Despite a slow real estate market and high interest rates, TD Bank reported a 7% increase in real estate secured lending (RESL) in the second quarter.
RESL includes residential and commercial mortgage transactions, as well as home equity lines of credit (HELOCs) and refinancing.
“Our Canadian personal and commercial banking segment is firing on all cylinders, delivering strong loan and deposit volume growth year-over-year and substantial positive operating leverage,” President and CEO Bharat Masrani said on the bank’s second-quarter earnings call.
The bank also disclosed that it saw a rise in mortgage market share for the 12th consecutive month, in part thanks to its TD Mortgage Direct channel, which offers customers a streamlined process for obtaining a mortgage. The channel is designed to make the mortgage application and approval process more efficient by leveraging online tools and direct communication with mortgage specialists.
“Launched a year ago, this new distribution channel is resonating with our customers and modernizing the process for receiving personalized advice,” Masrani said.
TD facing $225B worth of mortgage renewals in the next two years
TD’s second-quarter filings also showed that $225 billion worth of the bank’s mortgage portfolio will be renewing by the end of 2026, or roughly 65% of the bank’s total amortizing balances.
That includes roughly $183 billion worth of fixed-rate mortgages and $42.5 billion of variable-rate mortgages.
Across all federally regulated financial institutions, 76% of outstanding mortgages are expected to come up for renewal by the end of 2026. In OSFI’s latest Annual Risk Outlook, Canada’s banking watchdog said the coming wave of renewals combined with high borrowing costs pose a “significant” risk to Canada’s financial system.
If interest rates were to remain at current levels, borrowers would face a median payment increase of roughly 30%, according to analyst Ben Rabidoux of Edge Realty Analytics. For static-payment variable-rate borrowers, the median payment increase is even higher at 60%.
TD is one of Canada’s big banks that offers fixed-payment variable-rate mortgages, which keep monthly payments fixed even as interest rates fluctuate.
OSFI has voiced concerns about such mortgage products on numerous occasions, particularly as rising rates caused many borrowers to reach their “trigger rate,” meaning their monthly payments no longer cover the interest cost.
But in a previous earnings call, Chief Risk Officer Ajai Bambawale said TD’s variable-rate borrowers have been proactive in addressing such situations.
“We are seeing positive payment actions by clients that are reaching trigger rates and we reach out to those clients well in advance of them reaching trigger rate,” he said. “And they’re responding positively by either making lump sum payments or moving to a fixed rate or increasing the [principal and interest].”
As a result, TD is continuing to see its mortgage amortization periods normalize. As of the second quarter, 16.5% of the bank’s mortgage portfolio had an amortization of 35 years or longer, down from a high of 27.4% reached in the first quarter of 2023.
Remaining amortizations for TD residential mortgages
| Q2 2023 | Q1 2024 | Q2 2024 | |
|---|---|---|---|
| 15-20 years | 13.7% | 14.1% | 14.7% |
| 20-25 years | 29.3% | 31.5% | 31.7% |
| 25-30 years | 22.2% | 24.6% | 26.3% |
| 30-35 years | 2.9% | 1.4% | 1.4% |
| 35 years and more | 22.8% | 19.2% | 16.5% |
TD earnings highlights
Q2 net income (adjusted): $3.79 billion (+2% Y/Y)
Earnings per share: $2.04
| Q2 2023 | Q1 2024 | Q2 2023 | |
| Residential mortgage portfolio | $247.7B | $263.9B | $266.4B |
| HELOC portfolio | $114.4B | $117.9B | $119.2B |
| Percentage of mortgage portfolio uninsured | 81% | 82% | 83% |
| Avg. loan-to-value (LTV) of uninsured book | 53% | 52% | 53% |
| Portfolio mix: percentage with variable rates | 43% | 39% | 34% |
| Percentage of mortgages renewing in 2024 | 9% | 9% | 9% |
| Canadian banking gross impaired loans | 0.13% | 0.15% | 0.15% |
| Canadian banking net interest margin (NIM) | 2.74% | 2.84% | 2.84% |
| Total provisions for credit losses | $599M | $1B | $1.07B |
| CET1 ratio | 15.3% | 13.9% | 13.4% |
Conference Call
- Average deposits rose 4% year-over-year, reflecting 6% growth in personal deposits.
- Net interest margin of 2.84% was flat quarter-over-quarter as higher margins on loans and deposits were offset by changes in balance sheet mix. “As we look forward to Q3, while many factors can impact margins, we expect lower NIM from downward pressure due to competitive market dynamics…” noted Chief Financial Officer Kelvin Tran.
- TD is still in the midst of a restructuring program to “reduce its cost base and achieve greater efficiency.” The changes will result in annual pre-tax savings of ~$400 million in 2024 and a fully realized annual cost savings of ~$725 million (pre-tax) going forward, TD says.
- Questions posed to TD executives on the earnings call largely focused on the bank’s failure to thwart money laundering activity in the U.S. The U.S. Department of Justice is currently investigating allegations that Chinese drug traffickers used the bank to launder at least $653 million U.S., and that they had bribed TD employees to do so. TD CEO and President Masrani reiterated that the bank has committed $500 million towards repairing the U.S. anti-money laundering program.
Source: TD Conference Call
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