Bank watches housing loans in hot real estate markets
TORONTO — Royal Bank CEO David McKay said the lender is “closely monitoring” the real estate markets in Vancouver and Toronto, where home prices are climbing at a breakneck pace.
“The short supply of singlefamily homes in both cities — coupled with strong demand fuelled by household formation, including net immigration — has driven strong price appreciation,” McKay said during a conference call to discuss the bank’s third-quarter results. “We have prudent underwriting practices in place and the necessary technology to closely monitor these markets and quickly react as situations may materialize.”
McKay added he supports Ottawa’s plan to form a working group to study the housing market and develop recommendations to mitigate some of the risks stemming from the combination of soaring house prices and record consumer debt.
Executives at RBC, which reported $2.895 billion of net income in the third quarter, were peppered with questions about the bank’s residential mortgage portfolio during Wednesday’s conference call. Analysts wanted to know what contingency plans the bank has in place in the event of a downturn in house prices.
RBC’s chief risk officer Mark Hughes touted the bank’s “diligent” process for verifying the incomes of borrowers and noted the bank doesn’t participate in the second mortgage market or offer subprime mortgage loans.
Hughes also highlighted the fact that 48 per cent of the loan portfolio is insured, up from 46 per cent last year. The bank purchased additional portfolio insurance this quarter, Hughes added.
“Overall, we remain comfortable with our exposure to the housing market,” he said. “Our clients’ credit profiles are strong and have remained stable.”
Edward Jones analyst Jim Shanahan said that while having credit-worthy customers is important, it doesn’t insulate the bank from potential losses in the event of a correction or a crash. “It’s unlikely that any Canadian bank wouldn’t feel some pain, whether they were selecting high-quality customers or not.”