Royal Bank CEO David McKay says the lender is closely monitoring the real estate markets
Royal Bank CEO David McKay says the lender is “closely monitoring” the real estate markets in Vancouver and Toronto, where home prices have been climbing at a breakneck pace.
“The short supply of single-family homes in both cities – coupled with strong demand fuelled by household formation, including net immigration – has driven strong price appreciation,” McKay said during a conference call to discuss the bank’s (TSX:RY) third-quarter results.
“We have prudent underwriting practices in place and the necessary technology to closely monitor these markets and quickly react as situations may materialize.”
McKay, Royal Bank CEO, added that he supports Ottawa’s plan to form a working group to study the housing market and develop recommendations to mitigate some of the risks stemming from the combination of soaring house prices and record levels of consumer debt.
Executives at RBC, which reported $2.895 billion of net income in the third quarter, were peppered with questions about the bank’s residential mortgage portfolio during Wednesday’s conference call.
Analysts wanted to know what contingency plans the bank has in place in the event of a downturn in house prices.
RBC’s chief risk officer Mark Hughes touted the bank’s “diligent” process for verifying the incomes of borrowers and noted that the bank doesn’t participate in the second mortgage market or offer subprime mortgage loans.
Hughes also highlighted the fact that 48 per cent of the loan portfolio is insured, up from 46 per cent last year.
The bank purchased additional portfolio insurance this quarter, Hughes added.
“Overall, we remain comfortable with our exposure to the Canadian housing market,” Royal Bank CEO said.
“Our clients’ credit profiles are strong and have remained stable.”
Edward Jones analyst Jim Shanahan said that while having credit-worthy customers is important, it doesn’t insulate the bank from potential losses in the event of a correction or a crash.
“If there’s a substantial decline in home prices in Canada, it’s unlikely that any Canadian bank wouldn’t feel some pain, whether they were selecting high-quality customers or not,” he said.
According to Shanahan, slightly more than half of RBC’s $531-billion loan book is comprised of Canadian residential real estate loans such as mortgages and home equity lines of credit.
“It’s the biggest pocket of risk in the loan book,” he said.
“There’s some concern from time to time about oil and gas loans, but that’s only a $7-billion portfolio out of $531 billion. That’s really small.”
Shanahan noted that for now, there’s no data to suggest that a correction is coming – but it’s certainly something worth keeping an eye on.
Housing affordability has become a concern in Toronto and Vancouver. According to data from RBC, home-ownership costs for a single detached house in Toronto were 71.4 per cent of the median household income, while in Vancouver costs were at 109 per cent of the median income.
RBC’s third-quarter profit was up 17 per cent from a year ago, when it had a profit of $2.475 billion. The increase was partly due to the sale of an insurance business.
The earnings amounted to $1.88 per share, up from $1.66 during the same quarter in 2015.
Excluding the after-tax gain of $235 million from the sale of RBC General Insurance, RBC’s net income would have been $2.66 billion, or $1.72 per share, up seven per cent from a year ago.
RBC had total revenue of $10.26 billion during the quarter ended July 31, compared with $8.83 billion during the same period last year.
The bank also announced it’s raising its quarterly dividend by two cents to 83 cents per share.