Major Bank Results Signal Rising Strain on Household Debt Repayments
Canada’s biggest banks posted a boost in profits in the first quarter of their fiscal new year, but their strong bottom lines obscure a growing trend of rising loan losses in credit cards, personal loans and mortgages as economic uncertainty weighs on consumers.
The banks have shrugged off concerns over geopolitical and trade turmoil. Market volatility has spurred trading and advisory activity in capital markets and wealth management, and the banks have set aside billions of dollars as a buffer against potential loan losses.
But delinquency data included with earnings results this week for the first quarter ended Jan. 31 show that more consumers are struggling to pay off their debts.
“The impact from tariffs on the economy varies depending on the clients or sectors,” Royal Bank of Canada RY-T chief executive officer Dave McKay said during a conference call with analysts.
“We are seeing strong profitability and improving productivity for many of our corporate clients, while commercial clients in tariff impacted sectors and geographies are facing headwinds, and the impact of the K-shaped economy continues to bifurcate Canadians,” he said, referring to an economic phenomenon in which higher-income households are doing well and continuing to spend while those on the lower end are struggling.
The U.S. trade war has put the Canadian job market under severe stress over the past year. Job losses and economic concerns are weighing on lower-income and more-indebted customers, boosting potential losses across certain personal banking loans.
Delinquencies in which payments were more than 90 days late edged higher across credit cards, unsecured lines of credit, mortgages and auto loans.
As a buffer against loan defaults, banks set aside money as provisions for credit losses, based on models that use economic forecasting to predict future losses. The lenders have been building those reserves in recent years as the economic outlook has worsened. When the economy improves and risk of defaults wanes, they can release those provisions for use elsewhere, bolstering profits in the relevant quarter.
Analysts and shareholders have been watching for signs that the banks have reserved enough money and are prepared to start releasing those reserves. But in the first quarter, the banks continued to set aside provisions.
At Bank of Nova Scotia BNS-T, impaired loans – debt that the bank believes is less likely to be repaid – rose largely on concerns over borrowing in Canadian retail banking.
In unsecured loans, “we are seeing stress among single‑product, younger client cohorts,” Scotiabank chief risk officer Shannon McGinnis said. “The portfolio continues to perform in line with expectations given how unemployment has trended for these segments.”
While risks have been rising, this trend is unlikely to affect the banks’ financial results. Scotiabank and the other banks say they have built up provisions to manage these losses, and these riskier loans make up a relatively small portion of their overall loan books.
Ms. McGinnis said she expects these trends to moderate later this year as early-stage delinquencies are starting to improve, and the unemployment rate is expected to stabilize in the coming months. The other banks echoed similar predictions.
The job market improved in January, bucking economists’ expectations. The unemployment rate fell to the lowest level in 16 months in January.
At Bank of Montreal BMO-T, credit-card delinquencies have risen owing to “stress at the lower end of the market,” which is a “broad phenomenon in the country,” according to BMO head of Canadian personal and business banking Mathew Mehrotra.
He said BMO has focused on growing its premium credit-cards business with more affluent customers. Premium account growth rose 13 per cent year-over-year, in part owing to the launch of the bank’s travel rewards card with Porter Airlines and Mastercard last year.
The credit-card business “does ebb and flow with the macro environment, and so our outlook is tied pretty closely to unemployment and improvement in the Canadian economy overall,” Mr. Mehrotra said. “We did see good insolvency performance. That’s a little bit hard to predict over time, but we do see the stabilizing for the most part.”
During the COVID-19 pandemic, homebuyers made their purchases at a time when real estate prices were high and interest rates were low. In the years that followed, concerns mounted over a potential wave of mortgage defaults as the economy worsened.
While most homebuyers have managed to avoid mass defaults, delinquencies in mortgages have edged higher over the past year, driven by borrowers in the pricier Toronto and Vancouver regions. Many of those loans are coming up for renewal over the next year, with lower home valuations and higher costs of borrowing, boosting the risk of loan losses.
BMO’s chief risk officer Piyush Agrawal said he is confident that defaults will not escalate significantly. The bank expects 26 per cent of its mortgage balances to renew in the next 12 months.
But interest rates have started to fall, and most borrowers have strong loan-to-value ratios – a metric that measures the amount a homeowner owes relative to the appraised value of the property. He also expects the housing market to pick up in the spring.
“In terms of our own portfolio, you’re seeing higher delinquencies – this is some of the stress in the Canadian consumer,” Mr. Agrawal said. “But I don’t see that broadly – for us or the Canadian market – translate into higher losses.”
Senior bankers said that much of the outlook depends on the fate of the United States-Mexico-Canada Agreement on trade, which is being reviewed this year.
At Canadian Imperial Bank of Commerce, CM-T provisions for impaired loans in its commercial banking unit – which includes businesses that are smaller than large corporations – rose owing to higher risks across accounts in various sectors. But the bank said it does not expect losses among business clients to remain elevated throughout this year.
“We are staying close to them as they navigate a fluid operating backdrop with heightened focus on trade developments and geopolitical tensions,” CIBC CEO Harry Culham said, referring to the bank’s clients in general.
“From my conversations with CEOs and industry leaders over the past few months, clients are generally managing near-term uncertainty well and remain optimistic about the longer term.”
This article was first reported by The Globe and Mail
