Paul Bagnell

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Canada’s Big Six banks generated lots of headlines as they reported their fiscal first-quarter results this week. Loan-loss provisions plunged far more than analysts had expected, driving big earnings beats across the sector. A few banks actually released earlier-booked loss reserves on so-called “performing” loans. With one exception (Bank of Nova Scotia) revenue was stronger than it was a year earlier, an impressive accomplishment amid the pandemic-ravaged economies in which the banks operate. And their capital markets businesses provided outsized profit gains.

But another, less heralded, trend also become apparent. The banks are selling more residential mortgages than ever before, and reported sharp increases in their Canadian residential mortgage balances over the past year. Low interest rates and work-from-home requirements are compelling Canadians to buy homes. And that’s a good thing for the banks in an otherwise stagnant market for personal lending.

Rob Wessel, a former Bay Street bank analyst, told me low interest rates are the key factor behind strong mortgage demand. He also noted that, for the banks, rising home prices mean higher loan values. This drives loan volume growth in mortgages, their most important lending category. Wessel is now managing partner at Hamilton ETFs, which recently launched a Canadian banks exchange-traded fund.

'NOW OR NEVER'

The president of brokerage Realosophy Realty Inc. said suburban flight and frantic first-time buyers are pushing housing demand to new heights.

“I would say the move out of the cities is a big factor behind the surge in demand we are seeing for houses," John Pasalis said in an interview. “The other is an urgency among young buyers to suddenly buy a home.”

“The fact that CMHC was certain home prices were going to fall, but (they) didn't, left many buyers feeling optimistic that prices will keep going up,” Pasalis said. “Combine that with the Bank of Canada's forward guidance about keeping rates low and using every policy tool available to keep the economy going; it has left buyers feeling that if they are going to buy a home, it's now or never.”

On one of the bank conference calls, an analyst said the mortgage books have been “on fire” across the sector.

LINE-BY-LINE

Royal Bank of Canada, for instance, reported $305.1 billion in Canadian residential mortgage loans outstanding. That was up 12 percent from a year earlier, and the figure rose steadily through the pandemic-affected quarters since then.

Canadian Imperial Bank of Commerce also stood out, with eight percent growth over the past year. CEO Victor Dodig said the bank had worked hard to close the gap in mortgage lending between it and its competitors, and the bank had successfully won market share.

National Bank of Canada, with a big presence in the Quebec market, boosted its mortgage balances 9.7 per cent.

The gains are important because they provide an important source of growth at a time when loan growth in their core Canadian retail banking units is difficult to achieve. 

That 12 per cent gain in residential mortgage balances at Royal, for instance, looks pretty appealing when compared to its stagnant credit card book ($17 billion in outstanding balances, down 14 per cent from a year earlier) and low-growth small business book ($5.7 billion, up 3.6 per cent from a year earlier).

As 2021 progresses, the banks – and their shareholders – will want to see that strength in mortgage-lending continue, while personal loans, small business lending and credit card balances take time to stage a comeback.