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Bank of Canada warns nation’s renters showing signs of financial strain

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The Bank of Canada is raising concern about the impact of higher interest rates on renters.

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The Bank of Canada is raising concerns about the impact of higher interest rates on renters while acknowledging that, even as most households appear to be managing increased debt servicing costs, there are still many mortgage holders who will face large payment increases when they renew over the next two-and-a-half years.

The adjustment to higher interest rates “continues to present risks to financial stability,” Bank of Canada governor Tiff Macklem said Thursday as the bank released its annual report on stresses across the financial system.

Senior deputy governor Carolyn Rogers, who has previously raised concerns about renters, said the data compiled suggests there is stress in these households.

“After hitting historical lows during the pandemic the share of households without a mortgage that are behind on credit card and auto loan payments has come back up to — or surpassed — typical levels,” she said. “And over the past year, the share of borrowers without a mortgage who carry a credit card balance of at least 80 per cent of their credit limit has continued to climb.”

Other issues flagged in the report included “stretched” valuations of some financial assets, a sharp rise in the use of leverage by the non-bank financial sector and risks due to the exposure to commercial real estate, where weaker demand has pushed the national office vacancy rate up to around 20 per cent.

Since the Bank of Canada began to increase interest rates in March 2022, payments have increased for about half of all outstanding mortgages. Over the next two-and-a-half years, a big share of remaining mortgages will renew and these borrowers will face even larger payment increases.

 

“Over the coming years, more borrowers will face pressure as they refinance existing mortgages at higher rates,” the report said. “Higher debt-servicing costs reduce a household’s financial flexibility, making them more financially vulnerable if their income declines or they face an unexpected material expense.”

The report showed that the median increase in monthly mortgage payments will be more than 20 per cent at renewal in 2025 and more than 30 per in 2026, compared with origination. For variable rate mortgages with fixed payments, the median increase will be more than 60 per cent in 2026.

“The financial pressure will increase most for households that took out a mortgage in 2021 and early 2022 when house prices were close to their peak and mortgage rates were very low,” the report said. These buyers generally took on large mortgages relative to their incomes and have seen very little increase — and potentially a decrease — in their home equity.

By the end of 2023, more than a third of new mortgages had a debt-service ratio greater than 25 per cent, double the share in 2019.

Credit arrears climbing

The Financial Stability Report said large banks with healthy capital cushions are handling the stresses in the mortgage market so far, but some smaller lenders have already seen a sharp uptick in credit arrears.

“Increased provisions for loan losses are impacting profitability but also enhancing banks’ resilience,” the report said, adding that funding for banks remains stable, though costs have increased.

The report said small and medium-sized lenders are likely seeing more mortgages in arrears because their borrowers tend to have higher risk profiles. In addition, with typically shorter terms, nearly all these borrowers have renewed. In contrast, about half of the mortgages at large banks have yet to renew.

The Financial Stability Report suggested that with conservative wage increases, most borrowers should be able to manage, and that some are increasing savings and adjusting payments, including making lump-sum contributions. A bigger shock to the financial system, including the banks, would be felt with a hit to wages from rising unemployment.

Appetite for risk rising

With many central banks considering cutting interest rates after sharp increases over the past couple of years brought down inflation, speculation about when rates will be cut, and by how much, is increasing the risks of sudden swings in asset prices, according to the Bank of Canada’s report.

“This has driven a renewed appetite for risk,” the Financial Stability Report said, adding that, in addition to pushing up the prices of a range of financial assets, it has driven down risk premiums and credit spreads in both Canada and the United States. This leaves them vulnerable to sudden repricing if the conditions on which they are predicated do not materialize.

Corporate credit spreads are now at or below levels seen on average since the 2008-09 global financial crisis, the report said.

Macklem said stretched asset valuations of some financial assets, such as market prices rising beyond fundamentals, increases the risk of a sharp correction that could generate system-wide stress.

“The recent rise in the use of leverage in the non-bank financial sector could amplify the effects of such a correction,” he said.

 

The report noted that the use of leverage through borrowing in the repo market has risen considerably in the past 12 months, particularly among pension and hedge funds. For hedge funds, repo leverage has increased by about 75 per cent. This appears to be driven by relative-value trading strategies including an increasingly popular cash-futures basis trade in the Government of Canada bond market.

“I think it’s traders arbitraging anticipated changes in interest rates,” Rogers said in an interview. “As long as there’s a bit of room to speculate on where interest rates are heading, that trade is going to probably stay popular.”

She added that leverage is used to amplify profits, but it can work the other way around to amplify losses and volatility.

Commercial real estate exposure

The Financial Stability report said both bank and non-bank financial entities are involved in the commercial real estate sector in Canada, though there are “substantial data gaps” for non-bank financial intermediaries. For banks, this is mostly in the form of loans, including commercial mortgages and loans to real estate developers.

 

The commercial real estate sector accounts for about 10 per cent of the loan books of large banks in Canada, and about 20 per cent for small and medium-sized banks. This is much lower than their counterparts in the United States, where exposure of small and medium-sized lenders is around 36 per cent.

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Canada’s largest life insurance companies hold about 12 per cent of their total invested assets in the global commercial real estate sector and 70 per cent of that is held in commercial mortgages. For large pension funds, the percentage of total invested assets is 15 per cent, but about 90 per cent of the exposure reflects ownership stakes. Both hold about three per cent of their invested assets in the office subsector.

The Bank of Canada report said some pension funds and insurers have written down their exposures, but there may be more to come, particularly in the office sector, as private valuation adjustments have lagged declines in public market valuations.

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Telus prioritizing ‘most important customers,’ avoiding ‘unprofitable’ offers: CFO

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Telus Corp. says it is avoiding offering “unprofitable” discounts as fierce competition in the Canadian telecommunications sector shows no sign of slowing down.

The company said Friday it had fewer net new customers during its third quarter compared with the same time last year, as it copes with increasingly “aggressive marketing and promotional pricing” that is prompting more customers to switch providers.

Telus said it added 347,000 net new customers, down around 14.5 per cent compared with last year. The figure includes 130,000 mobile phone subscribers and 34,000 internet customers, down 30,000 and 3,000, respectively, year-over-year.

The company reported its mobile phone churn rate — a metric measuring subscribers who cancelled their services — was 1.09 per cent in the third quarter, up from 1.03 per cent in the third quarter of 2023. That included a postpaid mobile phone churn rate of 0.90 per cent in its latest quarter.

Telus said its focus is on customer retention through its “industry-leading service and network quality, along with successful promotions and bundled offerings.”

“The customers we have are the most important customers we can get,” said chief financial officer Doug French in an interview.

“We’ve, again, just continued to focus on what matters most to our customers, from a product and customer service perspective, while not loading unprofitable customers.”

Meanwhile, Telus reported its net income attributable to common shares more than doubled during its third quarter.

The telecommunications company said it earned $280 million, up 105.9 per cent from the same three-month period in 2023. Earnings per diluted share for the quarter ended Sept. 30 was 19 cents compared with nine cents a year earlier.

It reported adjusted net income was $413 million, up 10.7 per cent year-over-year from $373 million in the same quarter last year. Operating revenue and other income for the quarter was $5.1 billion, up 1.8 per cent from the previous year.

Mobile phone average revenue per user was $58.85 in the third quarter, a decrease of $2.09 or 3.4 per cent from a year ago. Telus said the drop was attributable to customers signing up for base rate plans with lower prices, along with a decline in overage and roaming revenues.

It said customers are increasingly adopting unlimited data and Canada-U.S. plans which provide higher and more stable ARPU on a monthly basis.

“In a tough operating environment and relative to peers, we view Q3 results that were in line to slightly better than forecast as the best of the bunch,” said RBC analyst Drew McReynolds in a note.

Scotiabank analyst Maher Yaghi added that “the telecom industry in Canada remains very challenging for all players, however, Telus has been able to face these pressures” and still deliver growth.

The Big 3 telecom providers — which also include Rogers Communications Inc. and BCE Inc. — have frequently stressed that the market has grown more competitive in recent years, especially after the closing of Quebecor Inc.’s purchase of Freedom Mobile in April 2023.

Hailed as a fourth national carrier, Quebecor has invested in enhancements to Freedom’s network while offering more affordable plans as part of a set of commitments it was mandated by Ottawa to agree to.

The cost of telephone services in September was down eight per cent compared with a year earlier, according to Statistics Canada’s most recent inflation report last month.

“I think competition has been and continues to be, I’d say, quite intense in Canada, and we’ve obviously had to just manage our business the way we see fit,” said French.

Asked how long that environment could last, he said that’s out of Telus’ hands.

“What I can control, though, is how we go to market and how we lead with our products,” he said.

“I think the conditions within the market will have to adjust accordingly over time. We’ve continued to focus on digitization, continued to bring our cost structure down to compete, irrespective of the price and the current market conditions.”

Still, Canada’s telecom regulator continues to warn providers about customers facing more charges on their cellphone and internet bills.

On Tuesday, CRTC vice-president of consumer, analytics and strategy Scott Hutton called on providers to ensure they clearly inform their customers of charges such as early cancellation fees.

That followed statements from the regulator in recent weeks cautioning against rising international roaming fees and “surprise” price increases being found on their bills.

Hutton said the CRTC plans to launch public consultations in the coming weeks that will focus “on ensuring that information is clear and consistent, making it easier to compare offers and switch services or providers.”

“The CRTC is concerned with recent trends, which suggest that Canadians may not be benefiting from the full protections of our codes,” he said.

“We will continue to monitor developments and will take further action if our codes are not being followed.”

French said any initiative to boost transparency is a step in the right direction.

“I can’t say we are perfect across the board, but what I can say is we are absolutely taking it under consideration and trying to be the best at communicating with our customers,” he said.

“I think everyone looking in the mirror would say there’s room for improvement.”

This report by The Canadian Press was first published Nov. 8, 2024.

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TC Energy cuts cost estimate for Southeast Gateway pipeline project in Mexico

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CALGARY – TC Energy Corp. has lowered the estimated cost of its Southeast Gateway pipeline project in Mexico.

It says it now expects the project to cost between US$3.9 billion and US$4.1 billion compared with its original estimate of US$4.5 billion.

The change came as the company reported a third-quarter profit attributable to common shareholders of C$1.46 billion or $1.40 per share compared with a loss of C$197 million or 19 cents per share in the same quarter last year.

Revenue for the quarter ended Sept. 30 totalled C$4.08 billion, up from C$3.94 billion in the third quarter of 2023.

TC Energy says its comparable earnings for its latest quarter amounted to C$1.03 per share compared with C$1.00 per share a year earlier.

The average analyst estimate had been for a profit of 95 cents per share, according to LSEG Data & Analytics.

This report by The Canadian Press was first published Nov. 7, 2024.

Companies in this story: (TSX:TRP)

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BCE reports Q3 loss on asset impairment charge, cuts revenue guidance

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BCE Inc. reported a loss in its latest quarter as it recorded $2.11 billion in asset impairment charges, mainly related to Bell Media’s TV and radio properties.

The company says its net loss attributable to common shareholders amounted to $1.24 billion or $1.36 per share for the quarter ended Sept. 30 compared with a profit of $640 million or 70 cents per share a year earlier.

On an adjusted basis, BCE says it earned 75 cents per share in its latest quarter compared with an adjusted profit of 81 cents per share in the same quarter last year.

“Bell’s results for the third quarter demonstrate that we are disciplined in our pursuit of profitable growth in an intensely competitive environment,” BCE chief executive Mirko Bibic said in a statement.

“Our focus this quarter, and throughout 2024, has been to attract higher-margin subscribers and reduce costs to help offset short-term revenue impacts from sustained competitive pricing pressures, slow economic growth and a media advertising market that is in transition.”

Operating revenue for the quarter totalled $5.97 billion, down from $6.08 billion in its third quarter of 2023.

BCE also said it now expects its revenue for 2024 to fall about 1.5 per cent compared with earlier guidance for an increase of zero to four per cent.

The company says the change comes as it faces lower-than-anticipated wireless product revenue and sustained pressure on wireless prices.

BCE added 33,111 net postpaid mobile phone subscribers, down 76.8 per cent from the same period last year, which was the company’s second-best performance on the metric since 2010.

It says the drop was driven by higher customer churn — a measure of subscribers who cancelled their service — amid greater competitive activity and promotional offer intensity. BCE’s monthly churn rate for the category was 1.28 per cent, up from 1.1 per cent during its previous third quarter.

The company also saw 11.6 per cent fewer gross subscriber activations “due to more targeted promotional offers and mobile device discounting compared to last year.”

Bell’s wireless mobile phone average revenue per user was $58.26, down 3.4 per cent from $60.28 in the third quarter of the prior year.

This report by The Canadian Press was first published Nov. 7, 2024.

Companies in this story: (TSX:BCE)

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