National Bank of Canada, the smallest of the Big 6 banks, reported third-quarter earnings in line with market expectations.
The bank’s management team said its portfolio of real estate secured loans (i.e. mortgages and home equity lines of credit) performed well in the third quarter, but a slowdown was imminent in the coming quarters due to rising interest rates.
“While rising rates have already impacted the housing market due to lower volumes and prices, the resilience of our RESL portfolio remains strong,” said President and CEO Laurent. Ferreira. “Borrower income is growing, delinquency rates have improved, and customers have built up very healthy levels of equity, as evidenced by low LTVs.”
The bank noted that almost a third of its mortgages (31%) have variable rates and that 11% of its mortgage borrowers are investors.
Ferreira added that the current environment is “uncertain and complex”, due to high inflation, rising interest rates and heightened geopolitical risks.
“Our credit portfolios continue to perform well. We maintain a disciplined and balanced approach in underwriting new transactions, and we continue to maintain a prudent level of reserves,” he said during the bank’s conference call.
Lucie Blanchet, executive vice president, retail and customer experience, added that the bank is seeing a “market normalization” of its mortgage portfolio, not a “market collapse.”
“So we believe that rising rates will continue to reduce the number of transactions, which should lead to more balanced markets across the country,” she said.
NBC Earnings Highlightss
Here’s a look at how BNC’s mortgage portfolio performed during the quarter…
Q3 net income: $826 million (-2% year-on-year)
Earnings per share: $2.35 per share
- The bank’s residential mortgage portfolio reached $88 billion in the third quarter, up from $82.2 billion a year ago.
- The bank’s residential mortgage portfolio is 37% uninsured, down from 34% a year ago.
- The average LTV on the uninsured mortgage portfolio was 50% (vs. 55%), while the average LTV on the HELOC portfolio was 46% (vs. 50%).
- Quebec represented 55% of the mortgage portfolio (compared to 54% a year ago), while Ontario represented 28% (compared to 27%) and Alberta 7% (unchanged).
- The net interest margin stood at 2.17% in the third quarter, against 2.09% a year earlier.
- Of the bank’s uninsured residential mortgage portfolio, 0.07% is more than 90 days past due, compared to 0.11% in Q3 2021.
- The bank added $57 million to its provisions for credit losses in the quarter, compared with $3 million set aside for bad debts in the second quarter and a recovery of $43 million a year ago. .
Source: National Bank Q3 Investor Presentation
- Regarding the bank’s current economic outlook, Chairman and Chief Executive Officer Laurent Ferreira said: “While the likelihood of a recession has increased in recent weeks, this is not our base case. Our team of economists is currently calling for a soft landing for the Canadian economy. In our view, inflation should continue to decelerate and interest rates should normalize this decline to just over 3%”.
- The bank’s mortgage volumes were up 8% year-over-year, but Ferreira noted that “given rising interest rates, we expect demand for secured home loans to continue to grow.” normalize back to pre-COVID levels.”
- “Several factors continue to support the Canadian housing market, including strong immigration and unemployment at historically low levels,” he added. “We also expect the housing market in Quebec to be resilient given the improvement in relative housing affordability, consumer savings and debt levels in the province.
- “As evidenced by our third quarter results, the Bank is benefiting from rising interest rates,” said Chief Financial Officer Marie Chantal Gingras. “On a total Bank basis, [net interest income] increased 16% year over year, and our non-trading net interest margin increased 9 basis points year over year. »
- Asked why NBC outperformed its other major peer banks this quarter in revenue and earnings, Ferreira said that aside from a “disciplined approach, … one of the big differences you need to be aware of is that we are focused on Canada. We have a Canadian platform and most of our peers have businesses in the U.S. I think that could be a big delta in the results you’re seeing so far.
- William Bonnell, Executive Vice President, Risk Management, explains why the bank is confident in Quebec mortgage consumers and their increased ability to absorb higher interest rates and cost of living compared to consumers elsewhere from Canada (keeping in mind that half of the bank’s portfolio is from Quebec):
- “One thing that has been talked about a lot over the last 10 or 15 quarters is that Quebec households have two higher income households because of the very high participation rate of women in the labor market in Quebec. You know, of course, that the ratio of consumer debt to disposable income in Quebec is well below average,” he said, adding that household energy costs, the majority of which depend on electricity , have also been more stable relative to other parts of Canada.
- Lucie Blanchet, Executive Vice-President, Personal and Client Experience, pointed out that the rapid rise in interest rates has had an impact on the demand for mortgage loans. “We’ve had two years of unsustainable levels in terms of transactions,” she said. “So I think we’re back to normal. And with the further rate hikes we expect this fall, we believe originations will continue to grow at a slower pace in the fourth quarter.
- “We are well positioned because 50% of our origins are in Quebec and we see the market as being more resilient in Quebec,” added Blanchet.
Source: NBC Conference Call
To note: Transcripts are provided as is by the companies and/or third-party sources, and their accuracy cannot be guaranteed to be 100%.