Scotiabank isn’t worried about its floating rate portfolio

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With variable rates rising month-over-month and more hikes expected, watchers are keeping an eye on adjustable rate mortgages.

Borrowers with an Adjustable Rate Mortgage (ARM) see their monthly payments increase each time interest rates rise (to the tune of approximately $25 per $100,000 for every 50 basis points of rate increase, based on a 25-year amortization).

The Bank of Canada has already tightened 125 basis points this year, with another 100 to 150 basis points expected.

But Scotiabank, the largest mortgage lender that offers ARMs, said on its latest earnings call that it was not concerned about its adjustable-rate portfolio despite the current rising rate environment.

“We don’t worry about the credit portfolio for the [variable-rate mortgage] pound,” said Dan Rees, Group Head, Canadian Banking Services. “The variable-to-fixed conversion rate has accelerated over the past few months as prices have risen. This is a trend we have anticipated.

Rees went on to discuss the adjustable feature of Scotia’s variable rate mortgage products.

“We believe – and strongly believe – that a variable mortgage should have a payment that varies. We think it’s good for customers,” he said, adding that the bank has already proactively reached out to “tens of thousands” of customers who “may be vulnerable to an adjustment in their payment amount. monthly”.

Rees added that the average variable rate mortgage balance at the bank is about $400,000 and that for every 100 basis points of rate increases, monthly expenses would increase by about $250″ on a basis of household expenses over $5,000″.

“It’s not a meaningful adjustment,” he said.

Rees added that income levels tend to be higher for those taking variable rate products and many “have been doing it for a long time because the payment levels are lower.”

Following are highlights of the second quarter results from Scotiabank, BMO and TD Bank, with relevant sections highlighted blue.


Scotiabank

Q2 net profit: $2.75 billion (+12% YoY)
Earnings per share: $2.18

  • The total retail residential mortgage portfolio reached $272 billion in the second quarter, up from $235 billion a year ago.
  • 28% of the bank’s residential mortgage portfolio is insured. Among uninsured balances, the average loan-to-value ratio of this portfolio is down to 47% from 55% in 2019.
  • Residential mortgage volume increased 16% year over year.
  • Net interest margin decreased from 2.19% in Q2 2022 to 2.22% due to “higher deposit spreads and the impact of Bank of Canada rate hikes”.
  • Mortgages overdue for more than 90 days fell to 0.10%, from 0.12% in the first quarter and 0.17% a year ago.
  • Scotia’s provisions for credit losses fell a further $187 million in the second quarter, “due to improved credit performance net of growth in our Canadian retail portfolio…” said Phil Thomas, head of risk management. That’s down from a peak of $2.2 billion in Q3 2020.
  • An immediate and sustained parallel offset of +100 bps [in policy rate] would have a negative impact on annual net interest income of $126 million in year 1 and a positive impact of $191 million in year 2noted Scotia. He currently expects 150 basis points more in the Bank of Canada’s tightening by the end of the year.
  • The bank’s gross impaired loan ratio has improved four basis points to 64 basis points since peaking in the first quarter of 2021 at 84 basis points. “We continue to see a positive trend with weaker formations,” Thomas said.

Source: Scotiabank Second Quarter Investor Presentation

Conference call

  • Commenting on the bank’s lower provision for credit losses (PCL), Chief Risk Officer Phil Thomas said: “We bottomed out this quarter for PCLs and expect provisions to gradually increase in the second half.”
  • When asked if there were any concerns given the current economic forecast, Thomas said: “…we’re seeing people paying off loans in the last two-year period of 3%. We have seen investable assets increase in our…Canadian consumer portfolio by approximately 13%…We have had improvements in our client FICO scores over the past two years on average in our credit portfolio from 720 to 750 in our mortgage portfolio from 750 to 790. So all of that gives us very good confidence in what we’re seeing with our clients.
  • Porter added, “We conduct rigorous stress testing here at the bank of all of our portfolios in Canada; international, corporate and commercial… which would have tougher contributions today than we might have a year ago.
  • Asked about Scotiabank’s unique variable mortgage product where payments go up and down as rates fluctuate, Dan Rees, Group Head, Canadian Banking, replied:“We are not worried about the VRM book credit portfolio. Two-thirds of the book is fixed,” he said. “The variable-to-fixed conversion rate has accelerated over the past few months as prices have risen. This is a trend we have anticipated.

Q2 conference call


Bank of Montreal

Q2 net income: 2.2 billion dollars (+5% over one year)
Earnings per share: $3.23

  • BMO’s residential mortgage portfolio grew to $131.5 billion from $119.8 billion a year earlier.
  • The HELOC portfolio, 71% of which is amortizing (from 65% a year ago), grew to $45.2 billion from $36.7 billion a year ago.
  • 32% of BMO’s residential mortgage portfolio is insured, up from 37% a year ago.
  • The loan-to-value ratio on the uninsured portfolio is 47%, compared to 50% a year ago.
  • 67% of the portfolio has an effective residual amortization of 25 years or less, compared to 80% a year ago.
  • Net interest margin (NIM) in the quarter was 2.66%, unchanged compared to 2.66% in Q2 2021.
  • Total provision for credit losses (PCL) was $50 million in the second quarter, or 4 basis points, up from a reversal of $99 million last quarter.
  • The 90-day delinquency rate fell to 12 basis points from 21 basis points a year agowith a loss rate for the last four quarter period at 1bp (unchanged).

Source: BMO Q2 Investor Presentation

Conference call

  • The bank’s net interest margin (NIM) in Canadian Personal and Commercial Banking declined 2 basis points from last quarter due to higher deposit margins, but Chief Financial Officer Tayfun Tuzun , said NIM Expected to Rise in H2 Given Rising Rates.
  • “…we remain well positioned for the rising rate environment,” he said. “A rate shock of 100 basis points is expected to benefit net interest income by $635 million over the next 12 months.
  • In Canadian Personal and Commercial Banking, impaired loan losses were $79 million, unchanged from the first quarter.
  • We expect our impaired faculties [Provision for Credit Losses] rate slowly drift upwards [from 10 bps this quarter] on a level more consistent with our pre-pandemic experience, which was consistently high teens at under 20s in terms of base pointssaid Pat Cronin, director of risk management. “While it is difficult to predict when this level will be reached, given that the credit metrics of the current portfolio remain quite robust, I expect normalization to begin towards the end of this year or in fiscal year 2023.”

Q2 conference call


TD Bank

Q2 net income: $3.7 billion (-2% year-on-year)
Earnings per share: $2.02

  • TD’s residential mortgage portfolio hit $239.3 billion in Q2, against 220.5 billion dollars a year ago.
  • The bank’s HELOC portfolio has grown to $107.9 billion, compared to 97.7 billion dollars a year ago. 71% of the bank’s HELOC portfolio is amortizing.
  • TD Residential Real Estate Secured Loan portfolio volumes in the quarter were 79% uninsured (vs. 75% a year ago) with an LTV of 48% for the uninsured portion (vs. 52% in Q2 2021 ).
  • Mortgage volumes were up 16% year over year and 3% from last quarter.
  • Gross impaired loans in the Canadian retail portfolio were 0.18%, down from 0.19% in the first quarter and 0.22% a year ago.
  • Net interest margin increased 3 basis points from last quarter, “benefiting from higher deposit spreads and the impact of the Bank of Canada rate hike,” the chief financial officer said. Raj Viswanathan.

Source: TD Second Quarter Investor Presentation

Conference call

  • We have bottomed out this quarter for PCLs and expect provisions to gradually increase in the second half of the yearsaid Phil Thomas, Chief Risk Officer. “All Banks PCLs were $219 million, or 13 basis points, due to a net reversal in performing loan PCLs in Canadian Banking and Global Banking & Markets. Strong loan growth and less favorable macroeconomic forecasts were offset by a continued improvement in credit performance.
  • We had improvements in our FICO scores of our customers over the last two years on average in our credit portfolio from 720 to 750 in our mortgage portfolio from 750 to 790“, said Thomas.
  • Asked about changing market conditions and whether the bank’s underwriting appetite has changed, Ajai Bambawale, “We will not change our credit settings.”
  • “You have heard about us many times during the cycle, underwriters and we would like to keep our underwriting standards consistent, and that is the intention. We would therefore not change our underwriting standards unless we believe there would be an unexpected loss, Bambawale added. “We’re actually seeing very good quality across our resource portfolio, whether it’s HELOCs or residential mortgages.”

Q2 conference call

To note: Transcripts are provided as is by the companies and/or third-party sources, and their accuracy cannot be guaranteed to be 100%.
Image by Christinne Muschi/Bloomberg via Getty Images

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