EQB gains uninsured mortgage share as credit pressures persist

EQB gained ground in Canada’s uninsured mortgage market in the third quarter, but softer property values and lengthy enforcement timelines continued to push impaired residential balances higher.

The lender’s uninsured single-family mortgage portfolio reached $21.2 billion at the end of July, up 2% from a year earlier and largely unchanged from the previous quarter.

Chief executive Chadwick Westlake said EQB gained “meaningful market share” in uninsured mortgage originations and is seeing stronger application volumes, closer broker relationships and more efficient underwriting.

“While market share gains are encouraging, the housing market in general remains subdued with limited industry-wide growth,” he told analysts. “That said, taking share matters.”

EQB’s decumulation portfolio, which consists mainly of reverse mortgages, continued to grow more quickly, with balances up 22% year over year to $3.3 billion.

By contrast, insured single-family mortgage balances fell 25% to $5.9 billion. The bank said the decline was planned as it shifts capital away from lending segments offering lower risk-adjusted returns.

EQB has nevertheless re-entered parts of the prime insured mortgage market. Daniel Rethazy, executive vice-president of personal banking, said that has not changed its underwriting standards for uninsured borrowers.

“Nothing’s changed in terms of our adjudication criteria for new mortgages,” he said. “Nothing on the uninsured side [is] outside of our historical approval criteria for new originations.”

Mortgage growth remains uneven

EQB’s overall loan book grew during the quarter, although much of the increase came from the addition of PC Financial’s credit card portfolio following the acquisition’s July 1 closing.

Excluding those card balances, loans under management grew about 1% from the previous quarter, led by uninsured mortgages, reverse mortgages and insured multi-unit lending.

The bank’s insured multi-unit portfolio reached $36.4 billion, up 16% from a year earlier. EQB said demand for CMHC-backed rental and construction financing remained strong, while conditions were more challenging in uninsured commercial real estate.

Westlake said the bank is being more selective in that market, focusing on fewer deals offering stronger returns and acceptable credit risk. He expects the gains made in single-family lending to produce stronger portfolio growth once the broader housing market improves.

“As market activity returns, we will be well positioned to convert that momentum into earnings growth,” he said.

Longer enforcement timelines weigh on credit

Mortgage credit remained a key area of focus during the quarter, with gross impaired residential loans rising 5% from Q2 to $484 million, up from $349 million a year earlier. Provisions for impaired residential loans also increased.

EQB said the pressure remains concentrated in mortgages originated around peak market values in selected suburban areas of the Greater Toronto Area. Lower property values and longer resolution periods have made those loans more costly to work through.

Chief risk officer Puneesh Arora said the problems have not spread materially beyond the GTA or the mortgage vintages previously identified. “Our provisions are remaining concentrated in the shoulder vintages that we’ve spoken [about] in the past,” he said. “These are particularly in the GTA, where property values have fallen and resolution times are taking more.”

Rethazy said court and enforcement delays are extending the time needed to resolve troubled mortgages, with collection periods that had stretched to 12 to 18 months now reaching as long as two years.

“It’s actually getting longer,” he said. “We’re now seeing some in the 18- to 24-month [range]. It’s national. It’s across the country. I would highlight Quebec has been the most challenging.”

Despite those pressures, EQB said early-stage delinquencies and days past due are stable or improving. The bank nevertheless increased its reserves on performing mortgages to account for economic uncertainty, and executives stopped short of saying mortgage losses had peaked.

“We’re proactively provisioning for the current environment,” Westlake said. “We are comfortable with our provisioning, but that’s an important part of the build that we made.”

He said the areas management watches most closely, including new impaired loans, delinquencies and days past due, are showing more encouraging trends.

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