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Canada’s banks are guarding against bad loans. What this means for your money

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1 year ago

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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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Quick Quotes: What Liberal MPs have to say as the caucus debates Trudeau’s future

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October 23, 2024

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OTTAWA – Here are some notable quotes from Liberal members of Parliament as they headed into a caucus meeting Wednesday where they are set to debate Prime Minister Justin Trudeau’s leadership.

Comments made after the caucus meeting:

“The Liberal party is strong and united.”

Prime Minister Justin Trudeau

———

“Justin Trudeau is reflecting and he’s standing strong and we’re standing strong as a Liberal party.”

“We as a party recognize that the real threat here is Pierre Poilievre and that’s what we’re fighting for.”

“Trudeau has made very clear that he feels he’s the right choice but he appreciates all of what is being said because he’s reflecting on what is being done across Canada. I respect his decision, whatever that may be.”

Charles Sousa, MP for Mississauga—Lakeshore

———

“We had some open and frank discussions. People are relentlessly focused on serving Canadians and win the next election. This was really a rallying call to win the next election.”

Industry Minister François-Philippe Champagne, MP for Saint Maurice—Champlain

———

“I don’t know how many people spoke, well over 50 I’m sure. They came at this from all angles and now (we’ve) got to go back and process this.

“We’re on a good path.

“It was very respectful. You know, caucus has always had the ability to get into some tough conversations. We did it again today and it went extremely well. Where we land? Who knows? You know we have to go and really process this stuff. But one thing that is absolutely, you know, fundamental is that we are united in the fact that we cannot let that creature from the Conservative party run the country. He would ruin things that people greatly value.”

Ken Hardie, MP for Fleetwood—Port Kells

———

Comments from before the caucus meeting:

“There’s a — what would you call it? Some palace drama going on right now. And that takes us away from the number 1 job, which is focusing on Canadians and focusing on the important policies but also on showing the really clear contrast between our government, our party and Pierre Poilievre.”

Randy Boissonnault, Employment Minister, MP for Edmonton Centre

———

“We’re going to go in there and we’re going to have an excellent discussion and we are going to emerge united.”

Treasury Board President and Transport Minister Anita Anand, MP for Oakville

———

“I think caucus is nervous because of the polling that has been constantly going down in favour of Liberals, and there’s a lot of people who do want to run again. I’m not running again, although I already told the prime minister that. But there are people there that want to run again and they’re nervous because of what polls are saying.”

“He has to start listening.”

Ken McDonald, MP for Avalon

———

“We’re going to have a good caucus meeting. MPs should be free to air their perspectives, I’m sure they will, and we’ll come out of it united.”

Peter Fragiskatos, MP for London North Centre

———

“I have to read the room. There’s all sorts of wheels within wheels turning right now. I’m just going to go in there, I’m going to make my mind a blank and just soak it all in.”

“I’m not going to say anything about (the prime minister) until I have my say in there.”

Ken Hardie, MP for Fleetwood—Port Kells

———

“I wish there was a mechanism for it, yes,” he said, responding to whether he wanted a secret ballot vote in caucus to determine Trudeau’s leadership.

Sean Casey, MP for Charlottetown

———

“The prime minister will always be on my posters and he is welcome in Winnipeg North any time.”

Kevin Lamoureux, MP for Winnipeg North

———

“Absolutely I support the prime minister.”

Yvonne Jones, MP for Labrador

———

“When you look divided, you look weak.”

Judy Sgro, MP for Humber River—Black Creek

———

“I think Pierre Poilievre is absolutely beatable, he’s ripe for the picking with the right vision, the right leadership and the right direction for our party. The Liberal party is an institution in this country. It’s bigger than one person, one leader, and it’s incumbent on us as elected officials to make sure we put the best foot forward.”

Wayne Long, MP for Saint John—Rothesay

This report by The Canadian Press was first published Oct. 23, 2024.



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With Liberal election win, First Nations in N.B. look forward to improved relations

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October 23, 2024

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FREDERICTON – Chief Allan Polchies says he is excited about New Brunswick’s new Liberal provincial government.

Polchies, of St. Mary’s First Nation, says he looks forward to meaningful dialogue with premier-designate Susan Holt after years of tense relations with the outgoing Progressive Conservatives under Blaine Higgs.

He is one of six Wolastoqey Nation chiefs who have filed a land claim for a significant part of the province, arguing treaty rights have not been respected by corporations and governments, both of which have exploited the land for hundreds of years.

The December 2021 court challenge has been a sore point between Indigenous Peoples and the Higgs’s government.

Eight Mi’kmaw communities are also asserting Aboriginal title to land in the province, and they say they hope to work with Holt and her team on “advancing issues that are important to our communities.”

Holt’s campaign didn’t give details on the Liberal government’s position on the Indigenous claims, but she has said she wants to rebuild trust between the province and First Nations.

This report by The Canadian Press was first published Oct. 23, 2024.

The Canadian Press. All rights reserved.



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Abdelrazik tells of despair when Ottawa denied him passport to return home from Sudan

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5 hours ago

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October 23, 2024

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OTTAWA – Abousfian Abdelrazik told a court today about the roller-coaster of emotions he experienced during the tense days of early 2009 when he awaited the green light to return to Canada from Sudan.

The Sudanese-born Abdelrazik settled in Montreal as a refugee and became a Canadian citizen in 1995.

During a 2003 visit to his native country to see his ailing mother, he was arrested, imprisoned and questioned about suspected terrorist connections.

Abdelrazik says he was tortured during two periods of detention by the Sudanese intelligence agency.

He is suing the federal government, claiming officials arranged for his arbitrary imprisonment, encouraged his detention by Sudanese authorities and actively obstructed his repatriation to Canada for several years.

In March 2009, he made arrangements to fly home to Canada and asked Ottawa to issue him an emergency passport, but his hopes were dashed — at least temporarily — when the request was turned down.

This report by The Canadian Press was first published Oct. 23, 2024.

The Canadian Press. All rights reserved.



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