Despite interest rates having been elevated for over a year, Canada’s largest bank said the bulk of the impact is yet to be felt with nearly three quarters of its mortgage portfolio coming up for renewal over the next three years.
“To date, less than a third of mortgage clients have seen their payments impacted by higher rates,” RBC’s Chief Risk Officer Graeme Hepworth said during the bank’s fourth-quarter earnings call.
The bank will see 14% ($52.2 billion worth) of its mortgage portfolio come up for renewal in 2024, and another 25% ($89.5 billion) in 2025. Roughly 90% of those are fixed-rate mortgages that currently have an interest rate of between 3.10% and 3.60%, the bank disclosed.
Published rates by the big banks currently range between 5.80% and 7.5% depending on the term and mortgage type.
“As more people renew at higher rates and more of their income is used to service mortgage debt, we expect delinquencies and losses to increase in the retail portfolio,” Hepworth noted.
Like other lenders, RBC has already seen its mortgage delinquency rate trend upward over the past year. As of the fourth quarter, 0.15% of its mortgage portfolio is currently behind on payments by 90 days or more. That’s up from 0.13% in Q3 and 0.11% a year ago.
Although they remain low by historical standards, delinquency rates are now at or above pre-pandemic levels while “insolvencies have been steadily climbing,” Hepworth added.
However, the bank said it remains confident in the overall credit quality of its borrowers
“Our mortgage exposure benefits from the strong credit quality of our clients, significant borrower equity and our clients’ capacity to make higher payments,” he said. “As such, higher rates and rising employment are expected to have the largest impact on credit cards and unsecured lines of credit, consistent with the traditional credit cycle.”
In running its forecasts, RBC acknowledged that there remains “a lot of uncertainty on how credit plays out over 2024,” but that high interest rates and a rising unemployment rate will be the key influencing factors.
RBC sees interest rates starting to pull back by the second half of next year, stable home prices going forward, but it does anticipate the unemployment rate—currently at 5.8%—will continue to rise and likely peak by the middle of next year.
In its more pessimistic scenario, the bank said its forecasts assume a 15% decline in house prices and a steeper rise in the unemployment rate.
“We assume a rate environment where rates persist higher than they are now for a longer period. And we consider a world where unemployment could get up into the mid-7s,” Hepworth said.
Continuing a trend seen last quarter, RBC reported a continued decrease in the remaining amortization periods for its residential mortgage portfolio.
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 Q4, RBC saw the percentage of mortgages with a remaining amortization above 35% continue to ease to 22% of its portfolio, down from a peak of 25% in Q2 and down from 23% in Q3.
| Q4 2022 | Q3 2023 | Q4 2023 | |
| Under 25 years | 57% | 57% | 57% |
| 25-29 years | 16% | 19% | 20% |
| 30-34 years | 2% | 1% | 1% |
| 35+ years | 25% | 23% | 22% |
| Q4 2022 | Q3 2023 | Q4 2023 | |
| Residential mortgage portfolio | $352B | $363.2B | $366B |
| HELOC portfolio | $36B | $35B | $34B |
| Percentage of mortgage portfolio uninsured | 69% | 77% | 77% |
| Avg. loan-to-value (LTV) of uninsured book | 45% | 69% | 68% |
| Portfolio mix: percentage with variable rates | 34% | 29% | 27% |
| Average remaining amortization | 20 yrs | 24 yrs | 25 yrs |
| 90+ days past due | 0.11% | 0.13% | 0.15% |
| Mortgage portfolio gross impaired loans | 0.10% | 0.11% | 0.13% |
| Canadian banking net interest margin (NIM) | 2.42% | 2.68% | 2.71% |
| Provisions for credit losses | $381M | $616M | $720M |
Source: RBC Q4 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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