Home Capital issues not widespread: bank CEOs

TORONTO — The CEOs of two of Canada’s biggest banks say liquidity troubles at mortgage lender Home Capital are not indicative of a broader problem, but they are monitoring their mortgage portfolios in light of concerns about high house prices.

Home Capital doesn’t pose a systemic risk because it comprises only one per cent of the mortgage market, Royal Bank of Canada’s chief executive David McKay told analysts Thursday.

If Home Capital (TSX:HSG) continues to experience funding problems, those loans will simply be refinanced by other lenders, McKay said.

“I think it is an anomaly in the sense that there really wasn’t a credit reason to drive the liquidity challenges that Home Capital faced, but more a lack of confidence based on some disclosure,” McKay said during a conference call Thursday after the bank (TSX:RY) reported $2.81 billion of net income during the second quarter.

The health of Canada’s mortgage market has been a subject of discussion in recent weeks after savers started pulling their deposits out of Home Capital, leaving the lender in a cash crunch.

The withdrawals started after Ontario’s securities watchdog alleged the company had misled investors in how it handled a scandal involving falsified loan applications. Home Capital has said the allegations are without merit and that it will defend itself.

Victor Dodig, the chief executive at CIBC (TSX:CM), said it’s understandable that the market has been assessing the potential implications of Home Capital’s liquidity problems on the Canadian financial system.

But Dodig also said the problems faced by the Toronto-based alternative lender are not indicative of the Canadian housing market or the performance of the broader Canadian economy.

“It is important to note that CIBC does not originate subprime or even near-prime mortgage loans,” Dodig said during CIBC’s second-quarter call with analysts.

“As a large, diversified and predominantly core deposit funded financial institution, we also don’t face the same funding challenges as some of the alternative lending business models. That said, we continue to closely monitor the housing market.”

CIBC reported $1.05 billion of net income during the three-month period ended April 30 — up 11 per cent from a year ago.

Executives at both RBC and CIBC said they are keeping a close eye on their portfolios of mortgage loans in light of high house prices in the Toronto and Vancouver regions, as well as record-high household debt levels.

“While we recognize some of the concerns in the market, we remain confident in the Canadian economy, the strength of our mortgage book and our prudent credit adjudication process,” McKay said.

McKay also said he is encouraged by recent data coming out of Toronto, which suggests that the supply and demand dynamic that has been driving prices through the roof has begun to ease.

TD Bank (TSX:TD) also reported its second-quarter results on Thursday. The Toronto-based bank said it had $2.50 billion of net income during the second quarter, up 22 per cent from the same period last year.

TD also announced it has concluded a review of its sales practices following allegations contained in a CBC news report that said some of the bank’s employees allegedly broke the law in order to meet aggressive sales targets.

The bank said it continues to believe it does not have a widespread problem with employees behaving unethically in order to achieve sales goals.

“As we have indicated, we will act on the opportunities we found to improve our business,” TD chief executive Bharat Masrani said in a statement.


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