In wake of fraud allegations, RBC says it’s “very comfortable” with due diligence done on HSBC Canada’s mortgage portfolio

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RBC’s executive team today expressed confidence in its due diligence of HSBC Canada’s mortgage portfolio during the $13.5-billion acquisition.

The question arose on today’s first-quarter earnings call in the wake of whistleblower allegations of a mortgage fraud scheme at HSBC Canada’s Greater Toronto operations prior to RBC’s acquisition of the bank.

The allegations were first reported by journalist Sam Cooper at The Bureau and have caught the attention of Simcoe North MP Adam Chambers, who is calling for an investigation of the allegations.

“[Going back] to the diligence we did at the inception of transaction, credit was a huge part of our focus there,” said Chief Risk Officer Graeme Hepworth.

“We brought a lot of people into the room on that from the risk management side and the business side to go very deep on their portfolios, [and] really understand their mortgage portfolio, their commercial portfolios,” he continued. “We did that from both an aggregate portfolio view as well as right down to reviewing and understanding the underwriting they did on sample portfolios there.”

Through that process, he said RBC’s team was “very comfortable” with the credit quality of the portfolio.

“If anything, it skews a little bit better than some of our portfolios. The nature of their retail client base is a fairly high net worth one and so that tends to skew well,” he added. “We felt really good about the diligence we did at the time. Obviously, we’ll get the full details…But I don’t think at this point in time we’ve seen anything that was new there that would cause us concern.”

RBC’s acquisition of HSBC’s Canadian unit cleared its final hurdle in December after receiving approval from Chrystia Freeland, Deputy Prime Minister and Minister of Finance. The deal is expected to close by March 28.

Amortization periods coming back down

Continuing a trend seen in recent quarters, RBC reported a continued decrease in the remaining amortization periods for its residential mortgage portfolio.

In late 2022 and early 2023, banks that offer fixed-payment variable-rate mortgages, like RBC, TD, BMO and CIBC, saw the amortization periods for those mortgages spike dramatically as interest rates soared.

In most cases, however, the mortgage reverts to the original amortization schedule at renewal, which typically results in higher monthly payments unless borrowers take proactive payment action.

In Q1, RBC saw the percentage of mortgages with a remaining amortization above 35% ease to 22% of its portfolio, down from a peak of 26% a year ago.

RBC residential mortgage portfolio by remaining amortization period

Q1 2023 Q4 2023 Q1 2024
Under 25 years 57% 57% 58%
25-29 years 16% 20% 21%
30-34 years 1% 1% 1%
35+ years 26% 22% 20%

RBC earnings highlights

Q1 net income (adjusted): $4.07 billion (-5% Y/Y)
Earnings per share: $2.85

Q1 2023 Q4 2023 Q1 2024
Residential mortgage portfolio $365.8B $366B $366B
HELOC portfolio $35B $34B $35B
Percentage of mortgage portfolio uninsured 76% 77% 78%
Avg. loan-to-value (LTV) of uninsured book 50% 68% 71%
Portfolio mix: percentage with variable rates 33% 27% 27%
Average remaining amortization 21 yrs 25 yrs 24 yrs
90+ days past due 0.12% 0.15% 0.19%
Mortgage portfolio gross impaired loans 0.11% 0.13% 0.16%
Canadian banking net interest margin (NIM) 2.73% 2.71% 2.72%
Provisions for credit losses $532M $720M $813M
CET1 Ratio 12.7% 14.5% 14.9%
Source: RBC Q1 investor presentation

Conference Call

  • “Mortgage growth declined to 3% year-over-year as a strong retention rate offset continued pressure on home prices,” said President and CEO Dave McKay. “While we anticipate some continued recovery of housing resell activity, we expect mortgage growth to remain in the low-single digits through 2024, as we remain disciplined on pricing and spreads amidst intense competition.”
  • “The market continues to gain confidence that interest rates have peaked for the current cycle, and the probability of a hard landing for the economy is decreasing,” said Chief Risk Officer Graeme Hepworth. “Notwithstanding an improving macroeconomic outlook, we continue to see credit outcomes deteriorating as the lagging impact of interest rate increases takes hold for more clients.”
  • “In our retail portfolio, delinquencies, insolvencies, and impairments continue to increase, with delinquencies and impairments above pre-pandemic levels,” Hepworth added.
  • In our Canadian Banking retail portfolio, provisions on impaired loans were higher across all products, led by credit cards. The increases in unemployment rates we observed through 2023, and the impact of higher interest rates are now translating into losses,” Hepworth said. “Our current forecast on unemployment is we have that ticking up fairly significantly from where we are now [5.7%] to about 6.6% mid-year 2024.”
  • On the HSBC Canada acquisition:
    • Following the expected close of the bank’s acquisition of HSBC Canada by March 28, RBC said it expects its CET1 ratio to be approximately 12.5% by the end of the quarter.
    • “With this transaction, RBC will be better positioned to be the bank of choice for commercial clients with international needs, affluent clients needing Wealth Management capabilities, and newcomers to Canada,” McKay said.
    • RBC expects about $740 million of expense synergies, with 80% of those synergies realized in 2025.
    • “We do see [the HSBC acquisition] as, obviously, a very profitable and a very attractive client set [and] we continue to be impressed with the capabilities HSBC has brought, but we do see opportunities to bring products to the table that they don’t have,” said Neil McLaughlin.

Source: RBC Q1 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 Gary Hershorn/Getty Images

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