Mortgage war. Canadians may emerge winners as banks fight for business
Canadians could see a “mortgage war” in the months and years ahead as interest rates fall and unprecedented conditions drive competition among the country’s banks, according to RBC Capital Markets.
The growth restrictions recently imposed on TD Bank’s U.S. operations and the eventual arrival of open banking in Canada are among the factors at play, analyst Darko Mihelic writes in a fourth-quarter earnings preview report.
RBC’s concern about weak economic indicators and unhealthy loans has shifted to worries about “high competition for mortgages, specifically mortgages that are renewing, leading to lower margins and possibly shifts in market share,” the report says.
The convergence of various potential catalysts might hinder Canada’s banking oligopoly — with its small, stable membership — from acting “in a manner that would prevent such overt competition from occurring,” the report adds.
“All Canadian banks view mortgages as a significant anchor product and currently, loan growth across multiple loan categories is very low,” Mihelic wrote. “The chance to grab market share from a competitor is significant.”
RBC’s evaluation of the potential for some upheaval in the mortgage sector comes within a preview document that is otherwise “increasingly more bullish on bank stocks,” with moderate, mostly positive adjustments on estimates.
‘Strong incentive to shop around’
There is a significant number of mortgage renewals coming up, Mihelic writes, with 55 per cent coming in the next two fiscal years, and 85 per cent in the next three. The Bank of Canada’s easing cycle has lowered the magnitude of payment shock facing borrowers, Mihelic says, but “a significant proportion of mortgagors will still have higher mortgage payments – creating a strong incentive to shop around for the lowest available mortgage rate.”
New mortgage activity will be limited, furthermore, so mortgage brokers may largely opt to chase renewals and could be quite assertive in doing so, the report says. It notes anecdotal evidence of “significant discounting” at banks already, “where even automatic renewal letters are offering rates that appear lower than posted rates.” People renewing mortgages also have greater financial awareness given the passage of time and could thus be more inclined to scrutinize their options.
With open banking on the horizon in Canada — a system that will allow Canadians to more easily share their financial data — banks may also be inclined to hedge against heavier future competition, Mihelic argues. “[I]t might be wise for Canadian banks to drop rates on longer-term mortgages to lock customers into longer renewal terms as they prepare for open banking that may arrive in the next three to five years,” the report says.
If competition is typically muted among Canada’s banks, TD’s current situation may mean it “is incented to compete in Canada,” Mihelic writes. In October, U.S. regulators fined TD $3.1 billion and mandated a cap on the bank’s U.S. retail growth as a consequence of failures in its anti-money laundering programs. TD remains “well capitalized,” Mihelic notes.
“In our view, it would make sense for TD to compete aggressively for mortgages in the coming years as long as the mortgage borrower “gained” has a high probability of moving more of their financial needs to TD,” the report says.
If a mortgage war does break out, the report says “banks with large mortgage books and solid deposit bases are best positioned to either hold onto or take mortgage market share.” The risk of losing customers along with lower mortgage spreads is likely highest for BMO, Scotiabank and CIBC, Mihelic writes.
