TD Bank and CIBC both released their third-quarter earnings results on Thursday, and both commented on the status of their variable-rate mortgage balances.
With the Bank of Canada having hiked its benchmark rate by 225 basis points since March, variable-rate borrowers have seen their interest payments soar.
RBC announced on Wednesday that it expects 80,000 of its variable-rate mortgage clients to reach their “trigger point” by year end. That’s when borrowers’ monthly payments are only covering the interest and are no longer paying down any principal.
Aside from the impact of rising rates on variable-rate mortgage holders, the concern for mortgage lenders in the months ahead is the ability of borrowers to handle significantly higher mortgage rates at renewal time.
CIBC said $26 billion of its mortgages will renew over the next 12 months, comprising $19 billion of fixed-rate mortgages and $7 billion of variable-rate mortgages.
“Almost all of our variable-rate mortgages have fixed payments during the term and are, therefore, impacted by rising rates through an extension of amortization rather than an immediate change to the monthly payment,” said Chief Risk Officer Shawn Beber. “Renewal mortgages are reverted to the original amortization schedule, which may require additional payments.”
The bank added that “proactive outreach has already begun to help our clients through a rising rate environment.”
Rising interest rates are leading to higher amortizations at a number of big banks, where the percentage of amortizations of 35-plus years has risen to 20% or more in some cases (22% at CIBC, for example, up from 12% last quarter).
But not at TD Bank. And that’s due to how the bank deals with variable-rate clients reaching their trigger point.
“If a customer hits the point where they’re no longer amortizing the principal, we will reach out to the customer, and we’ll give them options,” said Michael Rhodes, Group Head of Canadian Personal Banking. “And the options are increase your payment, do nothing, make a lump-sum payment, things like that. If they do nothing, then at that point, their amortization will be…off the original schedule.”
Rhodes added that when the loan comes up for renewal in the coming years, “at that point, you have to look at the remaining amortization [and we will] adjust the payment to reflect the remaining amortization.”
Here’s a run-down of the mortgage portfolio performance for TD Bank and CIBC in the quarter…
TD earnings highlights
Q3 net income: $3.8 billion (+5% Y/Y)
Earnings per share: $2.09
- TD’s residential mortgage portfolio rose to $244.5 billion in Q3, up from $226.3 billion a year ago.
- The bank’s HELOC portfolio grew to $112.2 billion in Q3, up from $99.9 billion a year ago. 72% of the bank’s HELOC portfolio is amortizing.
- TD’s residential real estate secured lending portfolio is 80% uninsured (up from 76% a year ago), with a 47% LTV for the uninsured portion (down from 49% in Q3 2021).
- Gross impaired loans in the Canadian retail portfolio fell to 0.16%, down from 0.18% in Q2 and 0.22% a year ago.
- Net interest margin in the bank’s retail portfolio rose to 2.70% in Q3, up from 2.62% in the previous quarter and 2.61% a year ago, “primarily due to higher deposit margins, reflecting the rising interest rate environment, partially offset by lower loan margins,” said CFO Kelvin Tran.
- Overall, TD’s provisions for credit losses (PCL) increased by $324 million in the quarter to a total of $351 million. That compares to a recovery of $37 million in Q3 2021.
Source: TD Bank Q3 Investor Presentation
- Volumes in the bank’s real-estate secured lending portfolio were up 3% from the second quarter and nearly 9% year-over-year. “A second quarter of very good sequential loan growth demonstrating momentum from our investments across front-line sales channels, operations and account management,” said President and CEO Bharat Masrani.
- “We remain confident in the quality and mix of our real estate secured lending book supported by prudent underwriting practices,” Masrani added.
- “If you look at our sequential growth in our mortgage business, mortgage and HELOC combined on a quarter-over-quarter basis, this last third quarter was the best we’ve had since 2010,” said Michael Rhodes, Group Head, Canadian Personal Banking. “And so we feel good about that trajectory. I would tell you, we’re not getting there by actually under-pricing the market…We’re getting there by just managing our customer relationships, better managing our operational processes more effectively.”
Source: TD Conference Call
Q3 net income: $1.7 billion (-4% Y/Y)
Earnings per share: $1.78
- CIBC’s residential mortgage portfolio rose to $260 billion in Q3, up from $236 billion in Q3 2021.
- Of the uninsured portfolio, the loan-to-value LTV was 45%, down from 54% a year ago.
- The bank’s HELOC portfolio ended the quarter at $19.4 billion, up from $18.4 billion a year ago.
- CIBC said 88% of mortgages are owner-occupied, while investor mortgages performance is “strong and compares favourably with owner occupied mortgages.”
- 90+ day delinquencies in the residential mortgage portfolio fell to 0.14% (0.26% for the insured portfolio and 0.11% for the uninsured) from 0.19% in Q3 2021.
- Net interest margin in Q3 was 229 bps, up from 219 bps in Q3 2021, “due to product margins, which benefited from higher interest rates, partly offset by lower margins on new mortgage originations.,” said Chief Financial Officer Hratch Panossian.
- CIBC added $243 million in provisions for credit losses in the quarter, compared to a release of $99 million a year ago.
Source: CIBC Q3 Investor Presentation
- “While provisions for credit losses against performing loans trended higher, driven by the negative shift in the economic outlook, credit performance remains strong,” said Panossian.
- “Recently published data indicates a small drop in the housing price index,” said Chief Risk Officer Shawn Beber. “And should that continue, we would expect average loan-to-value increase somewhat over future quarters, but still provide strong coverage.”
- “At this time, we see only a small portion, less than $20 million of mortgage balances with clients that we see as being at higher risk from a credit perspective and those LTVs are in excess of 70%,” said Beber. “We actively monitor our portfolios and proactively reach out to clients who are at higher risk of financial stress, and we don’t expect to see material losses from our portfolios.”
- Commenting on the fact that 22% of CIBC’s mortgage portfolio now has an amortization of over 35 years, Beber said this: “As interest rates rise, more of the fixed monthly payment goes towards interest rather than principal, which then just mathematically extends the amortization,” he said. “If that capitalization continues, it hits what we call the designated amount, which is 105% of the original principal amount, then there needs to be an immediate payment to deal with that. But at this point, the 22% of the portfolio that has the amortization beyond is really the mathematical outcome of more monthly payments going towards interest rather than principal and automatically, therefore, extending out what the calculated amortization would be based on that payment.”
Source: CIBC Conference Call
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