BMO Financial Group says recent changes to the rules for stress testing mortgages, as well as lower prices and sales in some regions, could soften the situation in the housing market in the country.
“Given what we are seeing in house prices and sales right now, we can assume there will be some moderation,” Herminia Johansson, head of the North American retail banking group at BMO, told analysts.
“But in the near future, the mortgage market in Canada will continue to be quite stable.”
Johanneson commented as BMO exceeded expectations, saying its second-quarter earnings nearly doubled from last year, when the amount set aside for bad loans surged at the start of the pandemic.
The new mortgage stress rules go into effect on June 1st. They will set the qualifying rate on uninsured mortgages either two percentage points higher than the contract rate or 5.25%, whichever is higher.
The change aims to ease tensions in property markets like Toronto and Vancouver, where bidding wars, price surges and spikes in sales were the norm during the COVID-19 pandemic.
While hot market real estate councils report that sales are slowing and prices are falling, many potential home buyers are still not evaluating prices in popular markets.
It’s hard to predict what impact the new test will have, but Johansson believes that, combined with falling house prices in some areas, it could push buyers to look for more affordable housing or seek help from parents.
BMO is already preparing for what may happen with the new test, said BMO’s chief risk officer.
“We are sending more and more mortgages for manual review, especially where… we are seeing rapid increases in home prices just to make sure we are comfortable,” said Patrick Cronin during the same conference call.
BMO chief executive Darryl White said the pandemic brought problems that the bank had faced in the past and that will have repercussions for some time to come.
“We’ve grown stronger by building on our targeted strategy and culture that will foster sustainable and inclusive recovery,” White said.
In its quarter ending April 30, BMO generated $ 1.3 billion in net income, or $ 1.91 per share, up from $ 689 million, or $ 1 per share, a year ago.
The increase came as BMO’s total loan loss reserves fell to $ 60 million in the last quarter, up from $ 1.1 billion in the same quarter last year when the pandemic stalled the economy.
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Revenue for the quarter was nearly $ 6.1 billion, up from nearly $ 5.3 billion a year earlier.
According to the adjusted data, BMO said it earned nearly $ 2.1 billion, or $ 3.13 per share, for the quarter, up from adjusted earnings of $ 715 million, or $ 1.04 per share a year ago.
Analysts, on average, expected adjusted earnings for the quarter to be $ 2.77 per share, according to financial services firm Refinitiv.
Last month, BMO announced the sale of its Europe, Middle East and Africa (EMEA) asset management business to Ameriprise Financial Inc. for $ 1.09 billion.
BMO was the first major Canadian bank to report its second quarter results.
Canadian Imperial Bank of Commerce, Royal Bank of Canada and TD Bank Group will report on Thursday and the National Bank of Canada on Friday. Bank of Nova Scotia will share its data next week.
© 2021 Canadian Press