The Bank of Montreal (BMO) is the latest of Canada’s big banks to confirm most of its mortgage clients haven’t yet experienced challenges with their renewals.
The comments came as part of the bank’s fourth-quarter earnings results, in which it reported a 12% increase in residential mortgage volumes.
Chief Risk Officer Piyush Agrawal said the bank’s delinquency rates remain low at this time, and that just 12% of its portfolio will come up for renewal in the next 12 months.
“We are proactively reaching out to customers who we think are most likely to have future challenges at renewal, Agrawal said on the company’s earnings call. “We have had a positive customer response to this outreach, and there have not been any observable increase in delinquencies at mortgage renewals.”
He added that he’s also reviewed the bank’s underwriting standards personally to confirm the “high quality of the portfolio overall, the robust structures and underwriting practices, as well as the strong risk management capabilities and discipline.”
“This sound foundation will serve us in good stead as consumers and businesses adapt to the impact of high inflation and interest rate increases, while the macroeconomic environment and geopolitical situation remain uncertain,” he added.
The bank’s quarterly presentation touched on how rising interest rates are impacting its variable rate products with fixed payments, which is leading to an extension of the amortization until renewal.
It has seen the percentage of its mortgage portfolio with an effective amortization of 25 years or less fall to 55%, down from 78% a year earlier. Nearly a third of its mortgages (31.3%) now have temporary amortizations greater than 30 years.
“At renewal, the product reverts to the original amortization schedule, which may require additional payments,” the bank noted.
Q4 net income: $2.1 billion (-4% Y/Y)
2022 net income: $9 billion (+4.5%)
Earnings per share: $3.04
|Q4 2022||Q3 2022||Q4 2021|
|Residential mortgage portfolio||$139.4B||$135.5B||$128B|
|Percentage of mortgage portfolio uninsured||69%||69%||66%|
|Avg. loan-to-value (LTV) of uninsured book||52%||46%||51%|
|Portfolio mix: percentage with variable rates||44%||NA||NA|
|Mortgages renewing in the next 12 months||$23B (12%)||NA||NA|
|% of portfolio with an effective amz of >25 yrs||55%||60%||78%|
|90-day delinquency rate||0.11%||0.11%||0.13%|
|Canadian banking net interest margin (NIM)||2.66%||2.72%||2.63%|
|Provisions for credit losses||$226M||$136M||($126M)|
Source: BMO Q4 Investor Presentation
- “As we look ahead to 2023, the macro environment remains uncertain with inflation and higher interest rates expected to slow the economy in the near-term,” said President and CEO Darryl White. “Real GDP growth in both Canada and the U.S. is expected to be close to zero, and we expect interest rates to peak by the end of the first calendar quarter with lowering rates starting in January of 2024.”
- “In Canada, there were three factors this quarter that sort of played a role [in NIM compression],” said Tayfun Tuzun, Chief Financial Officer. “One of them was a very strong loan growth over deposit growth. So that by itself had almost like a 5 basis point type of impact. And mortgage prepayments had a couple of basis points…But we expect our NIM in Canada to expand…we will probably see almost a double-digit expansion in our NIM in Canada.”
- “Our approach in the mortgage market is really about expanding customer relationships with existing customers as well as acquiring new customers,” said Ernie Johannson, Head of Canadian P&C. “We have a very effective mortgage specialist sales team that is out there every day, talking to customers and seeking out more mortgages, more business for us, which in turn brings in new customers to our franchise.”
- “The majority of our customers come in with a mortgage first, if I can use that, end up being our primary customers,” Johannson added. “And that is really a fuel for our overall growth, whether it be deposits, credit card, business, etc.”
Source: BMO Q4 conference call
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