National Bank tightens mortgage rules in bid to reduce risk

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National Bank of Canada is tightening its mortgage standards and is restricting the loans it advances outside of Quebec, a move designed to reduce the lender's risk profile amid roaring housing markets in some of the country's biggest cities.

Montreal-based National Bank, Canada's sixth-largest bank by assets, said Wednesday it has been limiting the types of loans it originates through external broker Paradigm Quest outside of its home province. The new rules mean greater restrictions on lending to new immigrants and no more home equity lines of credit (HELOC) if clients go through a broker outside of Quebec.

The bank still provides new loans to immigrants and grants HELOCs to clients outside of Quebec, if people deal directly with National. The bank generates about 25 per cent of its mortgage business through its broker channel. Bank executives spoke about the changes the same day as the International Monetary Fund warned that governments should take further policy action to reduce the risk of a sharp correction in the housing market.

Diane Giard, executive vice-president of personal commercial banking and marketing, said National Bank also intends to reduce risk by increasing its focus on insured loans. The bank holds aboutÄ 47 per cent insured mortgages on its books. Those mortgages carry less risk to the bank because they are backstopped by the federal government.

"You'll see a better quality portfolio as you go forward," Ms. Giard said on a conference call with analysts on Wednesday to discuss the bank's fiscal second-quarter results.

In a subsequent interview with The Globe and Mail, Ms. Giard said the moves were done in part to reduce the bank's overall risk profile.

"Every time you include a third party you are increasing your risk because you're not in front of the client," she said. "What I want is the clients to go to the direct channel and not the indirect channel."

The changes, she added, had "nothing to do" with the recent troubles at alternative lender, Home Capital Group Inc.

A spokesman for National Bank clarified that these changes, which it began to implement in December, are driven by the bank's strategy to get closer to these clients through its own branch network, affording the bank more control of the process and visibility into the clients' financial profile.

During the conference call, executives at National sounded an upbeat tone about the firm's prospects in its home province. They were similarly encouraged by the health of Quebec's housing market.

"The Quebec housing market remains healthy, with balanced supply and demand conditions supported by good employment growth and modest home price increases," said William Bonnell, executive vice-president of risk management.

"In Quebec, [the] real estate market has not experienced the run-up in prices seen in some major urban centres in other parts of the country," said Louis Vachon, chief executive officer of National Bank, in the same call.

"Housing affordability, in the greater Montreal area, is still very reasonable," he added.

National Bank of Canada rounded out a robust second-quarter earnings season for Canada's big banks, exceeding expectations by posting dramatically lower loan loss provisions compared to the same period last year.

Quarterly results from the country's major banks have laid to rest some of the fears that have weighed on bank stocks in recent weeks including the risk of financial contagion from the crisis of confidence at Home Capital Group Inc.

Montreal-based National Bank posted profit of $484-million, or $1.28 a share, for the quarter that ended on April 30, recording a 130-per-cent increase over the same period last year. On an adjusted basis, which strips out one-time items, National's profit amount to $1.30 per share – 4 cents better than analysts surveyed by Thomson Reuters were expecting.

The Quebec-based bank set aside $56-million for bad loans in the second quarter of 2017. In the same period last year, the company set aside a $317-million reserve – much of that due to soured loans in the beleaguered energy sector.

National Bank, unlike the other big banks, is more exposed to the Quebec economy with 80 per cent of its personal and commercial operations weighted towards the province.

National also increased its quarterly dividend by 2 cents a share to 58 cents, and announced intentions to buy back up to 2 per cent of its shares outstanding.

"National reported a strong quarter for earnings but, more importantly, continues to put capital concerns to rest with an increase in its capital ratio and moves to return capital to shareholders," wrote John Aiken, analyst with Barclays in a note to clients.

"We believe that this should go a long way to further ease the overhang related to unease in its relative capital levels and we would expect to see some outperformance on the stock coming out of the quarter."

With files from Christina Pellegrini