Stock market symbol
TSX: MKP
TORONTO, Feb. 24, 2017 /CNW/ - MCAN Mortgage
Corporation ("MCAN", the "Company" or "we") announced Q4 2016 net
income of $9.0 million ($0.39 per share) compared to $9.5 million ($0.42
per share) in Q4 2015. We also announced record net income
for the second consecutive year of $40.2
million in fiscal 2016, up 22% from $32.9 million in 2015.
Highlights
Net Income
Q4 2016
- Net income totalled $9.0 million
in Q4 2016 compared to $9.5 million
in Q4 2015. Corporate mortgage interest and income from
financial investments and other loans were higher in Q4 2015, while
equity income from MCAP Commercial LP ("MCAP") and recoveries of
credit losses were higher in Q4 2016.
- Earnings per share totalled $0.39
in Q4 2016 compared to $0.42 in Q4
2015.
- Return on average shareholders' equity of 12.94% in Q4 2016
compares to 14.66% in Q4 2015.
- Continued strong equity income from our investment in MCAP of
$3.2 million in Q4 2016, an increase
of 55% from $2.1 million in Q4
2015.
Fiscal 2016
- For fiscal 2016, net income totalled $40.2 million, an increase of $7.3 million (22%) from $32.9 million in 2015. The increase was
primarily due to higher equity income from MCAP, income from
financial investments and other loans and securitization
income. We also incurred a $2.9
million hedge loss in 2015 that did not recur in 2016.
These items were offset by higher operating expenses in 2016.
- Earnings per share increased by $0.24 (16%) to $1.75 in 2016 from $1.51 in 2015.
- Return on average shareholders' equity of 14.74% in 2016
increased from 13.45% in 2015.
- Increase of 29% in securitization income from our continued
participation in the market mortgage-backed securities ("MBS")
program and re-entry into the Canada Mortgage Bonds ("CMB")
program.
Dividend
- Consistent with the prior quarter dividend increase, the Board
of Directors (the "Board") declared a first quarter dividend of
$0.30 per share to be paid
March 30, 2017 to shareholders of
record as of March 15, 2017.
Corporate Activity
Q4 2016
- Corporate assets totalled $1.19
billion at December 31, 2016,
a net decrease of $21 million from
September 30, 2016, comprised of a
decrease of $61 million in mortgages
and increases of $32 million in cash
and cash equivalents and $8 million
in financial investments.
- The corporate mortgage portfolio decreased during Q4 2016 to
$904 million from $965 million, comprised of decreases of
$35 million in uninsured single
family, $11 million in construction,
$8 million in commercial and
$8 million in insured single
family.
- Accumulated other comprehensive income increased by
$3.8 million during Q4 2016 as a
result of increases in the fair value of our marketable securities
portfolio and our investment in Crown Realty II Limited
Partnership.
Fiscal 2016
- Corporate assets increased by $33
million (3%) in fiscal 2016, including increases of
$35 million in cash and cash
equivalents, $15 million in financial
investments, $14 million in
marketable securities, $7 million in
our equity investment in MCAP and a decrease of $40 million in corporate mortgages.
- The decrease in the corporate portfolio is comprised of
increases of $32 million in
construction, $28 million in
commercial and $25 million in insured
single family, and decreases of $111
million in uninsured single family and $13 million in completed inventory loans.
Securitization Activity
- We re-commenced our participation in the CMB program in 2016 by
securitizing $100 million of insured
single family mortgages and $86
million of multi family loans. We recognized upfront
gains of $0.4 million in the
securitization of the multi family loans, while the single family
mortgages remained on our balance sheet after securitization.
- We securitized $42 million of new
MBS to third parties through the market MBS program.
Credit Quality
Q4 2016
- Impaired mortgages improved to $4.5
million from $5.0 million
during Q4 2016.
- The impaired total mortgage ratio improved to 0.14% from 0.15%
during Q4 2016.
- The impaired corporate mortgage ratio improved to 0.31% from
0.32% during Q4 2016.
- Total mortgage arrears improved to $27
million from $40 million
during Q4 2016.
Fiscal 2016
- Net write-offs were 2.4 basis points of the average corporate
portfolio in 2016, improved from 4.2 basis points in 2015.
- The average loan to value ratio ("LTV") of our uninsured single
family portfolio was 56.5% at December 31,
2016, improved from 63.4% at December
31, 2015.
Capital
- Our Common Equity Tier 1, Tier 1 and Total Capital to
risk-weighted assets ratios were 22.89% at December 31, 2016 on the transitional basis and
22.55% on the "all-in" basis compared to 22.22% and 21.81%,
respectively, at September 30,
2016.
- Our leverage ratio was 10.46% at December 31, 2016 compared to 10.24% at
September 30, 2016.
- Income tax asset capacity was $209
million at December 31, 2016
compared to $175 million at
September 30, 2016.
Outlook
Market conditions
The Bank of Canada has
forecasted 2017 Canadian GDP growth of 2.1%, a slight increase over
the 1.9% rate for Q4 2016. With the relatively low levels of
expected economic growth, the probability of increased interest
rates is again low for 2017. However, one of the effects of
the recent U.S. election has been an increase in U.S. bond yields,
which has also impacted the interest rate market in Canada. We expect housing markets to continue
to benefit from historically low interest rates, but we also expect
a slowdown in housing as a result of the impact of regulatory
changes announced last quarter to mortgage underwriting and
insurance.
Canadian residential real estate markets continue to have mixed
performances as regional economies adjust with local economic
conditions. Western Canada
continues to experience the negative impact of weak oil prices on
employment, while other regional economies benefit from the lower
Canadian dollar and employment strength in the manufacturing
sector. The Canadian dollar has strengthened marginally since the
U.S. election, but has continued to trade at a discount to the U.S.
dollar due to weak world-wide commodity prices, a stronger U.S.
economy, higher U.S. interest rates and the potential for further
U.S. rate increases.
We expect financial markets to experience increased volatility
following the U.S. election result, with increased uncertainty
around U.S. policy, particularly trade. Fluctuations in stock
markets upon reaction to announced changes will impact expectations
for global growth and volatility in international currencies as
they impact corporate earnings and valuations. In
Canada, the impact of a weak oil
sector and soft commodity prices continues to affect a significant
portion of the stock market. Concerns over low or regionally
negative economic growth and increases in unemployment rates are
expected to have a spillover effect on consumer confidence.
Ontario and British Columbia have continued to exhibit
strong fundamentals and growth, with GDP growth driven by exports
and immigration. In Alberta,
housing markets have continued to slow as a result of lower oil
prices and weakening employment. We continue to focus our
origination in Ontario and
British Columbia and monitor our
exposure to Alberta. We are selective in our origination of
new residential construction projects.
Real estate conditions
Canadian housing market conditions continue to be mixed. The
Toronto housing market continues
to experience significant price inflation with forecasts for
continued strength in 2017. Price inflation in Toronto continues to be well in excess of
levels supported by employment and income growth.
Vancouver has recently
experienced a slowing of sales and price inflation. This has arisen
after recent changes in mortgage underwriting rules and the 15% tax
on non-resident real estate purchases enacted in mid-2016.
This tax was intended to help restore housing affordability for
residents in the Metro Vancouver Area by raising non-residents'
cost of purchasing and, on the margin, discouraging foreign
speculation. The greatest impact of this foreign buyer tax
has been on homes selling above $5
million.
While some of the price inflation in both Toronto and Vancouver is driven by low mortgage rates and
lot supply shortages, we believe that price inflation at these high
levels increases the risk of a price correction. We are
operating with tightened underwriting policies for uninsured
mortgages, specifically for self-employed applicants.
In late 2016, the Department of Finance announced new mortgage
regulations. The most significant regulations expected to
impact the market are as follows:
- Expanding the stress tests to all insured mortgages, to be
qualified using the Bank of Canada's posted rate (currently at
4.64%).
- All portfolio-insured mortgages will be required to conform to
the same lending guidelines as insured mortgages.
- Principal residence capital gains will be limited to Canadian
residents.
We expect the impact of these new regulations to be as
follows:
- No change to overall market CMB issuance levels.
- Expected decrease to MBS issuance levels and tighter MBS
spreads in the market as less mortgages are eligible for portfolio
insurance.
- Redirection of uninsurable mortgages to balance sheet investors
such as MCAN, chartered bank covered bonds, asset-backed commercial
paper and potentially the private residential mortgage-backed
securities ("RMBS") market.
- Higher market uninsured mortgage rates as lenders price in
higher capital requirements and increased funding costs.
- Stable short-term market insured mortgage rates due to
increased competition amongst lenders.
The Department of Finance also launched a consultation in late
2016 on lender risk sharing for government backed insured
mortgages. We expect the impact of potential risk sharing to
be as follows:
- Increased lender costs; the Department of Finance expects an
increase of 20-30 basis points in lender costs over a five-year
period. To date, we have noted market increases in excess of
this amount.
- Increased risk-weighting and capital requirements for these
assets due to higher risk of loss, which may require increased
collective and individual mortgage allowances.
We have observed the early impacts of the changes noted above on
housing markets, specifically the slowing of first time buyers in
the market. However, Q4 2016 market activity is not a good
indicator of market momentum, given the relatively small portion of
annual sales that it represents. We are continuing to
evaluate the impact of these regulatory changes to the market and
MCAN. We believe that the effect of these changes will likely
require a minimum of 6-12 months to begin providing clarity on the
direction of the mortgage market in Canada.
Effective January 1, 2017, the
Office of the Superintendent of Financial Institutions Canada
("OSFI") introduced new minimum capital adequacy requirements for
mortgage insurers. These changes are expected to increase
premiums on mortgage portfolio insurance paid by lenders which may
impact rates charged to borrowers.
Impact on MCAN
We will continue to monitor housing market developments as they
evolve and will continue to ensure that our mortgage portfolio
remains well positioned. MCAN has a stated annual corporate
asset growth target of 10%. In 2016, we experienced
below-target growth of 3%. In 2017, we expect to continue to
make adjustments to the composition of our balance sheet so as to
evaluate the risks and rewards of each of our product lines.
We believe that MCAN is well positioned to adapt to changes in
mortgage and housing markets given that we, as a regulated
financial institution, have access to both the insured
securitization market as well as the term deposit funding
market.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan ("DRIP") is a program that
provides MCAN with a reliable source of new capital and existing
shareholders an opportunity to acquire additional shares at a
discount to market value. Under the DRIP, dividends paid to
shareholders are automatically reinvested in common shares issued
out of treasury at the weighted average trading price for the 5
days preceding such issue less a discount of 2%. For further
information on how to enrol in the DRIP, please refer to the
Management Information Circular dated March
11, 2016 or visit our website at
www.mcanmortgage.com/investor-relations/investor-materials.
Non-IFRS Measures
The following metrics are considered to be Non-IFRS measures and
are defined in the "Non-IFRS Measures" section of the MD&A:
Return on Average Shareholders' Equity, Taxable Income,
Taxable Income Per Share, Average Interest Rate, Net Interest
Income, Impaired Mortgage Ratios, Mortgage Arrears, Common Equity
Tier 1, Tier 1 and Total Capital Ratios, Total Exposures,
Regulatory Assets, Leverage Ratio, Assets to Capital Multiple; Risk
Weighted Assets Ratios, Tier 1, Tier 2, Tier 3 and Total Liquid
Assets and Liquidity Ratios, Income Tax Assets, Income Tax
Liabilities, Income Tax Capital, Income Tax Assets to Capital
Ratio, Income Tax Asset Capacity, Market Capitalization, Book Value
per Common Share and Limited Partner's At-Risk Amount.
Further Information
Complete copies of the Company's 2016 Annual Report will be
filed on the System for Electronic Document Analysis and Retrieval
("SEDAR") at www.sedar.com and on the Company's website at
www.mcanmortgage.com.
MCAN is a public company listed on the Toronto Stock Exchange
("TSX") under the symbol MKP and is a reporting issuer in all
provinces and territories in Canada. MCAN also qualifies as a
mortgage investment corporation ("MIC") under the Income Tax Act
(Canada) (the "Tax Act").
The Company's primary objective is to generate a reliable
stream of income by investing its corporate funds in a portfolio of
mortgages (including single family residential, residential
construction, non-residential construction and commercial loans),
as well as other types of financial investments, loans and real
estate investments. MCAN employs leverage by issuing term deposits
eligible for Canada Deposit Insurance Corporation ("CDIC") deposit
insurance up to a maximum of five times capital (on a
non-consolidated tax basis in the MIC entity) as permitted by the
Tax Act. The term deposits are sourced through a network of
independent financial agents. As a MIC, MCAN is entitled to deduct
from income for tax purposes 100% of dividends, except for capital
gains dividends, which are deducted at 50%. Such dividends
are received by the shareholders as interest income and capital
gains dividends, respectively.
MCAN's wholly-owned subsidiary, Xceed, is an originator of
residential first-charge mortgage products across Canada. As
such, Xceed operates primarily in one industry segment through its
sales team and mortgage brokers.
MCAN is also an NHA MBS issuer.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND
STATEMENTS
This press release contains "forward-looking statements" within
the meaning of applicable Canadian securities laws. The words
"may," "believe," "will," "anticipate," "expect," "planned,"
"estimate," "project," "future," and other expressions that are
predictions of or indicate future events and trends and that do not
relate to historical matters identify forward-looking statements.
Such statements reflect management's current beliefs and are based
on information currently available to management. The
forward-looking statements in this press release include, among
others, statements and assumptions with respect
to:
- the current business environment and outlook;
- possible or assumed future results;
- ability to create shareholder value;
- business goals and strategy;
- the stability of home prices;
- effect of challenging conditions on us;
- factors affecting our competitive position within the housing
markets;
- the price of oil and its impact on housing markets in
Western Canada;
- sufficiency of our access to capital resources; and
- the timing of the effect of interest rate changes on our cash
flows.
The material factors or assumptions that were identified and
applied by us in drawing conclusions or making forecasts or
projections set out in the forward-looking statements include, but
are not limited to:
- the Company's ability to successfully implement and realize on
its business goals and strategy;
- factors and assumptions regarding interest rates;
- housing sales and residential mortgage borrowing
activities;
- the effect of competition;
- government regulation of the Company's business;
- computer failure or security breaches;
- future capital and funding requirements;
- the value of mortgage originations;
- the expected margin between interest earned on mortgage
portfolios and interest paid on deposits;
- the relative continued health of real estate markets;
- acceptance of the Company's products in the marketplace;
- availability of key personnel;
- the Company's operating cost structure; and
- the current tax regime.
Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and
other factors, which may cause the actual results to differ
materially from the anticipated future results expressed or implied
by such forward-looking statements. Factors that could cause actual
results to differ materially from those set forth in the
forward-looking statements include, but are not limited to:
- global market activity;
- worldwide demand for and related impact on oil and other
commodity prices;
- changes in government and economic policy;
- changes in general economic, real estate and other
conditions;
- changes in interest rates;
- changes in CMB and MBS spreads and swap rates;
- MBS and mortgage prepayment rates;
- mortgage rate and availability changes;
- adverse legislation or regulation;
- availability of CMB and MBS issuer allocation;
- technology changes;
- confidence levels of consumers;
- ability to raise capital and term deposits on favourable
terms;
- our debt and leverage;
- competitive conditions in the homebuilding industry, including
product and pricing pressures;
- ability to retain our executive officers and other
employees;
- litigation risk;
- relationships with our mortgage originators; and
- additional risks and uncertainties, many of which are beyond
our control, referred to in this press release and our other public
filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake
no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or
otherwise. However, any further disclosures made on related
subjects in subsequent reports should be consulted.
SOURCE MCAN Mortgage Corporation