TD and CIBC comment on mortgage renewals and trigger points


Both TD Bank and CIBC released their third-quarter results on Thursday and commented on the status of their variable-rate mortgage balances.

With the Bank of Canada raising its key rate by 225 basis points since March, variable rate borrowers have seen their interest payments soar.

RBC announced Wednesday that it expects 80,000 of its variable rate mortgage customers to reach their “trigger point” by the end of the year. This is when borrowers’ monthly payments only cover interest and no longer repay the principal.

In addition to the impact of rising rates on variable rate mortgage holders, the concern for mortgage lenders in the coming months is the ability of borrowers to handle significantly higher mortgage rates at renewal time.

CIBC said $26 billion of its mortgages will be renewed over the next 12 months, including $19 billion in fixed rate mortgages and $7 billion in variable rate mortgages.

“Nearly all of our variable rate mortgages have fixed payments over the term and are therefore impacted by rising rates through an extension of amortization rather than an immediate change in monthly payment,” said Shawn Beber, director of risk management. “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 customers in a rising rate environment.”

Rising interest rates are leading to higher amortizations at a number of major banks, where the percentage of amortizations over 35 years and over has risen to 20% or more in some cases (22% at CIBC, for example, compared to 12% in the last quarter).

But not at TD Bank. And this is due to the way the bank treats variable rate customers reaching their trigger point.

“If a client reaches the point where they are no longer amortizing capital, we will contact them and provide options,” said Michael Rhodes, Group Head, Personal Banking in Canada. “And the options are increasing your payment, doing nothing, making 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 is renewed in future years, “at this point you have to look at the remaining amortization [and we will] adjust the payment to reflect the remaining amortization.

Here’s a look at how the TD Bank and CIBC mortgage portfolio performed during the quarter…

TD Earnings Highlightss

Q3 net income: 3.8 billion dollars (+5% over one year)
Earnings per share: $2.09

  • TD’s residential mortgage portfolio grew to $244.5 billion in the third quarter from $226.3 billion a year ago.
  • The bank’s HELOC portfolio reached $112.2 billion in the third quarter, up from $99.9 billion a year ago. 72% of the bank’s HELOC portfolio is amortizing.
  • TD’s residential real estate secured loan portfolio is 80% uninsured (vs. 76% a year ago), with an LTV of 47% for the uninsured part (compared to 49% in Q3 2021).
  • Canadian retail portfolio gross impaired loans fell to 0.16% from 0.18% in Q2 and 0.22% a year ago.
  • The net interest margin of the bank’s retail portfolio increased to 2.70% in the third quarter, compared to 2.62% in the previous quarter and 2.61% a year ago, “mainly due to the rise margins on deposits, reflecting higher interest rates, partially offset by lower loan margins,” said Chief Financial Officer 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 the third quarter of 2021.

Source: TD Bank Third Quarter Investor Presentation

Conference call

  • Volumes in the bank’s secured home loan portfolio were up 3% from the second quarter and nearly 9% year-on-year. “A second quarter of very good sequential loan growth demonstrating the momentum of our investments in frontline sales channels, operations and account management,” said Chairman and CEO Bharat Masrani.
  • “We remain confident in the quality and composition of our secured mortgage loan portfolio, supported by prudent underwriting practices,” added Masrani.
  • “If you look at our sequential growth of our combined mortgage, mortgage and HELOC business quarter over quarter, this past third quarter was the best we’ve had since 2010,” said Michael Rhodes, Group Head, Canadian Personal Banking. “And so we feel good in this trajectory. I would tell you that we don’t achieve this by actually undervaluing the market… We achieve this simply by managing our relationships with customers, by managing our operational processes better and more efficiently.

Source: TD conference call


Q3 net income: $1.7 billion (-4% year-on-year)
Earnings per share: $1.78

  • CIBC’s residential mortgage portfolio grew to $260 billion in Q3 from $236 billion in Q3 2021.
  • On the uninsured portfolio, the loan-to-value ratio was 45%, compared to 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 mortgage performance is “strong and compares favorably to owner-occupied mortgages.”
  • Delinquencies over 90 days 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 the third quarter was 229 basis points, compared to 219 basis points in the third quarter of 2021, “due to product margins, which benefited from higher interest rates, partially offset by lower margins on new mortgages,” said chief financial officer Hratch Panossian.
  • CIBC added $243 million in provisions for credit losses in the quarter, compared with a reversal of $99 million a year ago.

Source: CIBC Third Quarter Investor Presentation

Conference call

  • “While provisions for credit losses on performing loans have increased, due to the negative shift in the economic outlook, credit performance remains strong,” Panossian said.
  • “Recently released data points to a slight decline in the housing price index,” Chief Risk Officer Shawn Beber said. “And if that continues, we expect an average increase in the loan-to-value ratio over the next few quarters, while providing solid coverage.”
  • “At this time, we are only seeing a small portion, less than $20 million in mortgage balances with customers that we consider higher risk from a credit perspective and those LTVs exceed 70%,” he said. Beber said. “We are actively monitoring our portfolios and proactively contacting clients who are at higher risk of financial stress, and we do not expect to see significant 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: “As interest rates rise, more of the fixed monthly payment is spent interest rather than capital, which then only mathematically prolongs the amortization. ,” he said. “If this compounding continues, it reaches what we call the designated amount, which is 105% of the original principal amount, then there must be an immediate payment to meet that. But at this point , the 22% of the portfolio that has the amortization beyond is actually the mathematical result of a greater number of monthly payments intended for interest rather than principal and, therefore, automatically extending the amortization calculated on the basis of this payment.

Source: CIBC Teleconference

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

Featured image: Christinne Muschi/Bloomberg via Getty Images


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