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Canada’s banks brace for possible wave of loan defaults. Why that matters – Global News

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Earnings week for Canada’s biggest banks saw the country’s major lenders move in lockstep ahead of a projected economic downturn, with each putting more money away for a possible rise in credit losses.

Experts say the more expensive cost of borrowing in Canada and the possibility of job losses could catch up to households and push a growing number into default, though some believe the worst of the debt pain is likely at least a year away.

Canada’s big six banksTD Bank, RBC, BMO, Scotiabank, CIBC and National Bank — all reported earnings for their first fiscal quarters this week, with similar-sounding results. All reported a dip in profits as they put more money aside to handle credit losses.

Read more:

Scotiabank, BMO report Q1 profit dip as lenders set aside more money for loan defaults

Digging into the banks’ financial filings finds a worrying economic picture at the heart of these moves.

BMO’s filings show that the jump in credit loss provisions for last quarter “reflected a deteriorating economic outlook,” though it noted continuing improvements in the business environment after the peak of the pandemic offset some of these concerns.

The Montreal-based lender also pointed to a rapid rise in interest rates — the Bank of Canada hiked rates by a cumulative 425 basis points over the past year, with its next decision coming on Wednesday — as putting strain on its customers.


Click to play video: 'Interest rate hikes depend on ‘fundamental uncertainties’ in year ahead, Bank of Canada governor warns'

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Interest rate hikes depend on ‘fundamental uncertainties’ in year ahead, Bank of Canada governor warns


“The high-rate environment could have a direct impact on our customers through higher borrowing (e.g., mortgage rates) and debt servicing costs,” BMO wrote in filings Tuesday.

But just because the banks are preparing for higher credit losses doesn’t mean they’ll come to pass, says Angelo Melino, economics professor at the University of Toronto.

When the banks raised their provisions in 2020 because they were expecting major losses during the pandemic, a healthy dose of government aid offset the rate of defaults for businesses and consumers, Melino tells Global News.

But some of those fears from three years ago are being realized today.

In January, total insolvency filings across businesses and consumers were up 13.5 per cent from the previous month and 33.7 per cent higher than a year earlier, according to the Office of the Superintendent of Bankruptcy. Business insolvencies were up 55.4 per cent year over year, the data shows.

Read more:

Insolvency filings surged in January amid higher interest rates, inflation

Melino says banks are noticing the uptick in bankruptcies as pandemic-era stimulus dries up and businesses are forced to reckon with the new operating environment.

“A lot of companies that have been hanging in there no longer can,” Melino says. “So, in addition to everything else going on in the economy, there’s an overhang of stuff that’s been going on from the pandemic.”

Melino says the banks’ hikes to their credit loss provisions essentially confirms the dour economic outlooks that have led to recession calls from forecasters on and off Bay Street.

Paying down loans will get harder for Canadians this year

While credit loss provisions are on the rise amid higher interest rates and economic uncertainty, Veritas Investment Research analyst Nigel D’Souza says these figures are still below pre-pandemic levels and are currently in the process of “normalizing.”

Nonetheless, D’Souza tells Global News he sees indications that the credit situation is set to significantly worsen for many Canadians in the months ahead.

Higher interest rates are set to drive debt-servicing costs higher for many Canadians with outstanding loans, he says, adding that he expects these figures could “potentially reach a record high” later this year.

Read more:

Canadian consumer debt climbs 7.3% to $2.36 trillion in third quarter, Equifax says

Included in the calculation for these costs is disposable income, which means a rise in unemployment — and thereby a drop in income — can also drive this figure higher.

Canada’s labour market has yet to show significant signs of weakness, adding 150,000 jobs in January as the unemployment rate held steady at a near-record low of 5.0 per cent.

But Bank of Canada governor Tiff Macklem has cautioned that the low unemployment rate is not sustainable to lower inflation back to the central bank’s two per cent target. The Parliamentary Budget Office projected in its economic outlook this week that the unemployment rate would rise to 5.8 per cent before the end of 2023.

Melino says that if job losses start to pick up, that will translate to more losses for banks to absorb on consumer debt.

“What happens to the labour market this year is going to be very important for those consumer loans,” he says.


Click to play video: 'Canada’s job surge: How hot economy could affect employers, interest rates'

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Canada’s job surge: How hot economy could affect employers, interest rates


When debt-servicing costs rise, credit losses historically follow within two years, D’Souza explains. That implies that a surge in debt-servicing costs this year will see a wave of credit losses follow in late 2023 and into 2024, he says.

“That’s what I think will be an important level to pay attention to in terms of determining the risk of credit losses increasing over the next one to two years,” D’Souza says.

What will this mean for mortgages?

One significant source of debt on Canadian banks’ books is in their mortgage portfolios.

While there has been some stress in this segment already, D’Souza notes that the main pain of higher mortgage rates mainly hits the roughly 12 per cent of mortgages that are set to renew in a given year.

Read more:

Banking regulator launching consultations on mortgage stress test as debt risks rise

Even when Canadians end up delinquent on their mortgages, those losses don’t tend to make a huge dent in banks’ credit losses, D’Souza adds. Since these loans are backed by the properties themselves, they’re typically well collateralized in the event of a default, he says.

“When you look at the losses in past cycles, the bulk of credit losses is not driven by the (mortgage) portfolio. It’s driven by everything else: auto loans, unsecured lines of credit, credit cards, commercial lending,” he says.

Melino says that the bulk of the banks’ mortgages are also guaranteed by the Canada Mortgage and Housing Corp. (CMHC), meaning if there are losses here, it’ll affect taxpayers more than the banks themselves.


Click to play video: 'Options for homeowners struggling with mortgage payments'

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Options for homeowners struggling with mortgage payments


While banks may be preparing their balances to cover a possible rise in credit losses, D’Souza cautions that these impacts don’t hit suddenly — they take time to build.

While he says there are “signs of stress emerging,” such as an uptick in credit card delinquency rates and strain on variable-rate mortgage holders, D’Souza says the hit to banks’ balances — and the wider economy — could be a ways off still.

“It’s not to say that there aren’t any signs of stress going on. I would emphasize that credit risk does take time to build,” he says. “That doesn’t happen overnight.”

Read more:

Huge increase in number of people seeking credit counselling amid challenging economy

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STD epidemic slows as new syphilis and gonorrhea cases fall in US

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NEW YORK (AP) — The U.S. syphilis epidemic slowed dramatically last year, gonorrhea cases fell and chlamydia cases remained below prepandemic levels, according to federal data released Tuesday.

The numbers represented some good news about sexually transmitted diseases, which experienced some alarming increases in past years due to declining condom use, inadequate sex education, and reduced testing and treatment when the COVID-19 pandemic hit.

Last year, cases of the most infectious stages of syphilis fell 10% from the year before — the first substantial decline in more than two decades. Gonorrhea cases dropped 7%, marking a second straight year of decline and bringing the number below what it was in 2019.

“I’m encouraged, and it’s been a long time since I felt that way” about the nation’s epidemic of sexually transmitted infections, said the CDC’s Dr. Jonathan Mermin. “Something is working.”

More than 2.4 million cases of syphilis, gonorrhea and chlamydia were diagnosed and reported last year — 1.6 million cases of chlamydia, 600,000 of gonorrhea, and more than 209,000 of syphilis.

Syphilis is a particular concern. For centuries, it was a common but feared infection that could deform the body and end in death. New cases plummeted in the U.S. starting in the 1940s when infection-fighting antibiotics became widely available, and they trended down for a half century after that. By 2002, however, cases began rising again, with men who have sex with other men being disproportionately affected.

The new report found cases of syphilis in their early, most infectious stages dropped 13% among gay and bisexual men. It was the first such drop since the agency began reporting data for that group in the mid-2000s.

However, there was a 12% increase in the rate of cases of unknown- or later-stage syphilis — a reflection of people infected years ago.

Cases of syphilis in newborns, passed on from infected mothers, also rose. There were nearly 4,000 cases, including 279 stillbirths and infant deaths.

“This means pregnant women are not being tested often enough,” said Dr. Jeffrey Klausner, a professor of medicine at the University of Southern California.

What caused some of the STD trends to improve? Several experts say one contributor is the growing use of an antibiotic as a “morning-after pill.” Studies have shown that taking doxycycline within 72 hours of unprotected sex cuts the risk of developing syphilis, gonorrhea and chlamydia.

In June, the CDC started recommending doxycycline as a morning-after pill, specifically for gay and bisexual men and transgender women who recently had an STD diagnosis. But health departments and organizations in some cities had been giving the pills to people for a couple years.

Some experts believe that the 2022 mpox outbreak — which mainly hit gay and bisexual men — may have had a lingering effect on sexual behavior in 2023, or at least on people’s willingness to get tested when strange sores appeared.

Another factor may have been an increase in the number of health workers testing people for infections, doing contact tracing and connecting people to treatment. Congress gave $1.2 billion to expand the workforce over five years, including $600 million to states, cities and territories that get STD prevention funding from CDC.

Last year had the “most activity with that funding throughout the U.S.,” said David Harvey, executive director of the National Coalition of STD Directors.

However, Congress ended the funds early as a part of last year’s debt ceiling deal, cutting off $400 million. Some people already have lost their jobs, said a spokeswoman for Harvey’s organization.

Still, Harvey said he had reasons for optimism, including the growing use of doxycycline and a push for at-home STD test kits.

Also, there are reasons to think the next presidential administration could get behind STD prevention. In 2019, then-President Donald Trump announced a campaign to “eliminate” the U.S. HIV epidemic by 2030. (Federal health officials later clarified that the actual goal was a huge reduction in new infections — fewer than 3,000 a year.)

There were nearly 32,000 new HIV infections in 2022, the CDC estimates. But a boost in public health funding for HIV could also also help bring down other sexually transmitted infections, experts said.

“When the government puts in resources, puts in money, we see declines in STDs,” Klausner said.

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The Associated Press Health and Science Department receives support from the Howard Hughes Medical Institute’s Science and Educational Media Group. The AP is solely responsible for all content.

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World’s largest active volcano Mauna Loa showed telltale warning signs before erupting in 2022

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WASHINGTON (AP) — Scientists can’t know precisely when a volcano is about to erupt, but they can sometimes pick up telltale signs.

That happened two years ago with the world’s largest active volcano. About two months before Mauna Loa spewed rivers of glowing orange molten lava, geologists detected small earthquakes nearby and other signs, and they warned residents on Hawaii‘s Big Island.

Now a study of the volcano’s lava confirms their timeline for when the molten rock below was on the move.

“Volcanoes are tricky because we don’t get to watch directly what’s happening inside – we have to look for other signs,” said Erik Klemetti Gonzalez, a volcano expert at Denison University, who was not involved in the study.

Upswelling ground and increased earthquake activity near the volcano resulted from magma rising from lower levels of Earth’s crust to fill chambers beneath the volcano, said Kendra Lynn, a research geologist at the Hawaiian Volcano Observatory and co-author of a new study in Nature Communications.

When pressure was high enough, the magma broke through brittle surface rock and became lava – and the eruption began in late November 2022. Later, researchers collected samples of volcanic rock for analysis.

The chemical makeup of certain crystals within the lava indicated that around 70 days before the eruption, large quantities of molten rock had moved from around 1.9 miles (3 kilometers) to 3 miles (5 kilometers) under the summit to a mile (2 kilometers) or less beneath, the study found. This matched the timeline the geologists had observed with other signs.

The last time Mauna Loa erupted was in 1984. Most of the U.S. volcanoes that scientists consider to be active are found in Hawaii, Alaska and the West Coast.

Worldwide, around 585 volcanoes are considered active.

Scientists can’t predict eruptions, but they can make a “forecast,” said Ben Andrews, who heads the global volcano program at the Smithsonian Institution and who was not involved in the study.

Andrews compared volcano forecasts to weather forecasts – informed “probabilities” that an event will occur. And better data about the past behavior of specific volcanos can help researchers finetune forecasts of future activity, experts say.

(asterisk)We can look for similar patterns in the future and expect that there’s a higher probability of conditions for an eruption happening,” said Klemetti Gonzalez.

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The Associated Press Health and Science Department receives support from the Howard Hughes Medical Institute’s Science and Educational Media Group. The AP is solely responsible for all content.

The Canadian Press. All rights reserved.

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Waymo’s robotaxis now open to anyone who wants a driverless ride in Los Angeles

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Waymo on Tuesday opened its robotaxi service to anyone who wants a ride around Los Angeles, marking another milestone in the evolution of self-driving car technology since the company began as a secret project at Google 15 years ago.

The expansion comes eight months after Waymo began offering rides in Los Angeles to a limited group of passengers chosen from a waiting list that had ballooned to more than 300,000 people. Now, anyone with the Waymo One smartphone app will be able to request a ride around an 80-square-mile (129-square-kilometer) territory spanning the second largest U.S. city.

After Waymo received approval from California regulators to charge for rides 15 months ago, the company initially chose to launch its operations in San Francisco before offering a limited service in Los Angeles.

Before deciding to compete against conventional ride-hailing pioneers Uber and Lyft in California, Waymo unleashed its robotaxis in Phoenix in 2020 and has been steadily extending the reach of its service in that Arizona city ever since.

Driverless rides are proving to be more than just a novelty. Waymo says it now transports more than 50,000 weekly passengers in its robotaxis, a volume of business numbers that helped the company recently raise $5.6 billion from its corporate parent Alphabet and a list of other investors that included venture capital firm Andreesen Horowitz and financial management firm T. Rowe Price.

“Our service has matured quickly and our riders are embracing the many benefits of fully autonomous driving,” Waymo co-CEO Tekedra Mawakana said in a blog post.

Despite its inroads, Waymo is still believed to be losing money. Although Alphabet doesn’t disclose Waymo’s financial results, the robotaxi is a major part of an “Other Bets” division that had suffered an operating loss of $3.3 billion through the first nine months of this year, down from a setback of $4.2 billion at the same time last year.

But Waymo has come a long way since Google began working on self-driving cars in 2009 as part of project “Chauffeur.” Since its 2016 spinoff from Google, Waymo has established itself as the clear leader in a robotaxi industry that’s getting more congested.

Electric auto pioneer Tesla is aiming to launch a rival “Cybercab” service by 2026, although its CEO Elon Musk said he hopes the company can get the required regulatory clearances to operate in Texas and California by next year.

Tesla’s projected timeline for competing against Waymo has been met with skepticism because Musk has made unfulfilled promises about the company’s self-driving car technology for nearly a decade.

Meanwhile, Waymo’s robotaxis have driven more than 20 million fully autonomous miles and provided more than 2 million rides to passengers without encountering a serious accident that resulted in its operations being sidelined.

That safety record is a stark contrast to one of its early rivals, Cruise, a robotaxi service owned by General Motors. Cruise’s California license was suspended last year after one of its driverless cars in San Francisco dragged a jaywalking pedestrian who had been struck by a different car driven by a human.

Cruise is now trying to rebound by joining forces with Uber to make some of its services available next year in U.S. cities that still haven’t been announced. But Waymo also has forged a similar alliance with Uber to dispatch its robotaxi in Atlanta and Austin, Texas next year.

Another robotaxi service, Amazon’s Zoox, is hoping to begin offering driverless rides to the general public in Las Vegas at some point next year before also launching in San Francisco.

The Canadian Press. All rights reserved.

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