All eyes on mortgage originations as big banks prepare to report results
Canadian Imperial Bank of Commerce will serve as a bellwether of sorts for how stricter rules around uninsured mortgages are affecting Canada’s top banks when it releases first-quarter financial results on Thursday.
Canada’s fifth-largest lender will be the first of the Big Six to report earnings since the rules came into effect at the start of January.
Those changes include a new “stress test” that requires would-be homebuyers with a down payment of 20 per cent or more to qualify at whichever is higher: the Bank of Canada’s five-year benchmark rate, or their lenders’ contractual rate plus 200 basis points.
The new standards for uninsured mortgages (known as the revised B-20 guideline) are expected to tamp down loan growth at the big banks, which have telegraphed that they may take hits to their mortgage originations this year of between about five per cent and 12 per cent.
CIBC is on the higher end of that scale, having indicated in November that upping the qualifying rate for uninsured mortgages could cause a reduction of 10 per cent to 12 per cent in the amount of new originations.
The bank has also been in the thick of the rise in residential lending in general, having notched rates of domestic mortgage growth in the past that surpassed the competition.
While industry watchers will be keeping a close eye on CIBC’s results, the true effects of the B-20 changes may take another quarter before they become entirely clear.
Darko Mihelic, analyst at RBC Capital Markets, said that B-20 impacts would likely be “modest” in the first quarter, with the true “litmus test” coming in the second.
“January is the first month that revised B-20 guidelines were effective but we believe a large number of mortgage originations in January were likely pre-approved,” Mihelic said in a note. “The banks have guided towards a moderate B-20 impact but we continue to expect mortgage growth to slow from 6 per cent levels currently to (approximately) 2 per cent over our forecast period.”
Gabriel Dechaine, analyst at National Bank Financial, said they have also seen “clear signs” of mortgage demand being pulled forward, with recent months setting multi-year highs for uninsured mortgage growth.
“We do not have data for January, but expect to see the same trend,” Dechaine wrote. “While an eventual mortgage growth slowdown does not present a material earnings risk, we believe negative sentiment could increase, especially if weak mortgage growth is coupled with negative house price/sales volume data.”
The new rules regarding uninsured mortgages come as data published by the Office of the Superintendent of Financial Institutions shows regulated banks have been steadily growing their uninsured portfolios in recent years, after tighter rules regarding insured mortgages were put in place in 2016.
As of Dec. 31, 2017 (the most recent month for which data is available) total insured mortgages at the banks dipped to approximately $533.4 billion, while the lenders’ uninsured mortgages mushroomed to nearly $685.5 billion.
The latter is up from $585.9 billion at the end of 2016 and $470 billion at the end of 2014.
When it comes to overall profitability, the banks may enjoy some tailwinds as well.
Lenders have benefited from a Bank of Canada rate hike in January, as well as a cut to the corporate tax rate in the U.S., which could provide more than enough to offset weaker mortgage growth in January.
Royal Bank of Canada will publish its latest earnings on Friday. Bank of Montreal and Bank of Nova Scotia will report Feb. 27, followed by National Bank of Canada on Feb. 28, and Toronto-Dominion Bank on March 1.
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