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 banks — TD 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.
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.
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“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.
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.
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.
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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.
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.
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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.”
VANCOUVER – Contract negotiations resume today in Vancouver in a labour dispute that has paralyzed container cargo shipping at British Columbia’s ports since Monday.
The BC Maritime Employers Association and International Longshore and Warehouse Union Local 514 are scheduled to meet for the next three days in mediated talks to try to break a deadlock in negotiations.
The union, which represents more than 700 longshore supervisors at ports, including Vancouver, Prince Rupert and Nanaimo, has been without a contract since March last year.
The latest talks come after employers locked out workers in response to what it said was “strike activity” by union members.
The start of the lockout was then followed by several days of no engagement between the two parties, prompting federal Labour Minister Steven MacKinnon to speak with leaders on both sides, asking them to restart talks.
MacKinnon had said that the talks were “progressing at an insufficient pace, indicating a concerning absence of urgency from the parties involved” — a sentiment echoed by several business groups across Canada.
In a joint letter, more than 100 organizations, including the Canadian Chamber of Commerce, Business Council of Canada and associations representing industries from automotive and fertilizer to retail and mining, urged the government to do whatever it takes to end the work stoppage.
“While we acknowledge efforts to continue with mediation, parties have not been able to come to a negotiated agreement,” the letter says. “So, the federal government must take decisive action, using every tool at its disposal to resolve this dispute and limit the damage caused by this disruption.
“We simply cannot afford to once again put Canadian businesses at risk, which in turn puts Canadian livelihoods at risk.”
In the meantime, the union says it has filed a complaint to the Canada Industrial Relations Board against the employers, alleging the association threatened to pull existing conditions out of the last contract in direct contact with its members.
“The BCMEA is trying to undermine the union by attempting to turn members against its democratically elected leadership and bargaining committee — despite the fact that the BCMEA knows full well we received a 96 per cent mandate to take job action if needed,” union president Frank Morena said in a statement.
The employers have responded by calling the complaint “another meritless claim,” adding the final offer to the union that includes a 19.2 per cent wage increase over a four-year term remains on the table.
“The final offer has been on the table for over a week and represents a fair and balanced proposal for employees, and if accepted would end this dispute,” the employers’ statement says. “The offer does not require any concessions from the union.”
The union says the offer does not address the key issue of staffing requirement at the terminals as the port introduces more automation to cargo loading and unloading, which could potentially require fewer workers to operate than older systems.
The Port of Vancouver is the largest in Canada and has seen a number of labour disruptions, including two instances involving the rail and grain storage sectors earlier this year.
A 13-day strike by another group of workers at the port last year resulted in the disruption of a significant amount of shipping and trade.
This report by The Canadian Press was first published Nov. 9, 2024.
The Royal Canadian Legion says a new partnership with e-commerce giant Amazon is helping boost its veterans’ fund, and will hopefully expand its donor base in the digital world.
Since the Oct. 25 launch of its Amazon.ca storefront, the legion says it has received nearly 10,000 orders for poppies.
Online shoppers can order lapel poppies on Amazon in exchange for donations or buy items such as “We Remember” lawn signs, Remembrance Day pins and other accessories, with all proceeds going to the legion’s Poppy Trust Fund for Canadian veterans and their families.
Nujma Bond, the legion’s national spokesperson, said the organization sees this move as keeping up with modern purchasing habits.
“As the world around us evolves we have been looking at different ways to distribute poppies and to make it easier for people to access them,” she said in an interview.
“This is definitely a way to reach a wider number of Canadians of all ages. And certainly younger Canadians are much more active on the web, on social media in general, so we’re also engaging in that way.”
Al Plume, a member of a legion branch in Trenton, Ont., said the online store can also help with outreach to veterans who are far from home.
“For veterans that are overseas and are away, (or) can’t get to a store they can order them online, it’s Amazon.” Plume said.
Plume spent 35 years in the military with the Royal Engineers, and retired eight years ago. He said making sure veterans are looked after is his passion.
“I’ve seen the struggles that our veterans have had with Veterans Affairs … and that’s why I got involved, with making sure that the people get to them and help the veterans with their paperwork.”
But the message about the Amazon storefront didn’t appear to reach all of the legion’s locations, with volunteers at Branch 179 on Vancouver’s Commercial Drive saying they hadn’t heard about the online push.
Holly Paddon, the branch’s poppy campaign co-ordinator and bartender, said the Amazon partnership never came up in meetings with other legion volunteers and officials.
“I work at the legion, I work with the Vancouver poppy office and I go to the meetings for the Vancouver poppy campaign — which includes all the legions in Vancouver — and not once has this been mentioned,” she said.
Paddon said the initiative is a great idea, but she would like to have known more about it.
The legion also sells a larger collection of items at poppystore.ca.
This report by The Canadian Press was first published Nov. 9, 2024.
