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Canadian banks’ lending recovery seen clouded by hot inflation

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Surging inflation and rising bond yields are set to offer a shot in the arm for Canadian banks’ profit margins, which have languished during the pandemic, but an aggressive response by central banks could derail a nascent lending recovery and increase defaults, investors and analysts said.

Canadian banks’ loan growth outside of mortgages all but disappeared during the pandemic as lockdowns and surging deposits slowed consumer and business borrowing. Although spending has increased after lockdowns were lifted, that has so far failed to translate into robust credit growth.

Higher interest rates drive banks’ net interest margins. But uncertainty around how persistent inflation will be and how quickly rates will rise is clouding the outlook for lending recovery into next year that investors had hoped for.

“If (the Bank of Canada and U.S. Federal Reserve) raise rates too quickly, that would stifle economic growth, and loan demand will decline. … That would be a negative for the banks and have a negative impact on profitability,” said Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service.

An aggressive response would raise loan servicing costs, raising the potential for defaults. Banks would increase bad loan provisions, which would lead to weaker profit growth.

And given the recent surge in demand for variable-rate mortgages, a rapid rise in rates would make borrowers more vulnerable, potentially leading to loan losses, said Mike Driscoll, head of North American financial institutions at DBRS Morningstar.

The latest data showed inflation surged to a near two-decade high of 4.7% in October. While money markets expect a hike as soon as March and five in all next year, the Bank of Canada reiterated this week that increases are not expected until the middle quarters of 2022.

“Grocery prices, cars, everything that people buy is getting more expensive,” Driscoll added. “While wages may be increasing, real wages are declining. Given the high debt loads … that can be problematic. There could be higher credit losses.”

As the pandemic recedes, investors are hoping banks’ profit growth would once again come from core lending operations, rather than from releasing bad debt reserves that have driven better-than-expected earnings in the past year, and other businesses like wealth management and capital markets.

To be sure, most analysts and investors don’t expect the central bank to raise rates so quickly and abruptly that it derails the economic recovery. But if the Bank of Canada delays hikes, and inflation persists and seeps into wages, it may not have a choice, some investors said.

“We assume that if inflation continues to be elevated well above the target range, (the central bank) could be forced to act,” Colangelo said.

An overnight rate “pushing 3%” is the point that could choke off economic growth and possibly prompt a recession, said Brian Madden, portfolio manager at Goodreid Investment Counsel.

“A recession is unambiguously bad for the banks. … You get credit losses, and it chokes off loan demand,” he said. “I think it’s unlikely, but the risk isn’t zero.”

 

(Reporting By Nichola Saminather; additional reporting by Julie Gordon; editing by Jonathan Oatis)

Economy

Mindset Matters: The Responsibility Of Corporate Behavior In Magnifying The Disability Economy – Forbes

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Through a series of columns starting with the previous Mindset Matters piece, the hope is to open a dialogue around the significance of the emerging Disability Economy and discover some of the intricacies that are key to its very growth. As we mine deeper into this burgeoning economy of identity it is critical to recognize that this very concept is not static, but rather filled with complexity and nuances that must be explored further. If companies are going to truly embrace disability inclusion as a key stakeholder within their leadership strategy and a central theme to their long-term business success, then they must integrate key areas of knowledge that are essential to adopting a framework that radiates true disability confidence.

Corporations who choose to participate in this budding Disability Economy must understand the holistic nature of what needs to be done. A good starting point is to acknowledge the fact that the disability community is diverse, that the lived experience of disability cannot be seen through one lens, rather it must be seen through a diversity of perspectives that offer organizations a multitude of opportunities. Corporate leadership should have an awareness that while the Disability Economy is continuing to grow, it is ephemeral, in that it will continually change with each generation and each situation demanding new requirements that necessitate innovative ways of thinking and operating. It is this very awareness that will be critical for organizations to foster greater economic opportunities within this uncharted space.

So, what do businesses need to know? Corporate leadership must understand that to honestly immerse themselves within the Disability Economy in an authentic way they must identify with the value of needs. It is this understanding that must become the fundamental building block for corporate leaders to work on as they move forward while embracing disability into their business strategy. The value of needs is based on the notion that amplifying soft skills such as listening, trust, and empathy are central to pushing past barriers that are critical to gaining access to this new marketplace. 

The adage “Nothing About Us, Without Us” cannot be far from the mind of any corporate leader who is engaging in the disability space. For any corporate leader to be involved in the Disability Economy, one must begin with a level of trust. No matter what the product or service, having buy-in from the disability community is essential to the process. Understanding the communities’ needs is imperative, but it is also the first salvo in starting an ongoing dialogue between corporate entities and the disability community themselves. It is through this process that the potential for real evolution can happen, and new products and services can have real meaning within this growing market. 

As corporate leaders realize the value of need, the next step is making them habitual. The role of need must become an essential calling card for any organization doing business within the Disability Economy. It is not only critical for larger corporations but has value across many other branches of the emergent Disability Economy from entrepreneurship, social investors, to nonprofit organizations, and even government and educational institutions. These are topics that we will investigate further in future columns, but for the moment it is important to acknowledge the role behaviors play in expanding economic opportunities by celebrating the value of both the individual and the collective to shape the reality of the future.

Corporate leaders say they want to “do the right thing”, yet the question lies not just in the want, but the how. It is time for organizations and their leadership teams to be vulnerable and recognize that it is okay not to know. By identifying the needs of others to become a part of the habit of daily business life gives corporate leaders the flexibility to not only be prepared for change but move beyond a level of unconscious bias that offers a continuous mode of learning that will impact business both socially and economically creating opportunities for true disruption that can recalibrate the culture of business for the next century.

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Japan economy contracts 3.6% in 3Q as virus hits spending – Yahoo Canada Finance

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TOKYO (AP) — Japan’s economy contracted at a 3.6% annual rate in July-September as a wave of coronivirus infections crimped travel and other activities, the government said Wednesday.

The estimate for the last quarter, downgraded from an earlier report of a 3.0% contraction, reflected weakness in consumer spending and trade, the government said.

In quarterly terms, the measure used for most economies, the economy contracted 0.9%, compared to the earlier estimate of a 0.8% contraction.

The world’s third-largest economy was in a slump before the pandemic hit. Its recovery has been fitful thanks to precautions taken to curb COVID-19 infections. Troubles with supply chains, especially for computer chips used in autos, have also taken a toll.

Japan’s latest big coronavirus outbreak, in the late summer, has receded for now with a sharp drop in cases. But it hit during the usually busy summer travel season, with calls for restricted business activity and travel hurting restaurants, hotels and other service sector industries.

Consumer spending is recovering and will likely drive a recovery in the current quarter, Norihiro Yamaguchi of Oxford Economics said in a commentary.

“With supply chain disruptions easing in the auto sector, production and exports are also projected to recover, albeit at a moderate pace,” he said.

The latest data showed a lower level of private inventories than earlier reported and weaker government and consumer spending. It also showed wages contracted by 0.4%, instead of growing by 0.1% as earlier reported.

Japan’s Cabinet has approved a record 56 trillion yen, or $490 billion stimulus package, including cash handouts and aid to ailing businesses, to help the economy out of the doldrums worsened by the coronavirus pandemic. Parliamentary approval of the plan is expected this month.

The Associated Press

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The global economic transition to a green economy – Lombard Odier

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