/CIBC says drop in big-city mortgage markets larger and longer than expected

CIBC says drop in big-city mortgage markets larger and longer than expected

The drop-off in metropolitan housing markets has been “more pronounced and more prolonged” than anticipated, weighing on mortgage growth, according to Canadian Imperial Bank of Commerce.

Following the release of second-quarter financial results Wednesday morning, CIBC’s head of personal and small business banking for Canada, Christina Kramer, said that the lender’s “client-focused relationship” strategy in past years had been aimed at large urban centres, where booming housing and mortgage markets helped contribute to “outsized” growth for the bank.

In the large urban markets, pullback in activity has been more pronounced and more prolonged than we assumed

Christina Kramer, CIBC’s head of personal and small business banking

However, in the second quarter, the balance of its Canadian real estate secured lending portfolio stood at $223 billion, down 0.9 per cent year-over-year.

Kramer said during a conference call that an expected slowdown had been worse than predicted. “And that’s due to the market turning out different than we had anticipated, impacting us more than our peers due to our strategic focus. In the large urban markets, pullback in activity has been more pronounced and more prolonged than we assumed.”

The housing market analysis from CIBC followed the release last week of the Bank of Canada’s financial system review, which found that housing resales and price growth had “slowed significantly” in Toronto and Vancouver over the past two years.

Such a slowdown had been anticipated among Canada’s big banks following interest-rate increases and new policies from governments and regulators, including stress tests for loans and foreign-buyer taxes.

Kramer said there has been some pick-up in mortgage activity across Canada, such as in the Greater Toronto Area, but that it hasn’t been significant. Kramer said that there had also been more activity through “third-party” channels, where CIBC no longer actively participates, as well as increased competition among lenders.

“We remain competitive, but also disciplined on pricing, which means we’re not pursuing mortgages at any cost,” she said. “So going forward, if markets continue to perform as they have, it will take us longer to converge to industry growth levels for the product.”

A rougher outlook for the Canadian economy affected CIBC’s second-quarter earnings, which narrowly missed analysts’ expectations.

CIBC’s financial results for the three months ended April 30 included a profit of nearly $1.35 billion, up two per cent from a year ago.

While other segments saw growth, CIBC’s key Canadian personal and small business unit reported a two per cent drop in its earnings, to $570 million. Higher revenue was cancelled out by greater expenses, the bank said, including spending on “strategic initiatives” and increased provisioning for credit losses.

Provision for credit losses (PCLs) for the unit rose $26 million from the same quarter last year, to $229 million, “primarily due to an increase in allowance on performing loans, reflective of the impact of certain unfavourable changes to our economic outlook, as well as a model parameter update in the current quarter,” CIBC said.

CIBC’s total PCLs for the second quarter were $255 million, up from $212 million a year ago but down from $338 million for the bank’s first quarter.

Adjusted earnings per share for CIBC’s second quarter were $2.97, just shy of analysts’ estimates.

National Bank Financial analyst Gabriel Dechaine wrote in a note that CIBC’s earnings miss versus their estimate “was attributable primarily to higher PCLs.”

CIBC president and chief executive Victor Dodig said during the conference call that, given market conditions to date and the bank’s plans to keep investing in its business, the lender expects its year-over-year EPS growth to be “relatively flat” for its fiscal 2019.

“Longer term, the execution of our strategy will allow us to deliver on all of our financial targets over time, including our medium-term EPS growth target of five to 10 per cent,” Dodig said.

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