Problematic mortgages loomed over Laurentian Bank of Canada’s first-quarter earnings on Wednesday, but the Montreal-based lender said it’s making headway in resolving the situation.
Laurentian’s results included an update to last year’s revelation that the bank had discovered some loans sold to third parties had been affected by “documentation issues and client misrepresentations,” and that others were “inadvertently sold,” or portfolio-insured when they may not have been eligible for insurance.
The bank warned in December that it might have to buy back around $304 million of the problematic mortgages, and increased that estimate to $392 million in January, after $88 million of loans sold to the Canada Mortgage and Housing Corp. were confirmed as no longer eligible for portfolio insurance, and were repurchased by Laurentian in the second quarter.
The bank said that, following talks with the Crown corporation, it would not have to do a full review of the mortgages sold to CMHC’s securitization programs, “nor make material repurchases.”
“This securitization program remains available and we continue to securitize mortgage loans,” Laurentian said.
The lender also said Wednesday that the situation involving mortgages with “documentation issues,” which had been underwritten by Laurentian’s B2B Bank unit and sold to an unnamed third party, was resolved following the first-quarter buyback of $89 million in loans and a follow-up audit by the buyer.
Laurentian bought back another $91 million in mortgages in the first quarter that had been mistakenly sold to the same third party.
The bank, Canada’s eighth-largest by market cap, says it has now bought back $268 million in problematic mortgages.
The $392-million target could still vary, as it includes an estimated $124 million in approximately 1,900 potentially problematic loans that were underwritten in Laurentian’s branch network and sold to the unnamed third party. The bank said it was reviewing approximately 1,900 of those mortgages.
The bank expects its review to finish towards the end of its second quarter, to be followed by another audit by the unnamed third party.
“Since November 1, 2017, we implemented improved quality control and underwriting procedures at B2B Bank and in the branch network,” Laurentian said Wednesday.
The bank reiterated that the buybacks are not expected to have a material impact on its operations, funding or capital. It has said that no employees have been implicated in any misrepresentations, and that the paperwork problems looked to be unintentional.
“The situation also reaffirms the need for our transformation into a simpler and more automated bank,” said François Desjardins, president and chief executive officer of Laurentian, on a conference call Wednesday morning.
While the loans make up a small amount compared to Laurentian’s $18.6 billion residential mortgage portfolio, housing issues remain a sensitive subject in Canada. The bank’s earnings also followed S&P Global Ratings’ recent warning that more proof of Canadian residential mortgage fraud could start popping up amid high home prices and household debt levels.
Laurentian also reported Wednesday that net income for its quarter ended Jan. 31 was $59.7 million, an increase of 23 per cent from a year ago.
Diluted earnings per share were $1.41, up eight per cent, but adjusted earnings per share were below analysts’ expectations, at $1.49.
“Overall, earnings came in below expectations with both expenses and fee-based income weighing down the results against our estimates,” said Robert Sedran, analyst at CIBC World Markets, in a note. “Of course, earnings alone is not what has preoccupied the market of late and so the fact that the ongoing review of its internal mortgage practices has turned up little new information since the recent equity issue is a positive that may help that issue begin to fade.”
The bank’s stock was trading 2.7 per cent lower on Wednesday to $51.17 on the Toronto Stock Exchange.
• Email: [email protected] | Twitter: GeoffZochodne