Predictions may not materialize due to a continued slump in home sales activity
Canadian banks' expectations for mortgage growth may be too optimistic, according to a financial services analyst with KBW.
While the largest Canadian banks expect their mortgage portfolios to grow in the low-to-mid single digits this year, Mike Rizvanovic, director of financial services at KBW, said the continued slump in home sales activity will have a negative impact on the banks' ability to originate new mortgages.
Rizvanovic noted that sales volume has been down for the past seven or eight months, with the continued slump indicating that “there’s no originations going on.”
“Unless you start to see sales volume pick up, that's really your indication on originations,” Rizvanovic told Yahoo Finance Canada. “So, it's a bit confusing as to how the banks can remain confident.”
The only way banks could achieve low-to-mid single digit mortgage growth is if the housing market accelerates, Rizvanovic said further, adding that he is not convinced this will happen in the near term.
He said there is downside risk to banks’ optimistic predictions, especially as overall growth in mortgages and home equity lines of credit for Canada’s big banks in the first quarter sequentially was only 0.3%.
This is the smallest increase since early 2014, according to Rizvanovic’s analysis.
Despite his warnings, Rizvanovic said declines in the banks’ mortgage portfolios would likely be a “very modest contraction.”
“I'm just suggesting the downside scenario could be a few percentage points down,” he told Yahoo Finance Canada. “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.”
In their earnings conference calls, bank executives have acknowledged the substantial decrease in mortgage originations and highlighted the resilience of their mortgage portfolios.
While RBC executives said they do not see the company’s mortgage portfolio shrinking, they noted that overall value and number of mortgages will likely decrease due to falling home prices and fewer originations.
Additionally, TD executives said they expect to the housing market to rebound but are open to changing their predictions based on how the market will perform.
CIBC executives, meanwhile, noted that the late-stage delinquencies across their portfolios continue to remain low compared with pre-pandemic levels.
“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,” said Frank Guse, CIBC’s chief risk officer.
CIBC’s latest financial results also showed that 20% of its mortgage holders have monthly payments that can no longer cover even the interest portion of their loans, accounting for $52 billion worth of mortgages out of the bank’s $263 billion residential loan portfolio.
