CIBC sees “no areas of concern” as 100,000 mortgage clients renewed at higher rates so far this year

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CIBC reports that its mortgage clients are so far managing to absorb the payment shocks as their mortgages come up for renewal at higher rates.

The bank made the comments during its third-quarter earnings call, where Chief Risk Officer Frank Guse confirmed the bank has already navigated a substantial number of mortgage renewals at higher interest rates, totalling approximately $25 billion year-to-date, impacting close to 100,000 clients.

“We are monitoring that cohort very, very closely from a delinquency rate perspective,” he said, with specific attention being paid to performance over the past six to eight months.

“Those clients are performing broadly in line with what we would have seen in 2019,” he noted. “So, there are no areas of concern that we are seeing so far emerging because clients are absorbing higher payments at renewal.”

The bank confirmed that another $37 billion worth of mortgages will be renewing over the next 12 months.

However, Guse said the bank is confident that clients will continue to be able to handle the rate increases and reiterated that delinquencies still remain low.

“We do feel comfortable…that those payment shocks—even though they are high, and they will certainly go higher over time—are manageable for those clients,” he said. “Our overall late-stage delinquencies remain low, especially when compared with pre-pandemic levels.”

Closely monitoring variable-rate clients

Guse added that the bank is “very, very closely” monitoring its variable-rate clients, which currently comprise about a third of the bank’s Canadian residential mortgage portfolio, down from 37% in Q1.

“We know their renewal schedules. We look very closely into what payment shocks are, again, under assumptions of where interest rates are over time,” he said, adding that, so far, this mortgage segment continues to display “strong credit quality and performance.”

As a result of the Bank of Canada’s latest interest rate hikes in June and July, CIBC said $50 billion worth of variable-rate mortgages have reached their trigger point, meaning the borrowers’ payments are only covering the interest portion. That’s up from $44 billion worth in the second quarter.

But Guse says the bank is continuing to reach out to clients whose mortgages are currently negative-amortizing, which is yielding “good responses.” To date, he said about 8,000 clients have increased their monthly payments and more than 1,000 made lump-sum payments.

“We will continue to work closely with our clients through this high interest rate environment and other market developments,” he said.

A quarter (25%) of CIBC’s residential mortgage portfolio now has an effective amortization of 35 years or longer, down slightly from a peak of 27% in Q1.

Remaining amortizations for CIBC residential mortgages

Q3 2022 Q2 2023 Q3 2022
20-25 years 33% 31% 31%
25-30 years 18% 19% 20%
30-35 years 3% 2% 2%
35 years and more 22% 25% 25%
This table summarizes the remaining amortization profile of CIBC’s total
Canadian residential mortgages based upon current customer payment amounts.

Dodig addresses recent press on CIBC’s underwriting practices

During the conference call, one analyst asked President and CEO Victor Dodig for his take on information that was leaked to the Globe and Mail concerning remediation orders the bank faced from the Office of the Superintendent of Financial Institutions (OSFI).

The Globe had cited two unnamed sources who said CIBC was put under remediation orders for more than a year after an audit of its mortgage portfolio unearthed debt-ratio breaches that reportedly involved thousands of clients with home equity lines of credit. When combined with their mortgages, the total credit available was reportedly in breach of regulatory guidelines.

“What I will say about articles like that, it’s disappointing to see when things are being reported publicly that are presented in a way that simply does not reflect the way we actually operate,” Dodig said.

And while he said he couldn’t comment specifically on regulatory matters, Dodig did say, “our regulators play an incredibly important role in ensuring strength and stability in the financial system in Canada, and I think they’ve done that over a century and a half and they do it well.”

“I can tell you that we maintain an ongoing transparent engagement with all of our regulators in all of the jurisdictions that we operate and with our board,” he added. “We’ve also got effective controls to ensure compliance with supervisory expectations, and we continue to manage all of our businesses including our mortgage business prudently with a client focus.”

CIBC earnings highlights

Q3 net income (adjusted): $1.47 billion (-15% Y/Y)
Earnings per share: $1.52

Q3 2022 Q2 2023 Q3 2023
Residential mortgage portfolio $260B $263B $265B
HELOC portfolio $19.4B $19B $19.1B
Percentage of mortgage portfolio uninsured 81% 82% 83%
Avg. LTV of newly originated uninsured mortgages 65% 66% 66%
Mortgages renewing in the next 12 months NA $34B $37B
Canadian res’l mortgages 90+ days past due 0.14% 0.16% 0.17%
Canadian banking net interest margin (NIM) 2.51% 2.57% 2.67%
Total provisions for credit losses $243M $438M $736M
Source: CIBC Bank Q3 Investor Presentation

Conference Call

  • “The Canadian consumer book is holding up very strong,” said Frank Guse, Chief Risk Officer. “We see impaired losses normalizing, but we see them normalizing well within our expectations…if you look at delinquency rates, if you look at impairment rates and so on, we are pleased with that resilience because it is performing better than our expectations.”
  • “NIM was up 10 basis points sequentially, including help from nonrecurring items,” said Hratch Panossian, Chief Financial Officer. “Excluding this, the key driver was deposit margin expansion in the quarter, supported by higher rates which more than offset moderating pressure on mortgage margins.”
  • “We saw a build in performing allowances this quarter, reflecting a prudent outlook based on the macroeconomic environment,” said Guse. “Our impaired loans continue to normalize and remain within expectations.”
  • “After nearly 18 months of rate hikes, our forecast expects servicing pressures of higher interest rates and rising unemployment,” Guse added.

Source: CIBC Q3 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Featured image by Igor Golovniov/SOPA Images/LightRocket via Getty Images

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