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Royal Bank of Canada said it remains confident in the ability of a majority of its mortgage borrowers to handle payment increases.

The comment was made during the bank’s fourth-quarter earnings call on Wednesday. RBC announced net income of $3.9 billion in the quarter and full-year profits of nearly $16 billion, both of which were down roughly 2%.

The bank continued to grow its mortgage portfolio, which reached nearly $362 billion in the quarter. But the rapid rise in interest rates over the course of the year and “softness” in housing demand and prices are “headwinds” facing the portfolio, said Chief Risk Officer Graeme Hepworth.

“As a result of higher rates, more of our clients will experience an increase in payments as they cross their trigger rate threshold,” he said. As has been reported on extensively recently, the trigger rate is the point when monthly payments by borrowers with fixed-payment variable rates are only covering the interest portion and are no longer paying down any principal.

“As I discussed in detail last quarter, our mortgage portfolio and mortgage client base remain exceptionally strong,” Hepworth added. “And our internal payment analysis indicates a majority of our clients will be able to absorb these anticipated payment increases.”

During RBC’s third-quarter earnings call, Hepworth said the majority of the bank’s mortgages still have fixed rates and won’t be impacted by rising rates until their mortgages renew. For a majority of them, renewals won’t occur until after 2025.

Commenting on mortgage origination volumes, President and CEO Dave McKay noted RBC grew its portfolio by over $30 billion this year.

“While mortgage origination volumes have declined from recent peaks, given rising interest rates and supply-demand imbalance, they remain in line with pre-pandemic levels,” he said. “We expect mortgage growth to be in the mid-single digits next year.”

Here’s a run-down of RBC’s mortgage portfolio performance in the quarter…

RBC earnings highlights

Q4 net income: $3.9 billion (-3% Y/Y)
2022 net income: $15.8 billion (-2%)
Earnings per share: $2.78

Q4 2022 Q3 2022 Q4 2021
Residential mortgage portfolio $361.8B $347B $329.5B
HELOC portfolio $36B $36B $35.2B
Percentage of mortgage portfolio uninsured 76% 75% 72%
Avg. loan-to-value (LTV) of uninsured book 48% 36% 47%
Portfolio mix: percentage with variable rates 34% NA NA
Average remaining amortization 20 years NA NA
90+ days past due 0.11% 0.10% 0.14%
Mortgage portfolio gross impaired loans 0.10% 0.10% 0.11%
Canadian banking net interest margin (NIM) 2.42% 2.60% 2.70%
Provisions for credit losses $381M $340M ($227M)

Source: RBC Q4 investor presentation

Conference Call

  • On mortgage rate pricing and spreads, Neil McLaughlin, Group Head, Personal and Commercial Banking, said this: “The mortgage market is exceptionally…efficient. We track all of—through mystery shopping—all the competitor prices to make sure we stay in market. And we mentioned there are different ways to go to market, but the actual end client rate is very, very similar across the industry.”
  • “On the fixed rate side, it is just a very, very competitive market,” McLaughlin added. “So, it’s tough. But we look at it as an important product. It’s a relationship product, it’s a moment of truth in the client’s relationship with us.”
  • McLaughlin noted that mortgage spreads are “a lot tighter than we’ve seen over the last five years.”
  • “Elevated uncertainty continues to affect asset valuations and market volatility, which in turn is impacting investor sentiment and client activity in both public and private markets,” said President and CEO Dave McKay. “While strong labour markets paint a favourable picture and inflation appears to have peaked, we maintain our cautious stance on the outlook for economic growth.”
  • “Although higher interest rates are needed to preserve long-term economic stability, the lagging impact of monetary policy, combined with strong employment and significant liquidity in the system, has likely delayed what may end up being a brief and moderate recession,” McKay added.
  • RBC added 400,000 clients in 2022, more than the previous two years combined. “Our partnership with ICICI Bank Canada to create a seamless banking experience for newcomers to Canada is expected to attract approximately 50,000 clients as immigration levels reach record highs,” McKay noted.

Source: RBC Q4 conference call

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

Featured image by Gary Hershorn/Getty Images

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