This first quarter Canada's Big 5 bank (NYSE:BMO)s reported surprisingly strong headline numbers. But by digging into conference call transcripts, investors can find interesting management commentary on key trends. Let's take a look at three of my three favorite quotes from this quarter and discuss the key takeaways for investors.
Real estate crash unlikely
The biggest concern north of the border is a U.S. style housing crash. Pundits claim the Canadian real estate market is a bubble fueled by cheap credit and lack lending standards. With household balance sheets stretched, a sudden rise in rates could leave borrowers unable to meet their mortgage obligations.
But this reassuring quote from The Bank of Nova Scotia (NYSE:BNS)'s Anatol von Hahn, head of Canadian Banking, suggests borrowers are hedging their interest rate exposure:
"Something that we're seeing in the market, and I think you're seeing it as well in some of the other banks, more of the mortgages, the variable rate mortgages that were booked 1, 2 and 3 years ago, as they're coming due now, are taking 3-, 4- and 5-year fixed-rate mortgages."
This eliminates a big catalyst for any type of real estate collapse. The U.S. housing decline was sparked by the end of teaser rate loans. If Canadians are opting for fixed-rate products, a surprise interest rate spike wouldn't necessarily result in mass bankruptcies.
Canadians households are almost tapped out
Consumers continue to pile on debt backed by abundant cheap credit and soaring house prices. During the first quarter, every Big 5 bank reported double-digit earnings growth from their domestic retail operations. But it's evident that the country's top bankers don't think this trend is sustainable. Here's what Royal Bank of Canada (NYSE:RY)'s CEO Gordon Nixon had to say on the issue:
“The consumer in Canada, we’ve been calling for them to back off now for two or three years. The good news is we were wrong for a couple of years, but unfortunately it’s going to happen.”
Canadian debt-to-disposable income hit a record 165% last year and it's unclear just how much more credit households can take on. With this lucrative market almost sapped, investors should expect higher defaults and lower margins in the future as conditions deteriorate.
Banks have been re-allocating capital to other businesses in search of growth. For example, RBC has beefed up its commercial lending operations by hiring more bankers, opening additional branches and expanding product offerings. TD has been diversifying into the United States with its American operations now accounting for 25% of profits. The question for investors: How successful will these companies be at replacing retail revenues through other segments and geographies?