RISING RATES NO THREAT TO BANKS

MORTGAGE BOOK WON’T SUFFER, RBC CEO TELLS CONFERENCE

TORONTO • An eventual increase in Canadian interest rates is not expected to lead to a spike in mortgage book losses for Canada’s banks, Royal Bank of Canada chief executive Dave McKay told investors Tuesday.

Canada’s largest bank has built higher rates into the adjudication process for mortgages, McKay said, adding that employment is the real driver of whether homeowners struggle with mortgage payments.

Provisions for credit losses in the mortgage book are “driven by job losses… not interest rate increases,” McKay said during the RBC Capital Markets Canadian Bank CEO Conference in Toronto.

Higher rates are likely only if the overall economy is doing well, he said, adding that the result for the bank would be higher net interest margins, which have been compressed during the prolonged period of low rates.

McKay said recent government policy aimed at reining in soaring home prices is likely to tamp down the market for first-time buyers. However, he said factors including immigration trends and limited housing supply in markets such as Vancouver and Toronto are expected to moderate any pullback in real estate.

At the same conference, Bank of Montreal chief executive Bill Downe said homeowners in the United States walked away f rom their mortgages during the real estate meltdown in 2008 only when they lost their jobs, got a divorce, or if the value of their home fell to 60 per cent or less than the mortgage.

He said 56 per cent of BMO’s mortgage book carries default insurance, and the average loan to value of the uninsured portion is 54 per cent.

Downe said “there’s an awful lot of equity” behind BMO’s mortgage loans.

The rate and economic outlook in the United States, particularly under president- elect Donald Trump, is expected to benefit Canadian banks with operations there, the CEOs said.

“When the sentiment turns, it is going to be helpful for us ,” Toronto-Dominion Bank CEO Bharat Masrani told the conference, citing anticipated policies including tax reform, infrastructure spending, and regulatory streamlining.

Brian Porter, the CEO of Bank of Nova Scotia, was asked whether Trump’s suggestion he’ll tear up the North American Free Trade Agreement ( NAFTA) is a concern for Scotia, given the bank’s operations in both Canada and Mexico.

Porter said he isn’t wor- ried about Mexico’s internal economy, adding that while the initial boost from NAFTA came as a result of “labour arbitrage,” the country’s development and education system over the past 25 years has changed the type of work that has moved there.

As for the trade agreement, now nearly a quarter of a century old, perhaps “it’s time for a bit of a refresh,” Porter said.

Despite the mostly bulli sh outlook f or t he U. S. economy under Trump, U. S. growth could be somewhat contained by tepid growth in European markets, suggested Victor Dodig, chief executive of Canadian Imperial Bank of Commerce. CIBC is in the midst of making a large acquisition in the U. S., which was stalled by a run-up in the share prices of mid-sized U. S. banks following Trump’s election in November.

Dodig said CIBC is continuing to pursue regulatory approvals for the US$ 4 billion purchase of Chicagobased Private Bancorp, and expects shareholders to vote once the U. S. bank’s board approves the rescheduling of a meeting that was postponed late last year following the share price run-up.

WHEN THE SENTIMENT TURNS IT IS GOING TO BE HELPFUL.