Data sheds light on big banks and mortgage market

While much has been made of forecasts and feelings regarding Canada's mortgage market in the last few months, nothing compares to cold, hard facts. Fortunately, Canadian Mortgage Trends has compiled a list of various figures from Canada's six largest banks to give a glimpse into the current state of the market. Citing quarterly earnings reports, presentations and conference calls, the data gives Canadian consumers a peek behind the window dressing at Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC), Royal Bank of Canada (RBC), Scotiabank and TD Bank.

Mortgage activity rises for most
Outside of CIBC, which saw mortgage activity decline by $1.3 billion during the second quarter of 2013, all other banks tracked saw year-over-year increases. BMO experienced a 13.7 percent rise in mortgage balances compared to the same time last year, as well as 1.9 percent on a quarter-over-quarter basis. NBC saw residential mortgage activity rise 13 percent year-over-year, as well as 4 percent quarterly. RBC had its residential mortgage volume rise 5 percent year-over-year during the second quarter, reaching $177 billion. Scotiabank's residential mortgage portfolio reached $188 billion during the second quarter, marking a 27 percent increase on a year-over-year basis. Finally, TD Bank also experienced an increase in residential mortgages, it's portfolio reaching $156 billion during the second quarter. This is up from $155 billion during the last quarter, as well as $145 billion during the same time last year.

Mortgage rules lead to more uninsured loans
It's hardly surprising that Finance Minister Jim Flaherty's mortgage restrictions, which included lowering loan-to-value ratios and amortization periods for government-backed mortgages, would result in fewer insured home loans.

Both BMO and TD Bank showed considerable decreases in their insured residential mortgage portfolio, while Scotiabank's insured portfolio remained unchanged from the first quarter of the year. Meanwhile, RBC's insured portfolio actually experienced a slight increase, rising from 40 percent in the first quarter to 42 percent during the second quarter.

Stress tests become the norm
As pointed out by CMT, stress tests are also a major trend with Canada's biggest banks. A stress test is analysis of a financial institution's ability to handle unfavorable economic circumstances. These are used to determine whether a bank can withstand these developments, and are often used to show investors that things are on the right track. In the case of the Canadian mortgage market, the top six banks are performing stress tests to see how their institutions will perform if the worst should happen.

"Residential mortgage and home equity line of credit (HELOC) exposures are areas of interest in the current environment," BMO stated in a report to shareholders. "BMO regularly performs stress testing on its mortgage and HELOC portfolios to evaluate the potential impact of tail events. These stress tests incorporate moderate to severe adverse scenarios. The resulting credit losses vary depending on the severity of the scenario and are considered to be manageable."

This sentiment was echoed by most of the other banks, many of them saying that even in the face of rigorous stress testing, their financial institution will prevail, or, at the very least, survive.

"Every time we do [stress tests], and we've become quite expert at doing stress tests, it continues to show that in Canada, given the nature of this business, given the government guarantees and the insurance portfolio, that we continue to make money in Canadian banking overall – we don't go into the negative," TD Bank said in a conference call. "…Three or four years into the (mortgage rule) changes, [the market is] moderating exactly as expected. But if we're wrong, at whatever percentage of likelihood that is, then we still feel good about the stress test(s)."

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