CIBC expects 'moderation' in new mortgages as new regulations take shape

CIBC

Soaring home prices have been a boon to mortgage businesses, but recent government efforts to cool the housing market could impact lenders if the economy falters, CIBC said Thursday.

While Canada's economy is pumping out jobs and growing at a steady pace, a potential shock could put borrowers at risk of foreclosure – particularly those who have overextended themselves to buy homes, said the bank's chief risk officer.

"If house prices do come off, we need our borrowers to continue to have their jobs to service their loans," Laura Dottori-Attanasio told analysts during the bank's third-quarter conference call.

"But in the event we find ourselves taking on assets, we do have – and continue to have – a good buffer as it relates to that loan-to-value."

CIBC reassured analysts that its loan book, which sits at $197 billion, won't turn into a problem. The bank took on $16 billion of new mortgages in the quarter, an increase of eight per cent over the same time last year, with more than half in Toronto and Vancouver's overvalued markets.

Dottori-Attanasio noted that both cities have lower delinquency rates over 90 days than the national average.

The prospect of more Canadians missing debt payments has become a hot topic of discussion in the financial sector as Canada heads into an uncertain economic climate next year. Many economists are calling for slower economic growth next year, saying the nearly four per cent pace logged in the first quarter of this year is not sustainable.

Moody's Investor Service said in a report earlier this week that mortgage growth is driving record consumer debt levels, which reached $1.69 of debt for each dollar of disposable income as of March 31.

Meanwhile, stricter regulations drafted by the Office of the Superintendent of Financial Institutions last month could also put the brakes on loan portfolio growth by curbing mortgage demand considerably. An imposed "stress test" for all uninsured mortgages would make it harder to qualify.

CIBC's chief executive Victor Dodig acknowledged that higher interest rates and regulatory changes would lead to a "moderation" in new mortgages, but told analysts that the bank is not concerned about any imminent impact.

Still, interest rate decisions by the Bank of Canada could add extra pressure, particularly when loans come up for renewal.

CIBC agrees with widespread expectations that the central bank will likely raise the benchmark interest rate by 25 basis points before the end of the year, adding to a rate increase it made last month.

Dodig suggested another prime rate hike of 50 basis points next year, barring any changes in U.S. trade policies that prove to be a "major barrier" to Canadian economic growth.

CIBC (TSX:CM) became the second Canadian bank to boost its quarterly dividend, following RBC on Wednesday. An increase of three cents puts CIBC's payment at $1.30 per share.

The bank posted net income of $1.1 billion or $2.60 per common share, which was down from $3.61 per share a year earlier when it recorded a gain from selling its minority stake in American Century Investments.

Adjusted earnings were $2.77 per share or $1.17 billion in the three months ended July 31, up from $1.07 billion a year ago, while revenue was steady at $4.1 billion.

CIBC's core retail and business banking unit in Canada grew net income by eight per cent to $719 million.

But net income at its Canadian wealth management arm was down 73 per cent or $370 million from last year, when CIBC recognized a $383-million gain from the ACI transaction. Excluding the gain, net income rose 10 per cent to $136 million.

At U.S. commercial banking and wealth management, the acquisition of PrivateBank helped boost adjusted earnings by 55 per cent to $44 million.

The bank's capital markets operation was the only major division to post declines in both net income and adjusted earnings, pulled down by weaker revenue.

Canada's other big banks are scheduled to release their results next week.