjustments we made in Q1 2016 had some spillover effects in the second quarter of 2016… Our third objective for 2016 is to continue to generate renewal volumes of 75 to 80% of loans eligible for renewal.”
  • “We continue to expect that on a full-year basis, gains as a percentage of mortgages sold will be in the range of 178 to 182 basis points,” said Marissa Lauder, Chief Financial Officer. “Our acquisition expense ratio was 106 basis points in the quarter; this compares to 102 basis points last year. The increase reflects lower relative renewal volume year-over-year and a broker incentive program we launched late in Q1 2016 that increased the acquisition cost in the quarter.”
  • Lauder added: “We continue to expect 2016 renewal volumes that are approximately 15% lower compared to (last year). But in 2017… we expect the upper trend in renewal volumes to resume. With renewal volumes expected to exceed to 2015 renewal volumes by 10% to 15% and 2018 renewal volumes (that) are expected to increase by 30% to 40% over a strong 2017 providing a real revenue boost in these years.”
  • Speaking on the quality of Street’s credit quality, President Lazaro DaRocha said, “… the serious arrears rate on our portfolio of mortgages was 11 basis points, well below the CBA performance. This is also well below last year which had 16 basis points..”
  • Asked to explain Street’s forecast for 2016 originations to match 2015, Gettings said: “…we’re looking at our current pipeline and we’re feeling good about the fact that we think we have turned the corner on those operational issues that we were dealing with in Q1 and Q2. Market share during the quarter went up as well from 7.6% in Q1 to 8.45%… so we believe that we are building momentum, and we’re clearly headed in the right direction.”
  • Asked whether there was any indication of declining demand overall or from first-time buyers in the heated Toronto and Vancouver markets, Gettings replied, “The broker channel itself is growing at between 4% and 5% year-over-year on a year-to-date basis. For first-time buyers, yes, the price points are being stretched for them. And what I understand is happening is that instead of buying houses they’re focusing on condominiums because the price point’s more attractive for them.”
  • In the last quarter, staff levels rose to 241 from 215 and was “primarily, if not all, within our underwriting and QA area,” said DaRocha.
  • On Street’s now discontinued broker incentive program, CFO Marissa Lauder said the program increased acquisition costs on a net basis by 5 bps for certain products. DaRocha added the program was a reaction to what Street’s competitors had in the market at the time. “We’re never the lowest rate or the highest commission, but we need to be competitive. So this was a reaction to others’ moves.”
  • On Alberta origination volumes, Gettings said: “It’s a slight decline on year-to-date originations. We would have had 15% of the book in Alberta last year; it’s dropped down to 14%. So it’s definitely a function of the market in Alberta, as well as some of our underwriting guidelines.”
  • Asked what is behind Street’s 75-80% renewal target, Gettings replied: “We definitely have a retention team in place that if we see a customer calling in that has a desire for a payout statement or something like that, we’ll immediately flip them to an in-house retention team and we’ll have a dialogue with the customer to understand what their needs are. If they’re looking to negotiate a bit on rate, we’ll take that into account.”
  • Asked how Street is managing the hot B.C. market, Gettings answered: “…we are really not targeting that high-end segment of the marketplace. Like other lenders, we have a sliding scale. So as you go up in loan amount we reduce the loan-to-value that we’ll lend to you as a customer. You have to have more skin in the game.” He said, for example, a borrower looking to buy a $1-million home would have to put down 20%, or $200,000. “We might consider lending you that full amount, depending on a number of underwriting criteria…the maximum that I will lend is in the $1.8, $1.9 (million) range, which takes our loan-to-value down into the 60% to 65% range. So we’ve got lots of capital protection in case of a default or a downturn in the marketplace. Our average loan size is in the $375,000 range.

 

Home Capital

HCG-LOGONotables from its call (source):

  • Home Capital reported net non-performing loans of 0.33% of gross loans as of year-end, unchanged from Q2 of last year.
  • It also reported combined traditional and Ace Plus and insured single-family residential mortgage originations of $1.37 billion for the quarter, up 5.7% from last year.
  • Noting that 2014 was Home Capital’s “high water mark” for originations, CEO Martin Reid said: “On a total origination basis, we are ahead of 2014, showing we are on the right track and within our different product lines there is room for improvement and we are working hard towards those improvements, particularly as it relates to our traditional mortgage product.”
  • He added: “Service levels are not where we think they should be for the mortgage broker, with slower turnaround times on commitments and verification of income, however, we are improving the process and momentum is picking up. We believe this is our biggest impairment to greater success on the residential side and a number one priority for management. Our investment and broker portal and digitization of internal process will help to address those issues and we hope to see the positive impact of that in the coming quarters.”
  • Talking about Home’s new uninsured product, Ace Plus, which is geared towards borrowers who just miss qualifying for a prime mortgage, Reid said: “We moved quickly to serve these borrowers by rolling out Ace Plus late last year and we are seeing the positive results. We originated $115 million of Ace Plus last quarter, significantly higher than we what we did in the first quarter.”
  • “We have launched our new broker portal and loyalty program to improve service and turnaround times in the mortgage origination process,” Reid said. “…This is a major effort that will improve how we do business. We will be able to process more business, more correctly with more control and a better customer and broker experience. The benefits will really start to flow toward the end of the year and into 2017…”
  • “…we are not seeing any unusual credit issues with the mortgages related to the 45 suspended brokers. We are now over 90% through our review of the portfolio originated by these brokers, so we are well on our way to finishing that up before the year end as we have previously stated,” Reid said.
  • Offering his take on current market conditions, Reid said, “We see a much more moderate market ahead of us rather than the double-digit price increases that have characterized Toronto and Vancouver recently with the better balance between supply and demand. We don’t see any significant move lower in prices.”
  • Responding to a question about an increase in run-off of mortgage originations, Reid said, “we were probably under-resourced in addressing some of that runoff. So we’ve addressed that…brokers like to sort of turn over their clients and they are very quick to try and sort of move clients from one institution to another and what we will do there is look for the early warning signs and then address it and try and keep that customer. So we have addressed that. We think we are going to get a little bit better traction, so I am not sure I would look at that runoff in the last couple of quarters as being indicative of future quarters.”
  • Asked about Home Capital’s plan to increase net profit, in the face of several quarters of continued year-over-year declines in net income, Reid answered: “…we had started doing some changes internally as it relates to our residential business and then we had the fraud situation, which accelerated a lot of those changes, so we spent a lot of time, a lot of money and a lot of energy from our employees in terms of implementing those changes. In the process of that I would say the biggest downfall has been our service level to the mortgage broker. So that’s really what’s impacted originations the most I think is that service levels of the mortgage broker, and these are mortgage brokers that we always dealt with and still deal with today. So for us… we continue to invest in technology, redefine process and do it in a way that we are putting the right risk and control framework in place, but trying to get that customer service to the mortgage broker back to where it needs to be. And that’s where we are seeing progress on originations if you look at the residential, consecutively we’re up about 25% from Q1 to Q2 and we do see that continuing to improve as we improve our service levels for the mortgage broker.”

First National

First-National.gifNotables from its call:

  • Mortgage originations in Q2 were up year-over-year by 8% to $5.5 billion.
  • Mortgages Under Administration or “MUA” increased another 7% year-over-year to a record $96.6 billion. This increase was attributed to “success in mortgage originations and renewal retention,” said CEO Stephen Smith.
  • “The only moderating factor was lower activity levels for our Calgary office, which was to be expected given the economic slowdown in Alberta,” Smith noted.
  • “Mortgage servicing income was 23% higher in the second quarter, reflecting higher revenue earned from First National’s third-party underwriting and fulfillment processing business,” said Rob Inglis, Chief Financial Officer.
  • Moray Tawse, Executive Vice President, spoke about the areas of focus going forward: “As we look ahead, we have significant renewal opportunities to take care of this year and that is one area of particular focus. Another is our underwriting and fulfillment processing business. We have an opportunity to continue to add to First National’s earnings by sustaining high levels of mortgage broker service in this area and we believe we have the resources in place to deliver.”
  • “…we will keep an eye out for changes in the landscape including government policy changes, but from our vantage point right now, it’s business as usual,” Tawse added.
  • Asked for his take on B.C.’s new foreign buyer tax, and the prospect of a similar tax being adopted in Ontario, Smith said: “…our average mortgage size is in the $300,000 range. We’re not particularly lending in the range of properties that are targeted by this tax. The issue of taxes both here and potentially in Ontario, that starts to be a more public policy issue. I think there’s a concern in B.C. A legitimate policy concern is that you don’t want your housing stock in your major cities to start to become a store of value for people outside the country. And that has overreaching policy concerns that probably just don’t necessarily affect us as a mortgage lender. I think we’ve always been prudent in the way we lend. And we make sure that the people have the down payment; the down payment comes from identifiable sources, that the people have the income and have a job to be able to support that income. Do I think [B.C.’s new tax] is going to affect the market particularly? I think it’ll have an effect in the market. You’ve just (increased) the prices by 15% for foreign buyers. But I don’t think it’s going to have a material effect at First National.”

Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.

Steve Huebl & Robert McLister


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Bank earnings_sq

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.

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Canada’s largest public non-bank lenders have wrapped up their first quarters. Among other trends, two big themes this quarter were the tightening of mortgage spreads and a refocus on improving customer retention. 

To get colour on those and more, we combed through the transcripts of three non-bank giants, First National, Home Capital and Street Capital. Here are the highlights…


Street Capital

Notables from its call (Source):

  • Street now has over $25 billion in mortgages under administration.
  • $1.52 billion worth of mortgages was sold during the quarter compared to $1.62 billion the year before.
  • CEO Ed Gettings said that Street’s first objective is to advance its Schedule 1 bank application through to completion. It has been strengthening its capital position as part of that process. “We expect to be in a position to operate as a Schedule 1 bank in 2017,” Getting said.
  • “Our second objective is to continue to grow mortgages under administration and hold steady our market share in the mortgage broker channel,” he added. “Our share dipped in Q1 to 7.6% as our underwriters adjusted to some of the changes we put in place during the quarter in preparation to become a Schedule 1 bank.”
  • Gettings said Street is currently ranked 6th in market share in the mortgage broker channel. “We are targeting to regain the number three or number four position in this channel.”
  • Looking ahead to 2017, Getting said Street is looking to generate “solid earnings growth” as loans underwritten over the past three years come up for renewal. “We sold 62% more mortgages in 2012 compared to 2011 and that is why we are so confident that 2017 will be a solid year for renewals.”
  • The gain on sale percentage (as a percentage of mortgages sold) was 177 basis points in the quarter, lower than the 192 basis points last year. “The decline was due to tighter spreads in Q1 of this year compared to the unusually high levels of last year,” said CFO Marissa Lauder. “We expect on a full-year basis that the gain on sale percentage will normalize in the range of 178 basis points to 182 basis points.” (178-182 bps would translate to $1,780-$1,820 gross revenue on a $100,000 mortgage.)
  • Renewals accounted for 21.7% of loan sales in the current quarter versus 18.5% in Q1 2015.
  • “…assuming the company launches the bank in late 2016, we are estimating that the bank activities could add approximately 2% to 5% to revenue in 2017 and 10% and 20% in 2018 when compared to 2015 revenue,” Lauder said.
  • Street Capital President Lazaro DaRocha provided this update on the company’s bank application progress: “…OSFI observations had required some adjustment to our underwriting process to align with new industry-wide changes. As at the end of February, we had completed all of the required changes. We now expect that OSFI will be conducting a follow-up onsite review to validate these changes in this summer. This timing supports our expectation of receiving approval in 2016. We fully expect to receive approval to operate as a Schedule 1 bank in fiscal 2016. However we have not built any meaningful contribution of profitability into our expectations until 2017.”
  • “…We’ve seen our Alberta volume, which was about two years ago probably in the range of 22% to 25% of total originations, has dropped down to roughly about 15% of total originations,” said DaRocha. “And that has happened through a combination of things. One, the market in itself out there (is) slowing down, but two, we proactively tightened up there, probably…a year and a half to two years ago.”

 

Home Capital

HCG-LOGONotables from its call (Source):

  • Total originations in the quarter were $1.78 billion, an increase of almost 29% from the last year’s $1.38 billion.
  • Net non-performing loans as a percentage of gross loans was 0.34%, compared to 0.25% of the end of Q1 2015.
  • “I am going to state categorically, Home Trust has no exposure to Urban Corporation,” said outgoing CEO Gerald Soloway. “We continue to observe strong credit profile and stable loan-to-value ratios across the portfolio, which continues to support low delinquency, a low non-performing rate and ultimately the key low net write-offs. In fact, net write-offs were $1.6 million in the quarter representing 0.04% of gross loans…”
  • On the topic of new technologies, current President and incoming CEO Martin Reid talked about Home Capital’s new broker portal, Loft. “Brokers can get time-stamped documents, real-time updates on the status of deals and the attributes of those deals. We’ve completed [the] pilot…We’ll continue to roll out Loft and should have it substantially rolled out by the end of the summer to all of our broker partners.”
  • Asked what makes the program different from others already on the market, Pino Decina, EVP, Residential Mortgage Lending, said this: “(It’s) literally end-to-end, so throughout the entire origination process of a mortgage, a broker can see exactly, as Martin mentioned, what the status is of their new application, of their pending mortgage, outstanding commitments all the way through the funding, so that sort of makes ours different from anything else in the marketplace.”
  • Martin also commented on Spire, a broker loyalty program that launched on April 1. “This is designed to reward brokers who bring us business but it’s much more than that; it rewards brokers who bring us the right kind of business.”
  • “…in 2015, an area of weakness that we identified was in retention of customers looking for early renewal,” said Reid. “This was part of why, despite growth in originations, our portfolio shrinks. We’ve added resources to our retention team with the focus on retaining these customers with increased originations and retaining more of our existing clients, we should start to see the overall portfolio growing quite nicely.”
  • Regarding the additional resources being dedicated to Home’s retention team, Decina said: “…the resources that we’ve allocated … are going to be more experienced underwriters or originators. So individuals that…do call in, looking for either mortgage statements or discharge request of their mortgages, obviously we know they are shopping somewhere else or they are looking to refinance somewhere else. They will be able to walk through with some sort of [idea] what they are looking for, find other opportunities, other products and ways to keep them here at Home. So that’s a first strategy. The second is actually built within our Spire partnership program. And really as we onboard brokers onto the program, it’s not only about what they are giving us on a monthly basis and new origination, there is a component built within Spire which rewards brokers for keeping clients here long term.”
  • Decina confirmed a portion of the increased expenses is going towards broker commissions.
  • Asked about the price increases in the GTA and Vancouver, and whether Home is seeing any of its traditional clientele being priced out of the market, Soloway responded: “People are still affording reluctantly. They can afford the houses … and we haven’t really seen any difference in credit quality. If anything, the credit quality sort of upticks year-over-year when we do all the analysis. As funny as it sounds, people are basically coming with larger down payments and better Beacon scores.”
  • Asked about the narrowing net interest margin, and whether Home is seeing competitive pressure on the pricing side, Soloway said, “the mortgage market remains quite competitive especially at the high credit quality end of the business. There has been a little tightening of spreads, but we’ve also been able to do acquisition funds that were a little more reasonable. We’ve found that our funds that we raised directly are cheaper on the whole than what we raised through the broker portal.”
  • Reid said the company is about 75% through the verification process of mortgages that were handled by brokers cut off from Home Capital. “What we are finding is that out of that portfolio, less than 10% we would not be willing to renew.”

First National

First-National.gifNotables from its call (Source):

  • Mortgages Under Administration increased 8% year over year to $94.3 billion, a new record, driven higher by strength in mortgage origination and renewal retention.
  • Originations in the quarter amounted to $2.9 billion, also an 8% increase over last year.
  • “…originations increased in spite of an obvious decline in mortgage activity in Alberta,” said CEO Stephen Smith. “As we’ve discussed on recent calls, volumes in our Calgary office have declined in the face of the oil industry’s downturn and higher unemployment. This quarter, First National’s single-family originations were down in the region by 10% over last year. We expect weak activity in oil patch communities to continue.”
  • “…the single-family team made up for this with higher originations in other areas of Canada such that total single-family originations were 3% higher than a year ago at just about $2 billion,” Smith noted. “First-quarter single-family renewals were higher than a year ago as well, up 28% on a good volume of renewal opportunities.”
  • Mortgage investment income was 5% or about $700,000 lower than a year ago, reflecting a provision for loan losses. “Lower mortgage rates also affected the amount of interest earned on mortgages warehoused prior to securitization,” noted Chief Financial Officer Rob Inglis. “In last year’s first quarter, 5-year mortgage rates were about 3.09% compared to 2.79% to start 2016.”
  • “From a market perspective, we think 2016 will be somewhat similar to 2015 with strength in most regional markets, save for Alberta and Saskatchewan,” said Executive Vice President Moray Tawse.
  • “The Alberta market downturn also elevates the risk of credit losses, but as we’ve noted previously – and as our long-term results show – First National does not have the same exposure as other financial institutions because our securitized mortgage portfolio is almost 100% insured and the uninsured MUA is on the balance sheets of our institutional customers,” Tawse said.
  • “First National has significant mortgage renewals coming up this year and we started to take care of this opportunity in the first quarter and we will continue to do so going forward,” Tawse added.
  • Asked about arrears for the quarter, Rob Inglis said: “…we haven’t seen a deterioration in arrears numbers with respect to Q4 numbers nor have we seen a deterioration in arrears numbers in Alberta or Saskatchewan.”
  • Asked about mortgage spreads in quarter, Smith said: “Earlier in the quarter we had some good opportunities. To some extent what we’re benefiting from here on the spreads is the fact that we took the fair market loss in the first quarter of last year and that starts to manifest itself in wider spreads for this year, so that would be one factor. I think actually spreads were fairly good in the fourth quarter and then in the first quarter, so that’s another good factor. Actually as we speak, I think spreads are quite tight. We’ve had a backup in the bond market in the last week or so, so we think we’ve seen spreads tightening. I think that will correct but, you know, it could remain tight for a while so predicting where spreads will go is always a little bit of an issue.”
  • On the topic of discipline among competitors, Smith noted: “every spring we see competitors not being particularly disciplined, just generally there always seems to be a bit of push for market share. I think (because of) the recent rule changes where aggregators now have their own NHA-MBS allocation. This provided a degree of liquidity to the market that put some pressure on spreads in the broker space, [where] monolines participate. I think we might see tighter spreads there.”

Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.

Steve Huebl & Robert McLister


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Despite growing unemployment in oil country, Canada’s largest non-bank lenders capped off 2015 with low arrears and solid mortgage originations. Themes from last quarter’s lender conference calls centred on default rates, fraud, compliance, mortgage spreads and renewal performance.

We’ve pulled all those tidbits and more from the transcripts of three non-bank titans, First National, Home Capital and Street Capital. Here’s a rundown of their reports to the street, with highlights in blue.


Street Capital

Notables from its call:

  • Mortgages under administration in Q4: $24.8 billion, up 15% YoY.
  • Street sold $2.1 billion worth of mortgages in Q4, $1.6 billion of which were new originations.
  • Street says its market share in 2015 was 8.8%, making it the third-biggest brand in the mortgage broker channel.
  • Renewals accounted for 27.5% of loan sales in Q4 vs. 12.4% last year. 
  • “Renewals are above trend this year … because they reflect both 5-year terms originated in 2014 and the higher than usual renewals of four- and five-year terms originated in 2011 and 2012, respectively,” said Marissa Lauder, Chief Financial Officer, Street Capital Group Inc. “This is a result of promotions we implemented in those years to meet investor demand for the three- and the four-year product.” (Source)
  • “The serious arrears rate on our portfolio of mortgages was 14 bps,” noted Lazaro DaRocha, President, Street Capital Group Inc. “This is well below last year, which at 23 bps was also a very good rate on a well-seasoned portfolio.”
  • At the end of the year the average Beacon score of Street’s portfolio was 742, the average loan-to-value ratio was 74.4% and the average total debt-service ratio was 36.2%. (Source)
  • “…we fully expect to receive approval to operate as a Schedule I bank in fiscal 2016…There is no denying that this process has taken longer than we anticipated,” DaRocha added. “Recent publicly disclosed developments and concerns in the broker channel associated with mortgage fraud has heightened the level of awareness and expectations associated with robust fraud prevention policies and procedures.” (Source)
  • “…while OSFI, when they came on site and did their file reviews, they found not one single file with any instance of fraud, they still are asking all lenders to tighten up policies as preventative measures. So that is what we are focused on doing,” DaRocha added. (Source)

 

Home Capital

HCG-LOGONotables from its call:

  • Home Capital reported net non-performing loans of 0.28% of gross loans as of year-end, vs. 0.30% at the end of 2014.
  • “As of January 15, 26.9% of deposits now come from non-broker areas, not that we don’t appreciate and love the deposit brokers, but we just (see it as) a safer long-term policy for the company to have wide diversification in its deposit source,” said Gerald Soloway, Home Capital’s soon-to-be-retired Chief Executive Officer.
  • “…late in the year we closed our purchase of a licensed bank, CFF Bank. This fulfilled the strategic priority we had been pursuing for some time. The integration of CFF is going very well and we see the benefits from the additional distribution that CFF brings to us and we have seen that in the fourth quarter and so far this year,” Soloway added.
  • Alberta accounts for only about 4% of Home’s balance sheet portfolio and a portion of that 4% is insured mortgages.
  • In terms of Home Capital’s outlook, Soloway said, “…our view is that the housing market in 2016 will be balanced with relatively stable prices and sales volumes, although of course we accept that there will be regional disparities and against that backdrop, we will be working very hard to increase our market share of the market that we participate in.”
  • Asked about the recent regulation changes and what impact it may have on Home’s margins, Soloway said: “I don’t know if we’ve done any work on quantifying it, because on the insured part what has come about is the margins are still very tight on the insured part and I think that what you’ll see is you’ll see a steady increase in what we’re doing both from our core business…the key for us is to be very competitive in our space to have the better technology, to give the brokers a fast turnaround and we think we can see some nice increases in all aspects of our business with technology…”
  • Asked about higher-than-normal run-off on the uninsured mortgages, Soloway responded: “when we look at the files that are closest to maturity…we make sure that before we renew any files, we get all the documentation. Now the way it’s running, there is about 90% of the renewals that are coming up, we can get all the documentation and everything is fine and we’re happy to renew the mortgage. There is a small portion where we need increased documentation. Sometimes we go back to the broker and we’ll go back and even though we’re not doing business with this broker, we’ll tell them that it’s their client that we need some documentation and we can’t renew it. Sometimes we’ve seen cases rather than give us the documentation the broker is a little unhappy about being cut off and he will just transfer mortgage to another source. But we’re not concerned because there are other sources that will take less documentation. They may be privates. They may be some of the credit unions. They may be other financial institutions.”

First National

First-National.gifNotables from its call:

  • First National (FN) originated $17.3 billion of mortgages, 7% more than in 2014.
  • Mortgage originations in Q4 were up by 2% to $4.2 billion with origination growth in both single-family and commercial segments. Single-family mortgage renewals of $1.2 billion in Q4 were 15% above prior year.
  • “This growth was achieved in spite of an 11% decline in single-family originations in Alberta where the energy industry is dominant,” said Stephen Smith, Chairman and Chief Executive Officer.
  • Rob Inglis, Chief Financial Officer, noted that one of the highlights of the year was “…the launch and transition to profitability of First National’s third-party underwriting and fulfillment services business.”
  • “We also experienced 69% growth in placement fees on higher volumes, and 32% growth in mortgage servicing – the majority of which pertains to the new third-party underwriting business,” Inglis added.
  • First National originated for securitization $2.1 billion of mortgages. “Generally, the single-family spreads on our securitization portfolio are wider now as mortgage rates have remained steady for the past six months despite decreased bond yields, which form the base for our costs of funding,” said Inglis.
  • Regarding the economic downtown being felt predominantly in Alberta, Moray Tawse, Executive Vice President, said: “First National does not have the same exposure as other financial institutions as our securitized mortgage portfolio is almost 100% insured and the uninsured MUA is on the balance sheets of our institutional customers.
  • Asked about per-unit broker fees going up 2% and expectations for future increase, Stephen Smith, Chairman and CEO, said: “We don’t see any particular pressure in the mortgage broker channel with respect to brokerage fees. There’s probably always a little bit of upward pressure on that but I’m not seeing significant jumps for the foreseeable future. ”
  • First National had its first loss provision since 2009 on a multi-family developer project, four loans totaling ~$40 million. “Loan loss provisions for us on our portfolio are a regionally rare event because we’re probably more conservative than most on that,” said Smith. “… We would think it’s unique to this particular property. We don’t think anywhere else in the portfolio are there lurking defaults or defaults that are just ready to emerge.”
  • Asked about the strong results for the net interest margins and outlook going forward, Rob Inglis explained one reason for the strong performance: “…we used to renew a billion dollars a year. Now, we’re doing $5 billion and maybe half of that is being securitized so there’s no broker fee to amortize against that spread.

Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.

Steve Huebl & Robert McLister


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Bank earnings_sqAlberta’s routed oil sector and the province’s surging unemployment rate (7.4% as of January) is, for the first time, having a noticeable impact on the Big Banks’ lending portfolios. Rising delinquency rates in personal lending have motivated banks to tighten their underwriting standards in the regions most affected by the oil crash, which also include Saskatchewan, Newfoundland and Labrador.

That said, this line from TD Bank’s Chief Risk Officer, Mark Chauvin, sums up the overall health of the Big 6 banks: “Although we are seeing definite signs of deterioration in consumer lending, delinquency, and loss rates in the impacted regions, to-date, loan losses have been largely offset by strong performance across the rest of the country.”

As we do every quarter, CMT has combed through the top Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related highlights. Notable comments appear below in blue.

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Bank earnings_sq

Just when you thought profits at the Big Banks couldn’t soar any higher, they do. And then some.

The Big 6 Banks earned a whopping $35 billion combined in 2015. Much of that is thanks to strong performance from residential mortgages, despite the slowdown in Alberta and Saskatchewan. Wider spreads on variable rate products also helped boost net interest margin for several of the banks.

There was ample discussion about the expected impact from slowing economies in the prairie provinces. The consensus from banks is that they haven’t seen a substantial increase in defaults so far, but that it will take more time for the full effects to flow through to their balance sheets.

As we do every quarter, CMT has dug through the Big 6 Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related highlights. The more interesting observations appear in blue.

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