After strong share price appreciation in 2021, National Bank Financial analyst Jaeme Gloyn thinks rising regulatory and policy “uncertainty” will constrain sector valuations and near-term share performance for Canadian mortgage providers.
Heading into fourth-quarter earnings season, he expressed caution despite the presence of several macro tailwinds, including “employment recovering the fastest on record, rebounding immigration, and excess household savings/disposable income above trend.”
“Regulatory temperature is heating up,” said Mr. Gloyn. “Most recently, the House of Commons finance committee announced it will hold hearings on January 17th, 21st and 24th to study causes of high inflation, including soaring real estate prices.”
“A wide range of other regulatory and policy tools are available to regulators: limits on activity (e.g., restrict share of lending to higher risk mortgages/consumers), higher down-payment requirements (e.g., CMHC will review down payments on investment properties), lower debt servicing thresholds (e.g., see CMHC adjustments in 2020), higher risk-weights for capital adequacy requirements, a stiffer stress test (e.g., most recently, OSFI kept the Minimum Qualifying Rate for uninsured mortgages stable in December 2021), and even climate-related measures (e.g., CMHC is developing a climate-risk score for real estate listings). Altogether, we believe this regulatory / policy uncertainty could constrain sector valuations in the near term. ... While data is limited to assess each potential item on the government agenda, we view HCG as most ‘at-risk’ given two factors: (1) greater exposure to residential mortgages (and less exposure to commercial mortgages that seem to garner much less regulatory attention); and (2) greater exposure to residential real estate investors.”
The analyst made some target price reductions to stocks in his coverage universe:
Equitable Group Inc. (“outperform”) to $91 from $98. Average: $93.64.
“EQB moves to the top of our pecking order given a more diversified asset mix (e.g., commercial and decumulation loans) and funding mix (EQ Bank and covered bonds offer NIM upside) to manage potential regulatory headwinds and rising interest rates,” he said.