Royal Bank Added $9 Billion in Mortgages to its Portfolio this Quarter

Royal Bank exceeded expectations for its third-quarter earnings, driven in large part by strong mortgage growth.

Canada’s largest bank grew its mortgage portfolio by $37 billion over the past year, with a gain of $9 billion in the last quarter alone. President and CEO David McKay said he expects “strong mortgage growth to continue.”

National Bank of Canada also saw strong results, thanks to a strong housing market in Quebec. Its residential mortgage portfolio was up 12% year-over-year.

Both banks also continued to release more funds from provisions they had set aside for potential credit losses at the start of the pandemic, much like BMO and Scotiabank, which released their earnings yesterday.

We’ve picked through both banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage notables below.

TD Bank and CIBC will round out the Big 6 banks’ Q3 earnings on Thursday.

Royal Bank of Canada

Q3 net income: $4.3 billion (+34% Y/Y)
Earnings per share: $3

• RBC’s residential mortgage portfolio rose this quarter to $320 billion, up from $283.4 billion a year ago.
• The bank’s HELOC portfolio fell to $35 billion from $37 billion a year ago.
• 71% of its mortgages are uninsured, up from 66% a year ago. The average LTV on the uninsured portion is 47%, down from 51% a year ago.
• 90+ day delinquencies in the residential mortgage portfolio fell to 0.14% from 0.16% in Q2 and 0.17% a year ago.
• RBC recovered $540 million of provisions for credit losses.
• 53% of the bank’s uninsured mortgage portfolio has an average FICO score of at least 800.
• Condos make up 11% of balances in the bank’s outstanding residential lending portfolio.
• Net interest margin was 2.51%, down from 2.55% in Q2 and 2.58% in Q3 2020, “largely due to competitive pricing, pressures in mortgages, and changes in asset mix,” said President and CEO David McKay.

Source: RBC Q3 Investor Presentation

Conference Call

• “In Canadian Banking, we added a market-leading $37 billion in mortgages year-over-year, including over $9 billion this quarter,” said McKay. “And we expect strong mortgage growth to continue, albeit at a lower rate than we’ve seen over an exceptional last 12 months.”
• Over the past year, RBC has added 1,700 employees to “capture strong client activity in mortgages, commercial banking and investment,” he added. One-third of RBC’s mortgage volume is coming from new bank clients.
• Asked for comment on the strong mortgage growth the bank has seen in the quarter, McKay said the market continues to deal with supply-demand imbalances, caused by everything from low interest rates and consumer preference changes to a lack of supply and price increases. Even RBC has been impacted by the rising cost of housing, McKay noted. “As an employer in the major metropolitan areas, we certainly worry about the cost of housing and the effects on our employees, and our ability to attract talent to the country and to the cities where we operate,” he said. “One of the reasons why we created the Calgary hub for technology is to diversify our employee base across the country and access talent in different marketplaces.”
  • Having said that, McKay said he’s not worried about the quality of the bank’s credit book, noting that one-third is insured. “We’re confident in the cash flows and the stress test, and the policies that have gone into changing those stress tests to make sure adjudication is solid. So, this is more a long-term macroeconomic issue,” he said. “Where I do worry..is the more cash flow that consumers are putting into housing stock, the less is available to drive the economy. So I think all policy-makers are worried, partly as well about long-term economic drag from that much cash flow going into servicing housing.”
• “Looking forward, we expect a 25-basis-points increase in the short-term interest rates, with the long-end of the curve unchanged, [which] would increase Canadian Banking net interest income by $90 million,” McKay said.
• McKay noted that provisions for credit losses (PCL) is at its lowest level in more than five years, adding that the bank realized $16 million in PCL reversals.

Source: RBC Conference Call

National Bank of Canada

Q3 net income: $839 million (+39% Y/Y)
Earnings per share: $2.36 a share

• The bank’s residential mortgage portfolio rose to $56.2 billion in Q3, up from $50.1 billion a year ago.
• The bank’s residential mortgage portfolio is 34% insured, down from 38% a year ago.
• NBC’s HELOC portfolio rose to $25.9 billion, up from $23.6 billion a year ago.
• The average LTV on the uninsured mortgage portfolio was 55% (down from 59%), while the average LTV on the HELOC portfolio was 50% (down from 56%).
• Quebec represented 54% of the mortgage book (up from 55% from a year ago), while Ontario made up 27% (up from 26%) and Alberta 7% (down from 8%).
• Net interest margin was 2.11% in Q3, down from 2.15% a year earlier.
• Of the bank’s uninsured residential mortgage portfolio, 0.11% are in arrears by 90+ days, down from 0.34% in Q3 2020.
• Provisions for credit losses on impaired loans fell to $34 million, down from $88 million a year ago.
• This earnings release was the least for President and CEO Louis Vachon, who is retiring from his position at the end of October after 29 years with the bank, nearly 15 years as CEO. Chief operating officer Laurent Ferreira will take over the top post starting Nov. 1.

Source: National Bank Q3 Investor Presentation

Conference Call

• “Our credit quality is strong and our portfolios have performed well since the beginning of the pandemic,” said Vachone. “Given the continued improvement in economic and market indicators, we have released $43 million in reserves this quarter.”
• “We believe that the forces driving the estate market will continue to be present,” said Lucie Blanchet, Executive VP, Personal Banking and Client Experience. “We think demand would continue to be stimulated by the lower interest rate environment, as well as the changing housing needs as a consequence of the flexible working conditions that the employers are now offering. And eventually, the reopening of immigration will also be a factor medium-term.”
• “I think one of the factors is also the short supply that will continue to put pressure on the markets,” Blanchet added. “We see that we are continuing to be well-positioned to capture that market share.”
• Given NBC’s strong mortgage growth in the quarter, Blanchet was asked how much of that volume could be attributed to mortgage brokers, since the bank has re-entered the broker channel exclusively through M3 Group brokers. “75% of our growth comes from our proprietary channel, which is really at the core of our strategy,” she said. “…our intent is to keep our strategy focused on our proprietary channel going forward.”

Source: NBC Conference Call