May 25, 2017 / 4:17 PM / 3 months ago

WRAPUP 2-Canadian banks play down concerns of Home Capital contagion

(Adds analyst comment)

By Matt Scuffham

TORONTO, May 25 (Reuters) - Three of Canada's biggest banks on Thursday played down concerns that Home Capital Group's problems could impact the broader financial system and reported quarterly results that topped market expectations.

The comments from executives came as investors, worried about a possible slowdown in Canada's red-hot housing market, are scrutinizing banks' mortgage exposures with the outlook clouded by issues at the country's biggest non-bank lender.

Home Capital has been struggling to finance its assets as its high-interest deposit account balances have fallen by more than 90 percent since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

Royal Bank of Canada Chief Executive Dave McKay said on Thursday those issues should not have systemic implications because Home Capital has only 1 percent of Canada's C$1.4 trillion mortgage market.

"It is not a systemic risk if that firm were to continue to experience trouble," he told analysts on a conference call to discuss earnings.

"I think it is an anomaly in the sense that there wasn't a credit reason to drive the liquidity challenges that Home Capital faced, but more a lack of confidence. I do not believe that is a systemic risk to the overall mortgage market."

Canada's biggest banks built a reputation for financial stability after emerging from the 2007-09 financial crisis unscathed. However, an index of Canadian bank shares hit a five-month low in May on worries about overheating housing markets, Home Capital and a Moody's downgrade that highlighted record household debt.

Canadian Imperial Bank of Commerce Chief Financial Officer Kevin Glass echoed the RBC CEO's comments, saying he did not anticipate broader problems emerging in the mortgage lending industry.

"They're a very small part of the industry. If you look at the issues they were dealing with they are very much entity specific," he said in an interview.

Toronto-Dominion Bank's Chief Financial Officer Riaz Ahmed likewise said he did not think contagion was a concern.

"The Home Capital matter was reported as being a liquidity issue and not a fundamental credit issue. We're pleased to see the situation has been stabilised," he said.

However, Edward Jones analyst Jim Shanahan said bank executives should not dismiss Home Capital as a non-issue.

"Financial services is all about depositor confidence in the institutions and anything that potentially puts a dent in that confidence could impact the banks," he said.

Deposit withdrawals at Home Capital have slowed in recent days.

A Reuters poll released on Thursday showed analysts believe Home Capital's problems are unlikely to affect investor confidence in the Canadian mortgage market.

Cheap credit and speculative buyers have pushed home prices higher, particularly in the Vancouver and Toronto markets, and sparked concerns of a housing bubble.

"Sales activity has come down in April and listings have increased which means that the demand/supply weakness has eased We're pleased that there is a cooling in the market particularly in the (Greater Toronto Area)," said TD's Ahmed.

EARNINGS BEATS

Canada's two largest banks, RBC and Toronto-Dominion Bank, reported second-quarter earnings that comfortably topped analysts' forecasts while Canadian Imperial Bank of Commerce achieved a more modest beat.

Shares in TD were up 1.3 percent and RBC rose 1.1 percent, while CIBC shares fell 0.8 percent.

RBC reported an 11 percent increase in earnings, helped by strong performance in its capital markets and wealth management businesses.

Canada's biggest lender by assets and market value said earnings per share rose to C$1.85 per share in the quarter to April 30 from C$1.66 a year earlier. Earnings per share, excluding one-off items, rose to C$1.89. Analysts had on average forecast earnings of C$1.80, according to Thomson Reuters I/B/E/S data.

Toronto-Dominion Bank results were helped by a strong performance at its retail and investment banking businesses.

Canada's second-biggest bank said earnings per share, excluding one-off items, rose to C$1.34 from C$1.20 in the same period the previous year. Analysts had forecast earnings of C$1.24.

CIBC, Canada's fifth-biggest lender, said growth across its businesses helped boost earnings per share to C$2.64 from C$2.40 a year ago, compared with analysts' estimate of C$2.57.

($1 = 1.3431 Canadian dollars)

Reporting by Matt Scuffham; Editing by Mark Potter and Meredith Mazzilli

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