Despite facing sharply higher mortgage rates on their mortgage renewals, Equitable Bank says its borrowers have so far shown “remarkable resilience.”
The comment came from Andrew Moor, President and CEO of Equitable Bank—Canada’s seventh-largest independent bank—during its first-quarter earnings results.
“In terms of the renewal percentages, we’re at [a] higher percentage than we’ve ever had. So that part is good,” he said on the bank’s earnings call. “There’s no doubt there is a sticker-shock on the part of our customers. Frankly, I have a lot of empathy for them, so we have to work with them to kind of figure out how to adjust to [higher rates].”
He noted that the bank isn’t trying to take advantage of clients, but is rather simply passing along the increases imposed by the Bank of Canada and offering its clients the current market rates.
“I think the big takeaway from all of this, when I read commentary around mortgage stress and so on, is that the balance sheets of households are still remarkably strong in Canada,” he added. “That’s why these portfolios are holding up really well.”
Moor noted that clients are not only benefiting from rising incomes, but also the fact that many renewing clients have resources available to them “way beyond just the current income.”
“We’re seeing remarkable resilience here,” he said. “That story about the balance sheet of Canadian consumers is one that doesn’t enter enough into the mortgage stability dialogue, and I believe it’s really important.”
Stabilizing house prices leading to an increase in origination activity
The bank reported a 10% year-over-year increase in net income and 33% growth in its uninsured single-family residential origination volumes, which reached $19.2 billion.
“With the Bank of Canada holding its policy rate steady, we’re already seeing signs of price stabilization and increased activity in the housing market,” said Moor. “We expect this to continue.”
Equitable’s residential mortgage portfolio remains in good shape, with an average Beacon score of 732 for new originations and an average loan-to-value of 65%, confirmed Chief Risk Officer Chadwick Westlake.
“We only conduct B-20 lending, and we continue to focus on lending in key urban areas with favourable population and economic growth trends, where job creation opportunities are significantly diversified,” he said. “An outcome of this design is our loss rate remains at the lowest of all peers.”
Highlights from the Q1 earnings report
- Net income (adjusted): $101.7 million (+10% YoY)
- Earnings per share (adjusted): $2.62 (-1%)
- Assets under management and administration: $104.8 billion
- Single-family alternative portfolio: $30.3 billion (+33%)
- Net interest margin: 1.92% (+5 bps)
- Net impaired loans (of total assets): 0.32% (+10 bps)
- Reverse mortgage loans: $930 million (+206%)
- Avg. LTV of Equitable’s uninsured single-family residential portfolio: 65%
Notables from its call
CEO Andrew Moor commented on the following topics during the company’s earnings call:
- On market competition in the prime lending space: “I think it’s been a challenge for all of us to participate in that space with the volatility in interest rates to actually be pricing properly and thinking about where margins need to be…the margins have widened a little bit, but I think it’s really because we’re all trying to make sure we don’t get caught offside with a change in interest rates. The competitive dynamic in a more traditional space of conventional single-family continues to be the same. Essentially, we have two or three significant players and are not seeing competitive behaviour that seems strange.”
- On interest rate risk: “This has been a deep well of trouble at some U.S. regional banks. Our advantage is derived from how our treasury team manages interest rate risk in the banking book in alignment with our low appetite for market risk. We operate with a target duration of equity of approximately one year as a means of tightly controlling exposure to interest rate movements. Another way to look at it, we don’t take a view on rates. We consider the sensitivity to changes in the economic value of equity to be the most important measure.”
- On potential changes to the CMB program announced in the federal government’s latest budget: “We don’t know, frankly, [what changes may be coming]. That was a line out of the budget…there was a proposal…around consolidating the issuance of Canada Housing Trust bonds into the general liabilities of the Government of Canada with the view that might reduce overall funding costs…To date, we haven’t heard much detail about that, but obviously very interestingly engaged on how that might flow through and whether it might create some other intended consequences that we should be engaging with. But I think it’s way too early to say.”
- Chadwick Westlake, Chief Risk Officer, provided some additional comments on EQ Bank’s diversification strategies: “The diversification of our funding stack has expanded materially over the past several years across direct and wholesale options combined with a maturing credit profile and rating. We can dial these funding stack levers based on availability and pricing. We have de-risked the bank well without an over-reliance on any single key funding source, as we avoid interest rate misalignment with a matched funding focus and sticking to our duration target. We’re not only well covered from a liquidity perspective, but strategically we are positioned to have more tailwind in our funding costs as we focus on additional diversification plus credit rating expansion.”
- Of Equitable’s $2.7 billion construction loan portfolio, which comprises mostly multi-unit buildings, over $1 billion is CMHC-insured, the bank confirmed.
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.