Banks' rosy outlook on mortgage growth too optimistic: Analyst
The biggest five lenders expect their mortgage portfolios to grow in the low-to-mid single digits this year
One Bay Street analyst thinks Canadian bank executives are too optimistic about growth to their mortgage loan books this year as home sales activity continues its slump.
"Any way you cut it, sales volume has been atrociously bad. It's been down for seven or eight months now. And until you see that start to turn, it's indicating that there's no originations going on," Mike Rizvanovic, director of financial services at KBW, told Yahoo Finance Canada.
"Unless you start to see sales volume pick up, that's really your indication on originations. So it's a bit confusing as to how the banks can remain confident."
Most of the largest Canadian banks expect their mortgage portfolios to grow in the low-to-mid single digits this year.
"They seem to always throw out that number as a trough level," he said, adding there's downside risk to those calls.
Overall growth in Canadian mortgages and home equity lines of credit for the big banks in the first quarter sequentially was a meagre 0.3 per cent, the smallest increase since early 2014, according to his analysis.
Bank executives acknowledged in their earnings conference calls that mortgage originations are down substantially, and Rizvanovic says the only way the banks could achieve low-to-mid single digit mortgage growth is if the housing market accelerates.
He's not convinced that's going to happen in the near term considering the state of the market, with many regional real estate boards reporting monthly sales activity down double digits.
However, if the banks' mortgage portfolios were to decline, it would likely be a very modest contraction, Rizvanovic says.
"I'm just suggesting the downside scenario could be a few percentage points down," he said.
"But that would be very different from low-single or mid-single digits. And that would have implications on the growth in the balance sheet in the loan portfolio, earnings and everything else."
Execs tout resilience of mortgage books
Bank executives touted the resilience of their mortgage portfolios on their conference calls, and even though delinquencies have ticked higher amid rising interest rates, they are increasing off an extremely low base.
"Our late-stage delinquencies across these portfolios continue to remain low compared with pre-pandemic levels. We will continue to take a prudent approach and are closely monitoring as interest rates rise and markets evolve," CIBC executives said on the call.
"At this time, we still only see a small portion, less than $20 million of mortgage balances, with clients we see as being at higher risk from a credit perspective."
However, 20 per cent of mortgage loan balances held at CIBC, or $52 billion worth, have grown because monthly payments did not cover the interest owed. The unpaid interest is being added back to the principal, extending the loan’s amortization.
It's the latest evidence of financial stress among Canadian homeowners with variable-rate mortgages.
RBC executives say they don't see the company's mortgage book shrinking, but with originations and home prices down, it does ultimately translate into a lower value and number of mortgages hitting its balance sheet.
Meanwhile, TD executives say they expect a pickup in the housing market, but could adjust their forecast depending on how the market progresses.
"The data I look at gives me some optimism on a go-forward basis, recognizing the market is soft. If the market softens up a whole bunch more, then I might change my tune, but just given what I see today, I think that's achievable," the executives said on the call.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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