Bustling mortgage activity helped lift banks
Some executives expect gains to continue amid supply shortages, housing demand
Canada's big banks reported strong growth in mortgage originations over the past year, fuelled by the country's hot pandemic housing market, but have differing views on whether that strength can continue in 2022.
Canadian residential mortgage and home equity line of credit (HELOC) volumes have grown by $151.2 billion or 13 per cent over the course of the pandemic, according to Bloomberg News. That growth outpaced the 2.8-per-cent pace seen in non-mortgage loans.
In quarterly earnings released this week, The Bank of Nova Scotia reported that it had seen a $30-billion (or 13 per cent) increase in residential mortgages on its books as compared to a year ago. Similarly, Royal Bank of Canada saw $35 billion in mortgages added to its balance sheet. National Bank also saw a growth in residential mortgages and home equity lines of credit, in their case to the tune of $10 billion.
The gains are something that some banking executives expect to continue in the new year as housing supply shortages and high demand for housing outweigh the prospect of rising interest rates.
“Looking forward, we expect mortgage growth to be strong in the high single-digit range, supported by low interest rates, supply and demand imbalances affecting prices and increasing immigration activity,” said David Mckay, RBC'S president and chief executive officer, in a conference call Tuesday.
Laurent Ferreira, the recently appointed president and chief executive officer of National Bank, echoed this sentiment. On a Wednesday conference call, Ferreira also cited the low-interest-rate environment and strong household balance sheets as factors that could keep mortgage activity strong.
Conversely, Dan Rees, Scotiabank's group head for Canadian banking, said that rising interest rates could potentially soften demand in the mortgage market.
Ron Butler, a Toronto-based mortgage broker who runs his own firm, Butler Mortgage, said that 2021 has been an immensely profitable year for those in the mortgage business, a growth that has come with a human cost as young buyers struggle to get in the market. However, he anticipates that higher mortgage and interest rates next year will slow that growth.
“There's volume of origination, like how many billions of dollars of new mortgages originated a year, and that's been great,” Butler said. “But it's not going to be as great next year. But, because rates will be higher, something the banks referred to as `NIM' will increase: net interest margin. So, when rates go up, their net interest margins get better. So, you can make the case that even if the actual amount of new mortgage origination declines, they'll end up making the same profit.”
Housing markets in many parts of the country continue to remain strong. Toronto, for example, posted another record-breaking month of home sales with a 3.3-per-cent boost year-over-year, according to data from the Toronto Regional Real Estate Board (TRREB) this week for the month of November.
Real estate firm RE/MAX released a market outlook this week projecting average price growth in 2022 could hit 9.2 per cent across the country.
While some have cautioned that the precipitous rise in home values was unsustainable and could pose a risk to banks, John Aiken, senior analyst and head of research at Barclays, said trouble for the banks was unlikely.
“It's definitely something that the market is keeping an eye on just because anything that grows strongly becomes an outlier and the potential risk factor,” Aiken told the Financial Post. “But the way that the mortgage market ... is structured, is that it is still a very, very low-risk product for the banks . ... High loan-to-value mortgages had insurance underpinning them, so the loss rates on the banks under that product — which is the riskiest category, residential mortgages — is virtually nil.”
If a policy change were to upend that structure, it would be a different story going forward, but would not immediately hit earnings.
“Because the banks actually have the stock of residential mortgages on their books, it may impact growth, but it's not going to impact their profitability,” Aiken said.
If mortgage origination growth slows down next year, Carl De Souza, senior vice-president of North American financial institutions at DBRS Morningstar, said that the loan-growth pendulum could swing from mortgage loans to non-mortgage loans, like credit cards.
“Going forward, it'd be interesting to see if those non-mortgage volumes rebound, because I think the expectation is that mortgage loan volumes will moderate somewhat going forward,” De Souza told the Financial Post earlier this week following Scotiabank earnings on Tuesday. “So, you want the non-mortgage volumes to increase under higher margin businesses ... that's good for the margins. We would like to see bouncebacks in those volumes.”