Despite the noticeable slackening of housing market sales and growth nationwide over the past months, Canada’s biggest banks can remain confident that for the moment, their incomes will remain relatively insulated from mortgage slowdown, according to industry observers.
RBC Capital Markets analyst Darko Mihelic said that “solid” earnings will mainly characterize the banks’ second-quarter results, which are set to be released in the next few days.
The trend of low unemployment rates and robust wage growth “should be supportive for the Canadian housing market,” he told The Canadian Press, although he also noted that “we would like to see a few more months of data to better understand the extent of the impact that recent changes to the housing/mortgage market have had on residential mortgage growth and the broader economy.”
Q2 2018 saw double-digit year-over-year declines in both national home sales activity and average sale price, according to the latest numbers from the Canadian Real Estate Association. CREA attributed most of the drop to a new stress test as of January 1 for uninsured mortgages, which has made it harder for some borrowers to qualify.
Residential secured lending represents, on average, 49% of total net loans for Canada’s biggest lenders, but mortgages bring less profit than some of the banks’ other financial products, CIBC analyst Robert Sedran explained.
“The fact that mortgages carry a lower margin makes a slowdown in growth less impactful than one might think,” Sedran stated in a research note.
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Fears over the domino effect of a cooling housing market on Canada’s largest lenders still abound amid new tighter mortgage lending guidelines, rising interest rates, and measures introduced by provincial governments, such as taxes on non-resident buyers.
Mitigating factors that might help fuel banks’ earnings in the second quarter are efficiency gains and better margins on the back of three Bank of Canada rate hikes in less than one year.
“This is not to suggest that everything is coming up roses, but there are enough flowers to hide the odd weed in the garden,” Sedran wrote in a note to clients, forecasting the banks’ earnings per share to grow 9% year-over-year. To compare, Mihelic is expecting an 8% bump.
Meanwhile, other factors are helping boost the banks’ earnings growth, such as double-digit commercial loan growth, ongoing efficiency improvements, U.S. corporate tax cuts, and expansion of net interest margins, which is the difference between the money they earn on the loans they make and what they pay out to savers.
“Particularly when one considers that banks are in fact diversified financial services conglomerates rather than pure banks (and diversified by geography as well), we believe that slowing mortgage growth will prove to be a very manageable headwind to earnings growth, as not only mortgage growth has been driving the sector,” Sedran said.
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