Canadian Banks Face Rising Loan Losses As Government COVID-19 Support Programs Decline

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A combined photo shows Canadian investment banks RBC, CIBC, BMO, TD and Scotiabank in Toronto on March 16, 2017.Chris Helgren / Reuters

Canada’s Big Six banks face mounting loan losses as government support programs end and consumer loan deferral and interest rate relief programs end.

Banks braced for big losses from defaults that could stem from the economic blow of the COVID-19 pandemic, as millions of Canadians lost their jobs and businesses closed to comply with distancing measures physical. Major Canadian banks have already recorded about $ 11 billion in provisions for credit losses in anticipation of projected losses on a range of debts, such as credit cards, lines of credit, mortgages and other loans.

Despite the economic plunge, consumers have so far remained largely aware of their debts. Personal insolvencies are below average and credit payments have remained stable.

This stability was made possible by extensive government programs, such as the Canada Unemployed Emergency Benefit and a wage subsidy given to hard-hit companies to keep staff working. The CERB, however, is expected to expire in the fall and the wage subsidy is expected to end in December.

“Once government support measures end, consumer loan write-offs will increase as workers struggle to adjust to the post-pandemic economy,” said a report released Thursday by Moody’s Investors Service.

“The main concern is that the economy will change in a post-COVID world, and many industries and jobs may take a very long time to come back or not come back at all,” Jason Mercer, vice president and director of Moody’s. senior analyst said in an interview.

The question is whether Canadian banks have already built up enough provisions to cover term loan losses. Canadian banks have allowed hundreds of thousands of financially troubled customers to defer payments on various loans, including more than $ 250 billion in mortgages. It is not known how many of these customers will be able to fully make up their payments when the deferrals end.

“I suspect we will see more provisions in the third quarter, but probably not as severe as the second as the economy has partially reopened since then,” said Mr. Mercer. “Longer term, future losses will depend on how long the crisis lasts and whether we can reopen more of the economy or be forced to close sectors if the pandemic worsens. “

Banks’ full credit loss potential is not “fully captured” despite the $ 11 billion in provisions already set aside, said Nigel D’Souza, analyst at Veritas Investment Research, in a report on the month latest.

“We expect bad loans to cause maximum credit losses during this cycle. Depreciations usually do not peak at the onset of a recession and tend to slow down as economic stresses intensify, ”he said. “We expect provisions to increase over the next few quarters as government deferrals and support programs end.”

Each bank has a different mix of loans in its portfolios, which makes calculating provisions tricky. In addition, at the end of 2017, a new accounting standard called IFRS 9 made forecasting losses even more complicated, forcing banks to divide provisions into two broad categories.

One is impaired loans, which are past due but have not yet been written off as losses. The other concerns healthy loans, which are still repaid, but which are deemed to be at risk of being written down based on economic forecasts and financial models.

“We continue to believe that Canadian banks are well capitalized to absorb the high loan losses during the remainder of the current recession, in large part thanks to the benefits of regulatory forbearance,” wrote Mike Rizvanovic, analyst at Credit Suisse, in a press release. research note.

“However, we see significant short-term risk of PCL (allowance for credit losses) and earnings volatility as a significant portion of Q2 deferred loans migrate to [impaired loan] classification, the magnitude of which will be determined by the path of the economic rebound.

Canadian banks have worked with the federal government to mitigate the economic effects of this crisis through targeted and tailored relief measures for individuals and businesses, said Mathieu Labrèche, spokesperson for the Canadian Bankers Association , in a press release.

“The Canadian banking sector is very well capitalized, has increased its lending capacity and will continue to provide solutions for Canadians to support a strong recovery.

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