Toronto-based Royal Bank of Canada (RBC) saw an uptick in demand for mortgages this fall as borrowers look to secure loans before tougher rules — including a stress test — take effect in the new year, one of the bank's executives says.
Neil McLaughlin, RBC's head of personal and commercial banking, told analysts on its fourth-quarter earnings call there is a heightened awareness of the banking regulator's revised mortgage underwriting guidelines, which is expected to reduce the maximum amount homebuyers who don't need mortgage insurance will be able to borrow.
"We have seen a little bit of pull forward this fall," McLaughlin told analysts on the call Wednesday. "As we talk to customers, some of them are surprisingly aware of what the stress test is about and have decided to move more quickly."
McLaughlin's comments came as RBC beat analyst expectations with a 12% jump in its fourth-quarter net income to $2.84 billion, driven by double-digit year-over-year increases in personal and commercial banking, wealth management and capital markets. Its latest earnings for the three-month period ended Oct. 31 helped to cap off its fiscal year with a record $11.5 billion profit, up 10% from fiscal 2016.
It also comes as the banking regulator in October finalized changes to its mortgage underwriting guidelines — moves aimed at reducing risk amid high household indebtedness and rising home prices, particularly in Toronto and Vancouver.
The revised guidelines, called B-20, require would-be homebuyers to prove they can still service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. An existing stress test requires those with insured mortgages to qualify at the Bank of Canada benchmark five-year mortgage rate.
Meanwhile, the Bank of Canada has raised interest rates twice in recent months to the current overnight lending rate of 1%. On Tuesday, the central bank said in its semi-annual review of the financial system that the steady climb of household debt and still-hot housing markets remained top vulnerabilities. However, it said the new mortgage guidelines would help mitigate the risks associated with low-ratio mortgages (with down payments of 20% or more).
McLaughlin told analysts Wednesday that more than 90% of its mortgages are already underwritten at these higher rates, and expects the overall impact of these guidelines to be "fairly modest."
"The vast majority of our portfolio and loan originations are not really going to be impacted," he said.
The Bank of Nova Scotia's chief executive, Brian Porter, told analysts on its earnings call Tuesday that he expects the new guidelines to create a "5% headwind" to mortgage originations.
McLaughlin told analysts that RBC expects "a similar number".
Dave McKay, RBC's president and chief executive, said he expects mortgage growth to "slightly moderate." Canada's biggest lender by market capitalization had $142.1 billion in uninsured mortgages as of Oct. 31, up 11% from $128 billion a year earlier.
"As the Canadian housing industry digests the changing regulatory landscape, we expect mortgage growth to slightly moderate to the mid single-digits," McKay said on the conference call. "Household demand, however, should still be supported by changing demographics including the large influx of immigrants expected in Canada over the next three years."
Borrowers are showing signs of caution, said Mark Hughes, RBC's chief risk officer.
"More recently, we have seen an increasing number of fixed rate mortgage originations, signalling increased conservatism by our clients in a rising rate environment," he told analysts on the conference call.
The guidelines could also help RBC retain its existing borrowers, said McLaughlin.
The new stress test rules won't apply to those renewing their mortgages if they remain with their existing lender.
"We do see this as a positive, and we do expect some lift to our retention rates," McLaughlin said.
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