Canada's big banks tighten grip on mortgage market after rule changes - TORONTO
(Reuters) - Canada’s biggest banks are tightening their grip over the
country’s C$1.5 trillion ($1.1 trillion) mortgage market as new rules
designed to cut out risky lending make it harder for borrowers to switch
lenders, with some analysts betting on more gains for the country’s
biggest two banks.
A Royal Bank of Canada (RBC) logo
is seen on Bay Street in the heart of the financial district in
Toronto, January 22, 2015.
The
rules, which stress-test borrowers’ ability to make repayments at 200
basis points above their contracted rates, had been expected to hurt
profitability at the banks’ domestic businesses by resulting in them
turning away more customers.
However, the country’s biggest five
banks, which account for about two-thirds of the Canadian mortgage
market, are reporting higher rates of renewals by existing customers
concerned they will not qualify for a mortgage with another bank.
The
rules, known as B-20 and introduced in January, do not apply when
borrowers are renewing mortgages with their current lender, creating an
uneven playing field.
“B-20 has created higher renewal rates for
the big banks, driving volumes and goosing their growth rates,” said
Eight Capital analyst Steve Theriault. “It’s had the unintended
consequence of reducing competition.”
Royal Bank of Canada
(RY.TO) (RBC), the country’s biggest lender, said last month that
mortgage renewal rates ranged between 90 and 92 percent in the second
half of its fiscal year compared with 87 to 88 percent before the new
regulations were implemented.
RBC said that is due in part to the
B-20 regulations and also to improvements it has made to make it easier
for customers to renew.
FLAT INDUSTRY GROWTH
DBRS analyst Robert
Colangelo said RBC and Toronto Dominion Bank (TD.TO) could exceed their
targets for mortgage sales growth of 3 to 5 percent and 4 to 6 percent,
respectively, next year, given the high retention rates.
“We
may see a bit of an uptick in mortgage growth above the guidance that
the banks have provided,” he said. “Borrowers have tended to stay with
their institutions and not go looking for a bank that might be offering a
flashy rate.”
Ron Butler, owner of Toronto-based brokerage Butler Mortgage, said the changes leave borrowers with less choice.
“Even
if they are up-to-date with their repayments, borrowers may find they
don’t qualify with other lenders so they’re stuck with their bank at
whatever rate it offers,” he said.
Senior Canadian bankers such
as RBC Chief Executive Dave McKay and TD’s CEO, Bharat Masrani, voiced
their support for the new rules prior to their introduction, saying
rising prices were a threat to Canada’s economy. [nL2N1MS0HE]
TD
increased its residential mortgage book, including home equity loans, by
6.5 percent during its latest fiscal year to Oct. 31, while RBC
expanded its book by 4 percent. The overall market grew by just 1
percent during that time.
In contrast, Canadian Imperial Bank of
Commerce’s CIBC.TO mortgage book, including home equity loans, was flat
during the year. The bank has reined in lending after a period of
aggressive growth, during which it expanded its team of mortgage
advisers and outperformed the market.
While analysts say RBC and
TD are expected to benefit from higher-than-normal retention rates in
2019, not everyone is sure borrowers will benefit.
“The banks are
becoming more sophisticated in targeting borrowers who would fail the
stress test and they can charge them higher rates at renewal knowing
they can’t move elsewhere,” Butler said.
($1 = 1.3344 Canadian dollars)
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