Canada’s biggest banks are upping the ante in the mortgage wars amid slowing growth and national housing sales at lows not seen in several years, but analysts say real estate market woes won’t dent lenders’ earnings, just yet.
The banks, which are set to begin reporting their second-quarter results this week, are expected to deliver “solid” earnings, said Darko Mihelic, an analyst with RBC Capital Markets.
Unemployment rates have stayed low and wage growth has generally remained strong “which should be supportive for the Canadian housing market,” he said.
However, Mihelic said that he still sees housing activity and prices as soft and the downside risk as real.
“We would like to see a few more months of data to better understand the extent of the impact that recent changes to the housing/mortgage market have had on residential mortgage growth and the broader economy,” he said in a recent research note.
CIBC is the first of the big banks scheduled to report its latest results with data out Wednesday, followed by TD Bank and Royal Bank on Thursday. Scotiabank is set to report its results on May 29, with BMO and National Bank on May 30.
Concern over the ripple effect of a cooling housing market on Canada’s Big Six lenders has been mounting amid new tighter mortgage lending guidelines, rising interest rates and measures introduced by provincial governments, such as taxes on non-resident buyers.
However, analysts are expecting improvement on other fronts, such as efficiency gains and better margins on the back of three Bank of Canada rate hikes in less than one year, to help fuel the banks’ earnings in the quarter.
“This is not to suggest that everything is coming up roses, but there are enough flowers to hide the odd weed in the garden,” said CIBC analyst Robert Sedran in a note to clients. He is forecasting the banks’ earnings per share to grow nine per cent, year over year, while Mihelic is expecting an eight per cent bump.
Still, the tail end of the banks’ second quarter, which ended April 30, saw double-digit year-over-year drops in both national home sales activity and average sale price, according to the latest figures from the Canadian Real Estate Association. CREA blamed a new stress test as of Jan. 1 for uninsured mortgages, which has made it harder for some borrowers to qualify, for the majority of the drop.
Residential secured lending represents, on average, 49 per cent of total net loans for Canada’s Big Six banks, but mortgages are less profitable than some of the lenders’ other financial products, said Sedran.
“The fact that mortgages carry a lower margin makes a slowdown in growth less impactful than one might think,” he said in a research note last week.
Meanwhile, Sedran adds, other factors are helping “buoy earnings growth” for the banks, such as double-digit commercial loan growth, ongoing efficiency improvements, U.S. corporate tax cuts, and expansion of net interest margins, which is the difference between the money they earn on the loans they make and what they pay out to savers.
“Particularly when one considers that banks are in fact diversified financial services conglomerates rather than pure banks (and diversified by geography as well), we believe that slowing mortgage growth will prove to be a very manageable headwind to earnings growth, as not only mortgage growth has been driving the sector,” Sedran said.
Still, Canadian banks are upping the ante in the battle for mortgage market share with deep discounts to their variable rates.
A rise in government bond yields have prompted the lenders to increase their posted five-year fixed mortgage rates, reflecting an increase in borrowing costs. But most of the big banks have cut their variable rates, which have better profitability if rates continue to rise.
Earlier this month, the Bank of Montreal discounted its posted five-year variable closed mortgage rate to 2.45 per cent until the end of May. TD Bank, Scotiabank and Royal Bank later matched their rival’s offer, for a limited time. The Canadian division of London-based bank HSBC undercut them all by lowering its five-year variable closed rate to 2.39 per cent, with no end date, but noting it could change at any time.