No ‘systemic risk’ from Home Capital

Mortgage company’s woes played down as RBC, CIBC, TD post strong Q2 numbers

TORONTO Concerns about the state of the mortgage market can’t seem to stop Canada’s big banks.

On Thursday, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank all posted strongerthan-expected quarterly results, with earnings per share growth in the 10 to 12 per cent range.

The results came amid lingering worries about surging housing prices and high levels of consumer debt, as well as the risk of wider fallout from the crisis of confidence hitting alternative mortgage lender Home Capital.

RBC’s chief executive Dave McKay, however, said Thursday that Home Capital and its recent liquidity problems do not pose a “systemic risk” for the broader Canadian mortgage market.

Home Capital — which primarily lends to those who do not qualify for loans at traditional banks — has a less than 1 per cent share of the total outstanding mortgages in Canada, he noted.

“I don’t view it as a positive development, nor do I view it as systemic . ... A small player like that would not have systemic risk that would cause, and should not cause, Canadians to lose confidence in the value of their homes, nor pose contagion credit problems to our book,” McKay told analysts. “Those are driven by the macro trends that we constantly talk about.”

Bank of Montreal also posted double-digit profit gains on Wednesday, but its earnings-per-share fell short of what the Street expected by one penny, due largely to higher loan losses in its U.S. commercial portfolio. The other three banks saw lower provisions for credit losses, or money set aside for bad loans, compared to a year ago.

“BMO is a little bit of the odd man out,” said Meny Grauman, an analyst with Cormark Securities in Toronto, in an interview. “Even with BMO, there is a commonality in the sense that Canada is looking pretty good, actually.”

The banks saw strong performances in wealth management, with growth in the amount of mutual fund assets under management, he added. Capital markets are faring well (albeit at lower levels compared to the previous quarter or a year ago) but investment banking has picked up some of the slack — particularly for those which have exposure to the U.S. capital markets, Grauman said.

TD and RBC’s latest earnings benefited from their U.S. footprint.

“It’s not really boom times. CIBC is an exception in terms of mortgage growth, in particular. But credit looks good in Canada, loan growth is pretty stable,” he said.

“There’s a little bit of margin pressure and operating leverage is spotty this quarter. But in general, management teams seem confident in the outlook, and they don’t expect anything significant from Home Capital.”

Home Capital, Canada’s largest non-bank lender, has faced a partial run on its funding, after a series of executive departures and allegations of misleading disclosure from the Ontario Securities Commission.

Since the end of March, deposit holders have withdrawn $1.89 billion, or more than 94 per cent, of the balances from its subsidiary’s high interest savings accounts, which help fund Home Capital’s mortgage lending. Those balances stood at $111 million as of May 24.

CIBC chief executive Victor Dodig told analysts Thursday that the recent issues in the alternative lending space don’t reflect the Canadian housing market or the domestic economy.

“The market has understandably been assessing potential implications for the financial system as a whole. It is important to note that CIBC does not originate sub prime or even near prime mortgage loans ... We also don’t face the same funding challenges as some of the alternative lending business models. That said, we continue to closely monitor the housing market.”

Canadian banking executives — who had been vocal in previous months about the need for government intervention to temper double-digit gains in housing prices — say they’re seeing early signs that the hot real estate market in Toronto is cooling down. The Ontario government introduced measures last month aimed at curbing surging housing prices in the Greater Toronto Area, including a foreign buyers tax.

“We’re definitely seeing some easing ... We would continue to see a little bit of easing, but we continue to be happy with our (mortgage) originations and the quality of our book,” said TD’s chief executive officer Riaz Ahmed in an interview.

Whether the latest round of bank earnings, so far, are enough to entice investors after valuations have come down in recent months remains to be seen, said Grauman.

“There’s still enough question marks out there that, for the time being, this is not the start of a big rally for Canadian banks ... It’s not the start of a big change in sentiment just yet.”

A small player like that would not have systemic risk that would cause, and should not cause, Canadians to lose confidence in the value of their homes

DAVE MACKAY,

RBC chief executive