While RBC posted stronger-than-expected earnings results, the bank said it expects credit losses to intensify in the coming months as interest rates remain elevated.
In comments made during the bank’s Q3 earnings call, chief risk officer Graeme Hepworth said the impact of inflation and high interest rates is expected to play out over the coming years.
“We are still in the early stages of the current credit cycle,” he said. “As we move further into the credit cycle, we expect to see losses driven by more systemic factors arising from the anticipated economic slowdown.”
The full extent of the anticipated slowdown or potential recession remains largely in the hands of the Bank of Canada, Hepworth added.
“Ultimately, the timing and magnitude of increased credit costs continue to depend on the central bank’s success in contributing to inflation while creating a soft landing for the economy,” he said.
For now, however, the bank’s retail portfolio continues to “outperform expectations,” supported by the current low unemployment rates, Hepworth added.
While slower than previous quarters, mortgage volumes remain up 5% compared to last year.
RBC also increased its provisions for credit losses slightly to $616 million in Q3, up from $600 million last quarter.
Similar to what TD Bank reported in its third-quarter earnings results, RBC also saw the remaining amortization periods for its residential mortgage portfolio start to decrease.
In previous quarters, banks that offer fixed-payment variable-rate mortgages, like RBC, TD, BMO and CIBC, had seen the amortization periods for those mortgages lengthen dramatically.
In most cases, however, the mortgage reverts to the original amortization schedule at renewal, which would typically result in a higher monthly payment.
In Q3, RBC saw the percentage of mortgages with a remaining amortization above 35% start to ease to 23% of its portfolio, down from a peak of 25% in Q2.
| Q3 2022 | Q2 2023 | Q3 2023 | |
| Under 25 years | 60% | 57% | 57% |
| 25-29 years | 16% | 17% | 19% |
| 30-34 years | 4% | 1% | 1% |
| 35+ years | 20% | 25% | 23% |
| Q3 2022 | Q2 2023 | Q3 2023 | |
| Residential mortgage portfolio | $347B | $356B | $363.2B |
| HELOC portfolio | $36B | $35B | $35B |
| Percentage of mortgage portfolio uninsured | 75% | 76% | 77% |
| Avg. loan-to-value (LTV) of uninsured book | 45% | 69% | 69% |
| Portfolio mix: percentage with variable rates | NA | 32% | 29% |
| Average remaining amortization | NA | 26 yrs | 24 yrs |
| 90+ days past due | 0.10% | 0.12% | 0.13% |
| Mortgage portfolio gross impaired loans | 0.10% | 0.10% | 0.11% |
| Canadian banking net interest margin (NIM) | 2.42% | 2.65% | 2.68% |
| Provisions for credit losses | $340M | $600M | $616M |
Source: RBC Q3 investor presentation
Source: RBC Q3 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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