Q4 Earnings Mortgage Morsels: Scotiabank & RBC

A discount in provisions put aside for potential credit score losses boosted fourth-quarter earnings outcomes for each Scotiabank and RBC this week.

Each massive banks reported sturdy development of their mortgage portfolios, however confronted compression in internet curiosity margin (NIM), due largely to the decrease spreads earned on mortgages in comparison with different merchandise, akin to bank cards.

As Scotia’s Chief Monetary Officer Raj Viswanathan famous throughout the convention name, the decline in NIM was “pushed by the shift within the mortgage portfolio combine in the direction of mortgages.”

Each Scotia and RBC additionally introduced dividend hikes, the primary such enhance for shareholders because the begin of the pandemic. This follows a choice by the Workplace of the Superintendent of Monetary Establishments (OSFI) final month to elevate pandemic-related restrictions that prevented federally regulated monetary establishments from elevating dividends, shopping for again shares and growing government compensation.

We’ve picked by means of the banks’ quarterly earnings reviews, shows and convention calls, and compiled all of the mortgage notables beneath.

Scotiabank

This fall internet earnings: $2.6 billion (+37% Y/Y)
Earnings per share: $2.10
Fiscal 12 months 2021 internet earnings: $10 billion (+45%)

• The full portfolio of residential retail mortgages rose to $255 billion in This fall, up from $243 billion in Q3 and $215 billion in This fall 2020.
• Residential mortgage quantity was up 13% year-over-year.
• Scotia raised its dividend by 11% to $1 a share, and introduced it is going to purchase again 24 million shares, or 2% of its excellent shares. 
• Internet curiosity margin fell to 2.20% from 2.23% in Q3 2021 and a pair of.26% in This fall 2020,”pushed by the shift within the mortgage portfolio combine in the direction of mortgages,” mentioned Chief Monetary Officer Raj Viswanathan.
  
• Mortgage loans that had been 90+ days late fell to 0.12% from 0.13% in Q3 and 0.15% a 12 months in the past, “pushed by decrease personnel prices, partially offset by increased promoting and enterprise growth prices,” Viswanathan famous.
  
• Scotia’s provisions for credit score losses fell to $168 million, down from $1.1 billion a 12 months in the past and a peak of $2.2 billion in Q3 2020.
  

Supply: Scotiabank Q4 Investor Presentation

Convention Name

• “Our asset high quality remained excessive, pushed by buyer demand for retail secured borrowing in Canada and in Worldwide Banking,” mentioned Chief Danger Officer, Phil Thomas. “Secured lending in our retail portfolio stays increased than pre-pandemic ranges.”
• The financial institution is anticipating write-offs to stay decrease than pre-pandemic ranges by means of fiscal 2022, Thomas added.
• “We ended the 12 months with allowances for credit score losses of $5.7 billion [down from a peak of $7.8 billion in Q4 2020], which is increased than pre-pandemic ranges of $5.1 billion,” Thomas mentioned. “The ACL ratio is now 86 foundation factors in comparison with 82 bps previous to the pandemic. The ACL ratio will proceed to development decrease by means of fiscal ’22 attributable to our expectation of decrease write-offs in comparison with historic traits.”
• Wanting forward, Thomas mentioned this: “We anticipate sturdy credit score efficiency to proceed, with improved credit score metrics pushed by increased credit score high quality of originations, in addition to a beneficial macroeconomic surroundings.”
• “We’re aware of reviews of a brand new variant of concern termed, Omnicron, however stay snug with our allowances, which offer for pessimistic COVID-19 situations, together with each a pointy rise in circumstances and an extended length,” Thomas added.
• “…mortgages have been rising considerably quicker than different companies, likewise enterprise banking. We adore it, however besides that it does influence the margin growth,” Porter mentioned in response to a query about margin compression. “…we consider that there might be margin growth. And like I discussed in my earlier calls, we’re positioned for charge will increase even from a hedging perspective.”
• Requested about potential considerations over the tempo of mortgage development in Canada, Dan Rees, Group Head, Canadian Banking, mentioned this: “Originations had been stronger than we anticipated, in addition to retention, which is an merchandise we’ve been re-engineering by means of the enterprise for the final variety of quarters…Our outlook for mortgage development subsequent 12 months is to start to gradual. We do consider that provide underpins worth appreciation. And whereas that persists, ought to charges rise sooner within the 12 months, as I believe many people predict, we anticipate that to melt demand.”
• He continued, “the expansion in upsizing, the acquisition of second properties and getting into the market was, in some style, supported by items inter-generationally by means of households, and that’s an vital supply of fairness motion, which we predict helps mortgage development from right here, together with by means of the danger lens. And to underline in our quarter and all 12 months lengthy, we didn’t see a HELOC e-book development, which I do know is an space of concern.”
• Requested about inflation considerations, Viswanathan mentioned, “…our economists’ view is there’s some stage of transitory inflation within the numbers that we’re seeing…And that we consider will normalize when you see a number of the provide chain points normalize, and that may very well be in 1 / 4 or two away from our perspective.”

Supply: Scotiabank Conference Call

Royal Financial institution of Canada

This fall internet earnings: $3.9 billion (+20% Y/Y)
Earnings per share: $2.68
Fiscal 12 months 2021 internet earnings: $16.1 billion (+41%)

• RBC’s residential mortgage portfolio rose this quarter to $322.4 billion, up from $291 billion a 12 months in the past.
• The financial institution’s HELOC portfolio fell to $35.2 billion from $37 billion a 12 months in the past.
• RBC additionally hiked its dividend to $1.20 per share, up from $1.08.
• 72% of its mortgages are uninsured, up from 67% a 12 months in the past. The typical LTV on the uninsured portion is 47%, down from 51% a 12 months in the past.
• 90+ day delinquencies within the residential mortgage portfolio fell to 0.13% from 0.14% in Q3 and 0.14% a 12 months in the past.
• RBC recovered $277 million of its provisions for credit score losses within the quarter in contrast with the $427 million it put aside for unhealthy loans in This fall 2020.
  
• 53% of the financial institution’s uninsured mortgage portfolio has a median FICO rating of no less than 800.
• Condos make up 11% of balances within the financial institution’s excellent residential lending portfolio, unchanged from the earlier quarter.
  
• Canadian Banking internet curiosity margin was 2.42%, down from 2.58% in Q3 and a pair of.56% in This fall 2020.
  

Supply: RBC Q4 Investor Presentation

Convention Name

• “We see development alternatives in every of our Canadian companies and our outcomes this 12 months replicate the worth we create for our purchasers,” mentioned President and CEO Dave McKay. “In Canadian Banking, we added over $35 billion in mortgages and over $22 billion in private deposits over the past 12 months, resulting in market share beneficial properties in each these anchor merchandise.”
• “Whereas increased rates of interest may add some drag to financial development, we don’t see materials credit score considerations, given extra shopper liquidity, sturdy underwriting, together with testing for increased charges,” McKay added.

Supply: RBC Conference Call

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