BoC rate cuts will ease pressure, but mortgage renewal shocks still loom, RBC says.
Canada’s largest bank said it expects loan losses in its retail portfolio to continue rising beyond 2025 as the bulk of its mortgages come up for renewal.
“Yes, we’ve had some rate cuts and those have been beneficial, [but] that doesn’t mitigate rates as a headwind for many of these consumers…when they go to reprice for mortgages,” said Chief Risk Officer Graeme Hepworth.
“Yes, it’s maybe not as acute in terms of the payment shock as they were facing when we saw rates where they were last quarter or two quarters ago,” he added. “But it still is a payment shock that many of these consumers will face. And the big repricing schedule there really goes from ’25, ’26 and into ’27.”
While RBC has outperformed in terms of losses through the early part of this year, “the trends on retail are still negative,” he noted.
In RBC’s residential mortgage portfolio, the percentage of loans that are 90+ days in arrears has grown to 0.24%, up from 0.20% last quarter and 0.13% a year ago.
“We do see it kind of growing through 2025, [but] I think the peak is probably less acute than maybe we were thinking about kind of at the beginning of this year,” Hepworth added.
Hepworth said the biggest factor has been a slower-than-expected rise in Canada’s unemployment rate, which held steady at 6.4% in July.
“Moving forward, credit outcomes will continue to be dependent on the magnitude of change in unemployment rates, the direction and magnitude of changes in interest rates and residential and commercial real estate prices.”
RBC residential mortgage portfolio by remaining amortization period
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| Under 25 years | 54% | 58% | 56% |
| 25-29 years | 22% | 21% | 25% |
| 30-34 years | 1% | 2% | 1% |
| 35+ years | 23% | 19% | 18% |
RBC earnings highlights
Q3 net income (adjusted): $4.7 billion (+18% Y/Y)
Earnings per share: $3.26
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| Residential mortgage portfolio | $363B | $401B | $405B |
| HELOC portfolio | $35B | $37B | $37B |
| Percentage of mortgage portfolio uninsured | 77% | 78% | 79% |
| Avg. loan-to-value (LTV) of uninsured book | 71% | 71% | 70% |
| Portfolio mix: percentage with variable rates | 29% | 29% | 28% |
| Average remaining amortization | 24 yrs | 24 yrs | 21 yrs |
| 90+ days past due | 0.13% | 0.20% | 0.24% |
| Gross impaired loans (mortgage portfolio) | 0.11% | 0.18% | 0.21% |
| Canadian banking net interest margin (NIM) | 2.68% | 2.76% | 2.84% |
| Provisions for credit losses | $532M | $920M | $659M |
| CET1 Ratio | 14.1% | 12.8% | 13% |
Conference Call
- RBC noted it ranked number one in customer satisfaction in both the J.D. Power 2024 Canada Banking app Mobile Satisfaction study and the Canada Online banking Satisfaction study.
- On its $13.5-billion acquisition of HSBC Canada:
- The recent acquisition of HSBC Canada contributed earnings of $239 million or adjusted earnings of $292 million.
- This included $90 million of cost synergies achieved and $156 million of underlying earnings, “including higher-than-expected Stage 3 PCL,” noted McKay.
- “Having realized annualized run rate savings to-date of approximately 50% of our stated target, we are confident we will achieve our expense synergy goal of $740 million per year,” he said.
- “We also remain impressed by HSBC Canada’s fundamentals, including the strength of the franchise and the balance sheet we acquired. Employee and client engagement is high and our combined sales force continues to rebuild lending origination pipelines, which had narrowed ahead of our extended close,” he added.
- “We’re seeing a lot of these clients come into existing RBC branches to renew these products,” noted Neil McLaughlin, Group Head, Personal and Commercial Banking. “We’ve already seen over $100 million of assets under management come in from these clients.”
Source: RBC Q3 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
This article was written for Canadian Mortgage Trends by:
