BMO sees “modest” risk of rising delinquencies as mortgages renew at higher rates
In its third-quarter earnings call, the Bank of Montreal said rising interest rates will have the greatest impact on mortgage borrowers at renewal time.
And the bank will see $14 billion of its uninsured portfolio renew in the next 12 months.
“We do expect the recent interest rate changes to impact borrowers when they refinance or renew, which ultimately could lead to increased delinquencies,” said Chief Risk Officer Pat Cronin.
However, Cronin said there are several reasons why the bank sees that risk as being “modest” at this time.
“First, 25% of our instalment RESL (Real Estate-Secured Lending) book is insured; second, renewals are spread out over time and only 10% of our uninsured instalment RESL products are up for renewal in the next 12 months, giving borrowers time to adjust,” he said.
“Finally, we have a high credit quality borrower base with an average credit bureau score of 793 and an average LTV of 48%. In fact, less than 2% of our Canadian RESL book is to borrowers with a combination of a credit bureau score less than 680 and an LTV greater than 70%.”
The bank added that variable-rate mortgage borrowers with fixed payments are most impacted by rising rates through an extension to their amortization period until renewal. “At renewal, the product reverts to the original amortization schedule, which may require additional payments,” reads the bank’s presentation to shareholders.
The bank has seen the share of its mortgage portfolio with an effective remaining amortization of fewer than 25 years slide to 60%, down from 79% a year ago.
Here’s a run-down of BMO’s mortgage portfolio performance in the quarter…
Q3 net income: $1.37 billion (-40% Y/Y)
Earnings per share: $3.09
- BMO’s residential mortgage portfolio rose to $135.5 billion, up from $126.3 billion a year earlier.
- The HELOC portfolio—72% of which is amortizing (up from 69%)—rose to $46.7 billion from $40.3 billion a year ago.
- Residential mortgage and amortizing HELOC volumes are up 13% year-over-year.
- 31% of BMO’s residential mortgage portfolio is insured, down from 34% a year ago and 40% in Q3 2020.
- The loan-to-value on the uninsured portfolio is 46%, down from 48% a year ago.
- 60% of the portfolio has an effective remaining amortization of 25 years or less, down from 79% a year ago.
- Net interest margin (NIM) in the quarter was 2.72%, up from 2.666% in Q3 2021.
- The bank set aside $136 million in the quarter as part of its credit loss provisions, compared to $50 million last quarter and a recovery of $70 million in Q3 2021.
- The 90-day delinquency rate fell to 11 bps from 14 bps a year ago, with the loss rate for the trailing four-quarter period at 1 bp (unchanged).
Source: BMO Q3 Investor Presentation
- “Looking into the fourth quarter and next year, NIM in both our P&C businesses and at the all bank level is expected to continue to widen, given the rising rate environment,” said Chief Financial Officer Tayfun Tuzun.
- BMO said a 100-bps rate hike would benefit net interest income by $525 million over the next year.
- Commenting on current economic conditions, President and CEO Darryl White said this: “While the economic environment remains uncertain, there are signs that central bank action aimed at taming inflation is having an effect. While activity is moderating, low unemployment and still high consumer and business savings are likely to provide some buffer to the downturn.”
- BMO announced that Chief Risk Officer Pat Cronin will be retiring after nearly 30 years at the bank. He will be replaced by Piyush Agrawal, former Chief Risk Officer at Citibank, N.A.
Source: BMO Conference Call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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