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Canada’s banks are guarding against bad loans. What this means for your money
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Nestled in the balance sheets of Canada’s biggest banks are fears that the economy is set for a rough patch that could see more Canadians defaulting on their loans.
While some experts say the country’s banks are just “being prudent,” they say that move signals choppy waters ahead for Canadians with outstanding loans as interest rates continue to put pressure on household budgets.
Canada’s five biggest banks — RBC, Scotiabank, CIBC, BMO and TD Bank — moved in lockstep this past week to increase their loan loss provisions as they reported second-quarter earnings. All except for CIBC missed earnings expectations in the period.
Loan loss provisions, or provisions for credit losses, are essentially money that banks set aside in case the loans they’ve given out to clients go sour.
Laurence Booth, finance professor at the University of Toronto’s Rotman School of Management, says banks always try to put aside more money to cover these losses if they think their clients — be they everyday consumers, commercial customers or homeowners with a mortgage — are more likely to default on their loans.
With fears of a recession rumbling for much of the past year, Canada’s banks are building up their reserves in case the economy takes a hit and Canadians or businesses aren’t able to pay down their loans.
“This is (as) regular as clockwork. Whenever we get a slowdown in the economy, or a forecast of a slowdown …(the banks) increase their provisions,” Booth tells Global News.
Booth notes, as well, that just because banks are raising their provisions doesn’t mean they’ll need them if a pronounced recession doesn’t come to pass.
The last time Canadian banks raised their loan loss provisions by significant magnitudes was at the start of the COVID-19 pandemic, when they feared consumers would be out of work and without steady income for an uncertain period of time.
Gregory Taylor, chief investment officer at Purpose Investments, says banks quickly lowered those provisions again once the federal government stepped in with COVID support programs in the early months of the pandemic.
“Now we’re seeing them reverse that, put them back on and try to be a little bit cautious heading into what could be a volatile period,” Taylor says.
“The banks are being a little prudent, from this point of view.”
Canadian banks not immune to U.S. turmoil
Canadian bank loan provisions also extend to lenders’ activities in the U.S. market, Booth notes, where the financial system has faced turmoil in recent months over the collapse of Silicon Valley Bank and other regional players.
While Canada’s large and well-capitalized banks have been well-insulated from the specific vulnerabilities that spurred uncertainty south of the border, Booth says banks such as TD have been pushing more into the U.S. market in recent years and have to adjust their risk profiles accordingly.
“The strength of the Canadian banks has allowed them to move into the U.S. with acquisitions, but that then exposes them to the risks of the U.S. market, which generally has higher provisions for credit losses,” he says.
TD Bank’s planned $13.4-billion acquisition of U.S. regional bank First Horizon was scuttled earlier this month after regulators denied the necessary approvals for the deal.
While the acquisition’s collapse was a factor in TD’s earnings miss last quarter, the extra capital the bank now has on hand because of the failed deal is helpful given the dour economic outlook, said CEO Bharat Masrani on an earnings call.
“We are going through an uncertain period here from an economic perspective … so to have the level of capital we have, that is a good thing,” he said.
Taylor agrees that it was probably good for TD overall that it didn’t have to pay the original price it offered for First Horizon as regional banks in the U.S. go through a revaluation.
Some analysts have said TD should take the opportunity to pause and rethink its U.S. expansion strategy.
“TD should revisit the idea of whether or not they should be pursuing aggressive growth in United States banking through acquisitions,” Veritas analyst Nigel D’Souza told Reuters this week.
What do higher loan loss provisions mean for consumers?
Canada’s banks are battening down the hatches on the loan side of their businesses at the same time as Canadians’ debt levels, particularly mortgage debt, continue to climb.
The Canada Mortgage and Housing Corp. (CMHC) said this past week that the country has the highest household debt in the G7, with the bulk of that held in mortgage loans.
Total residential debt surpassed $2 trillion in January, CMHC said on Thursday, up six per cent year-over-year.
Canada’s economy is heavily reliant on the health of the housing market, which Taylor says means any signs of stress in banks’ mortgage books are “something to monitor” if they start to appear.
“It’s probably too soon to say whether it’s going to be a really big issue or not, but it’s definitely one of the reasons the banks were increasing their provisions going into the quarter,” he says.
Booth notes that mortgages are one of the last things Canadians’ tend to default on as they’re willing to make most sacrifices before losing their home and the equity they’ve built up in it, which helps keep rates of mortgage delinquency relatively low in Canada.
From a macro perspective, both Booth and Taylor say there’s not much cause for concern for the banks themselves as they’ve put aside more money for loans going bad.
But on an individual level, Canadians should take the higher loan loss provisions as a sign that they might need to tighten their belts in the months to come.
“While Canadians don’t have to worry about their banks, they do have to worry about whether they can afford higher interest costs and that means that they have to cut back other spending,” Booth says.
More on Money
Messaging from the Bank of Canada and U.S. Federal Reserve in recent weeks that interest rates might need to remain higher for longer — or even rise further — means that Canadians should plan for an elevated interest rate environment, Taylor says.
One way to do that, he says, is by keeping less money in chequing accounts and putting it in investment vehicles that are showing higher rates of return. Taylor says that’s a solid approach for anyone worried about their finances through an expected period of “turbulence.”
“For Canadian consumers, it’s something that everybody should be looking at to make sure you’re getting the most for your money with higher interest earned on your cash.”
— with files from The Canadian Press, Reuters
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CTV National News: Tax hike coming for Canadians? – CTV News
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CTV National News: Tax hike coming for Canadians? CTV News
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2024 federal budget's key takeaways: Housing and carbon rebates, students and sin taxes – CBC News
Finance Minister Chrystia Freeland today tabled a 400-page-plus budget her government is pitching as a balm for anxious millennials and Generation Z.
The budget proposes $52.9 billion in new spending over five years, including $8.5 billion in new spending for housing. To offset some of that new spending, Ottawa is pitching policy changes to bring in new revenue.
Here are some of the notable funding initiatives and legislative commitments in budget 2024.
Ottawa unloading unused offices to meet housing targets
One of the biggest pillars of the budget is its housing commitments. Before releasing the budget, the government laid out what it’s calling Canada’s Housing Plan — a pledge to “unlock” nearly 3.9 million homes by 2031.
The government says two million of those would be net new homes and it believes it can contribute to more than half of them.
It plans to do that by:
- Converting underused federal offices into homes. The budget promises $1.1 billion over ten years to transform 50 per cent of the federal office portfolio into housing.
- Building homes on Canada Post properties. The government says the 1,700-plus Canada Post offices across the country can be used to build new homes while maintaining postal services. The federal government says it’s assessing six Canada Post properties in Quebec, Alberta and British Columbia for development potential “as a start.”
- Rethinking National Defence properties. The government is promising to look at redeveloping properties and buildings on National Defence lands for military and civilian use.
- Building apartments. Ottawa is pledging a $15 billion top-up to the Apartment Construction Loan Program, which says it will build 30,000 new homes across Canada.
Taxing vacant land?
As part of its push on housing, the federal government also says it’s looking at vacant land that could be used to build homes.
It’s not yet committing to new measures but the budget says the government will consider introducing a new tax on residentially zoned vacant land.
The government said it plans to launch consultations on the measure later this year.
Help for students
There’s also something in the budget for students hunting for housing.
The government says it will update the formula used by the Canada Student Financial Assistance Program to calculate housing costs when determining financial need, to better reflect the cost of housing in the current climate.
The government estimates this could deliver more aid for rent to approximately 79,000 students each year, at an estimated cost of $154.6 million over five years.
The government is also promising to extend increased student grants and interest-free loans, at an estimated total cost of $1.1 billion this year.
Increase in taxes on capital gains
To help cover some of its multi-billion dollar commitments, the government is proposing a tax hike on capital gains — the profit individuals make when assets like stocks and second properties are sold.
The government is proposing an increase in the taxable portion of capital gains, up from the current 50 per cent to two thirds for annual capital gains over $250,000.
Freeland said the change would impact the wealthiest 0.1 per cent.
There’s still some protection for small businesses. There’s been a lifetime capital gains exemption which allows Canadians to exempt up to $1,016,836 in capital gains tax-free on the sale of small business shares and farming and fishing property. This June the tax-free limit will be increased to $1.25 million and will continue to be indexed to inflation thereafter, according to the budget.
The federal government estimates this could bring in more than $19 billion over five years, although some analysts are not convinced.
Disability benefit amounts to $200 per month
Parliament last year passed the Canada Disability Benefit Act, which promised to send a direct benefit to low-income, working-age people with disabilities.
Budget 2024 proposes funding of $6.1 billion over six years, beginning this fiscal year, and $1.4 billion per year ongoing, for a new Canada Disability Benefit.
Advocates had been hoping for something along the lines of $1,000 per month per person. They’ll be disappointed.
According to the budget document, the maximum benefit will amount to $2,400 per year for low income individuals with disabilities between the ages of 18 and 64 — about $200 a month.
The government said it plans for the Canada Disability Benefit Act to come into force in June 2024 and for payments to start in July 2025.
Carbon rebate for small businesses coming
The federal government has heard an earful from small business advocates who accuse it of reneging on a promise to return a portion of carbon pricing revenues to small businesses to mitigate the tax’s economic costs.
The budget proposes to return fuel charge proceeds from 2019-20 through 2023-24 to an estimated 600,000 businesses with 499 or fewer employees through a new refundable tax credit.
The government said this would deliver $2.5 billion directly to Canada’s small- and medium-sized businesses.
Darts and vape pods will cost more
Pitching it as a measure to cut the number of people smoking and vaping, the Liberals are promising to raise revenues on tobacco and smoking products.
- Just Asking wants to know: What questions do you have about quitting smoking or vaping? Do you think sin taxes will encourage smoking cessation? Fill out the details on this form and send us your questions ahead of our show on April 20.
Starting Wednesday, the total tobacco excise duty will be $5.49 per carton. The government estimates this could increase federal revenue by $1.36 billion over five years starting in 2024-25.
The budget also proposes to increase the vaping excise duty rates by 12 per cent effective July 1. That means an increase of 12 to 24 cents per pod, depending on where you live.
Ottawa hopes this increase in sin taxes will bring in $310 million over five years, starting in 2024-25.
More money for CBC
Heritage Minister Pascale St-Onge has mused about redefining the role of the public broadcaster before the next federal election. But before that happens, CBC/Radio-Canada is getting a top-up this year.
The budget promises $42 million more in 2024-25 for CBC/Radio-Canada for “news and entertainment programming.” CBC/Radio-Canada received about $1.3 billion in total federal funding last year.
The government says it’s doing this to ensure that Canadians across the country, including rural, remote, Indigenous and minority language communities, have access to independent journalism and entertainment.
Last year, the CBC announced a financial shortfall, cut 141 employees and eliminated 205 vacant positions. In a statement issued Tuesday, CBC spokesperson Leon Mar said the new funding means the corporation can balance its budget “without significant additional reductions this year.”
Boost for Canada’s spy agency
As the government takes heat over how it has handled the threat of foreign election interference, it’s promising more money to bolster its spy service.
The Canadian Security Intelligence Service is in line to receive $655.7 million over eight years, starting this fiscal year, to enhance its intelligence capabilities and its presence in Toronto.
The budget also promises to guarantee up to $5 billion in loans for Indigenous communities to participate in natural resource development and energy projects in their territories.
These loans would be provided by financial institutions or other lenders and guaranteed by the federal government, meaning Indigenous borrowers who opt in could benefit from lower interest rates, the budget says.
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Canada's 2024 budget announces 'halal mortgages'. Here's what to know – National Post
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The 2024 federal budget says the Liberal government plans to introduce “halal mortgages” as a way to increase access to home ownership.
Here’s what “halal mortgage” means and what that effort might look like:
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What does Canada’s 2024 budget say?
The plan mentions the creation of “alternative financing products, including halal mortgages” as a means to “enable Muslim Canadians, and other diverse communities, to further participate in the housing market.”
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Ottawa is “exploring” measures that could change “the tax treatment of these products” or provide a “new regulatory sandbox for financial service providers,” it says.
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The government began consultations in March 2024 with financial services providers and “diverse communities” as it sets out to expand mortgage policies to include alternative financing, the budget adds. The Liberal government says it will make announcement detailing what such a plan would look like this the fall.
Why are regular mortgages not considered halal?
Islamic law, or Sharia, prohibits Muslims from charging or receiving interest because they are seen as exploitative and immoral. Instead of giving loans, Islamic banks use different payment structures to avoid charging interest.
What are halal mortgages?
Sharia-compliant mortgages include payment structures that take interest out of the equation. There are three common types of halal mortgages: ijara, Musharaka, and Murabaha.
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Ijara is a rent-to-own model in which a bank buys the asset and leases it back out to the customer over a set period. The payments go toward both the capital and provide a profit for the financial institution.
Musharaka, a form of partnership with the financier, involves both parties owning the property until the equity is gradually transferred and the partnership dissolves.
Murabaha is a credit system in which the ownership is immediately sold to the customer, with profits included in the final offer. The buyer’s credit history, deposit and terms of the agreement are factored in.
Because these structures are considered more risky, they are often more expensive than a traditional interest loan. Canada’s big banks do not currently provide halal mortgages, which the Liberal government hopes to change. According to Canadian Press, lack of halal financial options have left many Muslims waiting for smaller firms to allow them to make investments and buy homes.
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