First National Financial Corp T.FN

RBC

[retiredcf]

July 30, 2024

First National Financial Corporation 
Q2/24 EPS was ahead of our forecast

Our View: FN reported a good quarter considering residential housing/ mortgage activity remains weak with Q2/24 helped by strong multi- unit residential mortgage originations and ultimately driving better-than- expected EPS. We see the shares as fairly valued and while we don’t expect a housing downturn with severe losses, strong origination activity in commercial/multi-unit residential is likely to persist in the near-term and positively benefit FN’s EPS growth. However, we think FN’s single family originations are likely to remain negatively impacted by weak housing activity and elevated competition in the near-term.

Key points:

Sector Perform

TSX: FN; CAD 38.51

Price Target CAD 41.00

Q2/24 normalized EPS of $0.93 was higher than our $0.85 forecast and a penny above $0.92 consensus (range of $0.85 – $1.02). The positive variance was driven by higher-than-forecast net securitization income and mortgage servicing revenues (this includes revenues from handling underwriting from 3 bank lenders), partly offset by lower-than-forecast net placement fee revenues. On funding mix, FN reported originations funded via institutional placements that were below our forecast (52% funded via institutional vs. our 65% forecast). All else equal, a higher percentage of originations funded via institutional sales (vs. securitized) typically results in higher EPS in the immediate quarter, but lower EPS in future quarters (and vice versa). 

Q2/24 mortgage originations and renewals of $11.2B were ahead of our $10.2B forecast driven by Commercial/Multi-Unit Residential. On a segmented basis: (1) residential originations of $6.12B were slightly below our $6.33B forecast; and (2) multi-unit residential/commercial originations of $5.02B were well ahead of our $3.87B forecast. FN indicated Q2/24 residential originations were negatively impacted by continued housing market weakness and elevated competition by bank lenders in the mortgage broker channel. FN attributed strong commercial/multi-unit residential originations to elevated multi-unit residential activity, in part due to the recent significant increase in Canada Mortgage Bond issuance for multi-unit residential mortgages. Going forward, FN expects lower single-family origination volumes to continue due to bank competition (lower rates, higher mortgage broker compensation) and weak housing activity.

Q2/24 mortgages under administration (MUA) of $148.2B were marginally below of our $149.5B forecast. MUA increased +7.5% Y/Y, which was below our +8.5% forecast and lower than the +9.1% Y/Y growth in Q1/24.

Maintaining our Sector Perform rating and 12-month price target of $41.

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