Ottawa's efforts to rein in the mortgage market are forcing Manulife Financial Corp. to re-evaluate its fast-growing bank, making it the first financial institution to say that it intends to move toward tighter lending to consumers in response.
Manulife Bank, which allows consumers to run all of their banking, such as savings, mortgages and other loans, through one account, is being caught in the snare of Finance Minister Jim Flaherty's bid to stop over-indebted Canadians from continuing to use their homes as ATMs. Now one of the company's fastest-growing lines of business in Canada, it stands to be affected by Ottawa's move to cut back mortgage insurance. The Office of the Superintendent of Financial Institutions also said in March it is thinking of reducing the amount of equity that can be taken out of a house with a home equity line of credit.
Manulife Bank's product, Manulife One, "might be, very slightly, collateral damage in that process," Manulife Financial CEO Don Guloien said in an interview Thursday. "We'll take a look at the strategic plan for the bank and probably slow down the growth of it a little bit."
Manulife Bank last year posted record loan volumes of $4.7-billion and its assets hit $20-billion, driven in large part by the success of its Manulife One product.
Mr. Flaherty, the Bank of Canada, and the country's bank regulator have all expressed concern about the rapid growth in home equity lines of credit, or HELOCs, and mortgage refinancings, which surged to $64-billion in 2010 from $8-billion in 2001.
Mr. Guloien agrees the changes are necessary. "What the Canadian government is doing is very responsible. It hurts us a little bit in the short term, but it's the right thing to do," he said. "The Finance Minister is very concerned about the unprecedented rise in housing prices," and by how indebted people are, Mr. Guloien said.
"A lot of it is backed by home equity, and that is asking for the very same issues that have been experienced by our friends south of the border, and we should learn from that experience rather than trying to repeat it."
That being said, Manulife has no plans to stop offering Manulife One. Many rival financial institutions now have similar products.
"We have the ability to modify the product and do some things," Mr. Guloien said. "We're not going to back away from Manulife One, it's a very successful product."
In fact, he said, there is evidence that people who have it pay down their mortgages faster than they would if they were conventional mortgages.
"But there is a theoretical risk with any home equity line of credit that people can run it up to the max in stressful times," Mr. Guloien said. "And the government is concerned about people overleveraging themselves on their real estate, and that's a legitimate concern. I actually think it's great that they're dealing with it, but it's affecting all banks."
Manulife Bank, which had assets of just $1.6-billion in 2002, has grown rapidly to become a very important piece of the broader company's operations in Canada.
Thursday, Manulife Financial also reported first-quarter profit of $1.2-billion or 66 cents a share, up from $985-million or 54 cents in the same period a year earlier.
After accounting for one-time items, analysts said that the company's "core" earnings came in roughly inline with their expectations.
Manulife warned of expected charges in the future, including a hit of between $700-million and $800-million next quarter as a result of updating interest rate assumptions.
It also announced that it has recruited Steve Roder as its new chief financial officer. Mr. Roder was the CFO of AIA Group Ltd., a large Asian life insurer that Manulife has previously tried to buy, from 2007 to 2010. Before that he led KPMG's financial services practice in Asia.