MUTED NEAR-TERM RESIDENTIAL VOLUMES DUE TO LENDER COMPETITION
THE TD COWEN INSIGHT
The outlook from management suggests higher lender competition will weigh on near- term residential originations. The commercial outlook remains solid, although spreads are expected to tighten. First National continues to represent a solid income investment, and valuation based on 2025E EPS remains attractive.
Event: Q1/24 Conference Call
Impact: NEGATIVE
Management commentary was muted regarding near-term residential mortgage origination volumes. Offsetting is a constructive outlook for commercial originations (multi-unit apartments), and solid MUA retention. We have adjusted our estimates to reflect lower residential originations and margins. We forecast volumes, and fee yields, to improve
in 2025 on the back of lower interest rates (higher activity), and more rational lender competition. Our target moves to $42 (from $44) on lower 4QF estimates (multiple unchanged). With a 26% total return, we are maintaining our BUY rating.
Originations were flat y/y in Q1/24 ($6.6bln for originations + renewals). This reflects
a 20% decline for residential, offset by a 39% y/y increase for commercial. Management expects Q2/24 residential volumes to be down y/y, with volumes likely to improve when rates start to move lower (buyers move off the sidelines), and lender competition normalizes (currently heightened, but likely temporary). Commercial volumes are expected to remain solid for the remainder of 2024 (multi-unit GST incentives, expanded CMB funding, and other federal government initiatives). MUA growth in Q1/24 was a constructive 9% y/y despite the softer originations (run-off remains low).
Higher lender competition could add some near-term margin pressure. We are modeling slightly lower placement fee yields and higher brokerage expense rates (but assuming this dynamic moderates in 2025 as conditions normalize). We also model modest NIM compression in 2025.
Arrears remain stable on the prime residential side of their business, but arrears have moved higher for the near-prime Excalibur portfolio. Prime residential arrears are low (7bps, up from 6bps y/y), while Excalibur arrears are now 45-50bps (up from 15bps y/y). However, First National is not seeing any related credit losses (low LTVs and sufficiently liquid housing markets).
Our revised estimates reflect lower originations and MUA growth, and slightly lower placement fee yields and securitization NIM. Somewhat offsetting is a lower overall expense forecast (brokerage and interest expense due to lower origination volumes)