Unsecured debt draws attention

Continued from FP1

Some bank analysts are starting to pay particular attention to unsecured mortgages, which are growing as a proportion of some banks’ mortgage books, and other forms of unsecured debt such as credit cards and auto loans. Canadian household debt is at record levels, the highest among G7 countries, and has drawn concern from global organizations including the International Monetary Fund, and Bank for International Settlements.

The Fitch report said insured mortgages are anticipated to decline from current levels in the mix as the federal government moves to introduce a lender risk-sharing policy that would shift mortgage risk from the government to the lenders.

“With uninsured mortgages driving an increasing portion of overall mortgage and loan growth … the consequences of a decline in housing prices — most notably in the Toronto and Vancouver markets — weighs more heavily with each passing quarter,” National Bank Financial analyst Peter Routledge wrote in a report to clients Tuesday on BMO’s yearend earnings.

“We think borrowers’ ability and willingness to service unsecured loans deteriorates as house prices fall,” the analyst wrote, flagging the Toronto and Vancouver markets in particular, where housing prices have soared.

Perhaps as a consequence of the concern, the banks have started to disclose more detail of their consumer loan books, and mortgages in particular.

Last week, as Canadian Imperial Bank of Commerce reported an 11 per cent increase in mortgage volume in the fourth quarter that helped boost net income by nearly 20 per cent to $931 million, the bank disclosed that the average loan-to-value on homes in the Toronto and Vancouver markets is lower than in the rest of Canada.

Executives said the average LTV is 46 per cent in Vancouver and 53 per cent in Toronto, compared to 56 per cent across Canada, which provides an additional buffer in the hottest markets. In addition, they said delinquencies of 90 days or more are lower on uninsured mortgages in those markets.

While analyst Gabriel Dechaine of Canaccord Genuity Corp. described CIBC’s mortgage growth as “frothy,” he said the added disclosure should alleviate some investor concern.

Bank of Montreal also provided detailed disclosure about the mortgages on its books, including that 56 per cent of its overall portfolio is insured, and 70 per cent has a remaining amortization of 25 years or less.

In a presentation to analysts and media on Tuesday, BMO also broke out its exposure to insured and uninsured mortgages by province. Ontario and British Columbia account for the bulk of mortgages, at 42 per cent and 19 per cent respectively. More than half of the Ontario book is insured, while less than half is insured in B.C.

Analysts were interested in drilling down into BMO’s mortgage business, to be sure, but they were also focused on a 40 per cent spike in advisory fees, largely tied to mid-market merger and acquisition activity in the United States.

BMO, CIBC, and Bank of Nova Scotia all posted profits that beat analyst expectations in their final quarter of fiscal 2016, but even the banks that turned in results that were below forecasts made money.

Toronto-Dominion Bank posted a one per cent yearover-year decline in its Canadian personal and commercial banking unit, but still earned net income of $2.3 billion in the fourth quarter, up from $1.8 billion a year earlier.

Royal Bank of Canada, the country’s largest bank, missed analyst estimates for the fourth quarter, largely as a result of lower trading revenues. But RBC still posted net income of $2.5 billion, down two per cent from a year earlier.

On a conference call to discuss the results last week, RBC chief executive Dave McKay said the bank stands to benefit from recent policy changes aimed at cooling Canada’s real estate market.

He said smaller players in the market will face challenges to their funding models, and the big banks could pick up the slack.