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?
Mortgages become a loss leader
One way banks are replacing lending income is by pushing financial products through their retail channels. Here’s what Franklin Techar, head of Canadian Banking at Bank of Montreal (USA) (NYSE:BMO), had to say on his company’s strategy:
“…our 5-year fixed 25-year am [amortization] mortgage product was very successful last year in bringing new customers into the company. And in fact, every — for everyone that took that product last year, about 40% of them were new customers to BMO. And for those new customers coming into BMO, we sold an excess of two other products to them…. And as we continue to bring those customers in, I have a huge amount of confidence in our sales capabilities in our branches at this point.”
Bank of Montreal took a lot of criticism for its 2.99% 5-year fixed mortgage last year. It appeared to investors that the offering did little to improve market share while squeezing margins. But BMO is using its mortgage products as a loss leader, like a grocery store, to court new customers in hopes of selling them higher margin products within branches.
Foolish bottom line
This was a strong quarter for the Big 5 reporting a combined $7.33 billion in profits. Many skeptics, myself included, have been looking for a slowdown in core retail lending. But with almost every company in this space posting double-digit growth, I may have to re-evaluate my bear thesis.
The article 3 Can’t-Miss Quotes for Bank Investors This Earnings Season originally appeared on Fool.com and is written by Robert Baillieul.
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