The bank posted growth in residential mortgage defaults in its second-quarter earnings report, climbing to 30 basis points on the previous day in the past 90 days, up from 28 basis points in the first quarter, and just 19 basis points a year ago. The trend of severely damaged loans in mortgage books is a similar trend, with hitting 29 basis points, up from 19 basis points a year ago.
Chief Risk Officer Graeme Hepworth spoke on the bank’s earnings call, dismissing suggestions that the deterioration was related to the recent acquisition of the Canadian HSBC Canadian mortgage portfolio. “The customer base we absorbed from HSBC is of high quality and is actually higher than the rest of our consumption books,” he said.
Instead, he noted that pressure among existing clients has increased in higher borrowing costs, especially the Greater Toronto Area (GTA).
“We are seeing damage as more customers face challenges,” Hepworth told analysts, adding that it is certain markets that are “more challenging” with higher payment environments. “This will be the world’s GTA that really drives us to damage.”
According to investors from the Royal Bank of Canada (RBC), the 90-day crime rate in the Greater Toronto area is now 0.39%, which is much higher than 0.23% in the Greater Vancouver area and 0.30% nationwide.
Despite this, Hepworth stressed that the overall borrower quality is still strong and the loans are relatively small. Nearly two-thirds of RBC’s mortgage clients have a credit score of over 785, most with healthy equity cushions. Only 7% of mortgage books have loans up to over 80%, while almost 60% have a loan worth less than 65%.
Keep an eye on apartments and businesses
In addition to residential loans, RBC is looking for signs of weakness in other areas of its real estate portfolio, including the high-rise apartment sector and commercial real estate.
“While we are seeing a more balanced situation in the Canadian housing market and increased affordability and inventory levels, we are monitoring the risk of further slowdowns in the apartment sector, with some areas even more hit by economic weakness,” Hepworth said.
He added that the bank has established higher loan allowances in areas with increased risk. As for the apartment developer segment (which is part of the market pressure that the market is under slowing), RBC’s exposure remains relatively small.
“In terms of context, exposures from our exposure to high-rise apartment developers account for only 1% of total loans and acceptances,” Hepworth said. “The portfolio has a very strong credit profile that reflects our focus on top developers and conservative underwriting industries, including minimum presales backed by deposits and adequate liquidity support.”
On the commercial side, gross profit loans total losses climbed 1.1 billion CAD to $8.9 billion in the second quarter, mainly due to weak U.S. office market and bankruptcy of a major Canadian retailer. The latter case also affected the related commercial real estate exposure.
Hepworth noted that some increase in impairment is also related to administrative issues since then.
RBC’s revenue focus
Q2 Net Income (Adjusted): $4.5 billion (+8% y/y)
Earnings per share: $3.12 (+7%)
| Q2 2024 | Q1 2025 | Q2 2025 | |
|---|---|---|---|
| Residential Mortgage Portfolio | $401B | $410B | $412B |
| HELOC Portfolio | $37B | $37B | $38B |
| Percentage of uninsured mortgage portfolio | 78% | 79% | 80% |
| avg. Loan Value of Uninsured (LTV) | 71% | 70% | 68% |
| Portfolio Mixed: There are variable percentages | 29% | 28% | 33% |
| Average residual amortization | 24 years | 19 years | 18 years old |
| Expiration of more than 90 days (mortgage portfolio) | 0.20% | 0.29% | 0.30% |
| Total loan (mortgage portfolio) | 0.18% | 0.27% | 0.29% |
| Bank of Canada Net Interest Rate (NIM) | 2.71% | 2.87% | 2.92% |
| Credit loss regulations | $920 million | $1.05B | $1.4B |
| CET1 ratio | 12.8% | 13.2% | 13.2% |
Conference call
President and CEO Dave McKay provides the latest information on the following topics:
In terms of economic prospects:
- “Although we do not predict recession in Canada or the United States, the general uncertainty is that there are places in the North American economy, including housing, to curb confidence, sentiment, and customer activity. North American consumers are still resilient. They spend less on ongoing expenses, although less on discretionary goods and savings.”
About deposit growth:
- “Average deposits grew by 13% or 8% year-on-year, including the acquisitions of HSBC Canada, due to a significant increase in our lower cost core banking and savings products… We will continue to develop our core deposit franchise throughout the field, including in the Canadian banking industry, including the loan-to-loan ratio, while the loan ratio increased to 97%, helping to lend to 97%, helping to lend effectively and effectively obtaining effective ways.
About mortgage portfolio growth:
- “The growth of residential mortgages is largely supported by strong customer updates, with the higher volume of origin driven by strong mortgage conversions, partly offset by activity payouts and partly by higher repayments. We expect that as uncertainty overcomes lower debt, we will reduce the efficiency of debt reduction in interest rate competition. We will continue to carry out reduced debt in the year.”
Updates to HSBC Canada integration:
- “We are now continuing to bring new capabilities to market as we have now completed the migration of the largest and most complex commercial clients that we have acquired through the acquisition of HSBC Canada under the Transitional Services Agreement. As we exited the first quarter and we exited the second quarter, the execution of the execution cost collaborative program was largely complete, and we are becoming more confident about the annual cost cost of our targets, to the next quarter, which is our annualized cost.
Source: RBC Q2 conference call
notes: Transcripts are provided by company and/or third-party sources and cannot 100% ensure their accuracy.
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Last modified: May 30, 2025
