Canada’s biggest private banks are reporting quarterly earnings this week, and the first three to do so have signalled they are continuing to set aside money in case some loans, like mortgages, default.
All three say economic pressures continue to mount and that they will focus on “de-risking,” with one bank in particular saying that the risk scenario for some of its customers is being treated like a “recession.”
“From a credit cycle, we may not be in a recession, but we are treating the softness as one in terms of helping our customers and de-risking wherever we can,” said Piyush Agrawal, Bank of Montreal’s chief risk officer, in a conference call with analysts and shareholders on Wednesday.
“I don’t see this as a stress scenario. To me, we are managing very well through this, and we’ve taken early action.”
This comes as the war in the Middle East has created an extra layer of uncertainty, including how higher oil and energy prices will affect inflation in Canada, as consumers continue to grapple with an already high cost of living and weakening job market.
A recent report from Equifax shows the number of homeowners in Ontario and British Columbia who have missed a mortgage payment multiple times is increasing, including by 52 per cent year-over-year in Ontario and by 36 per cent in B.C.
Bank of Montreal says although it saw an overall positive quarter, it set aside an additional $739 million in loan loss provisions. These are extra funds banks use to cover some of their losses in case customers fail to pay off their loans.
Although that figure from BMO was a smaller increase than the $1.05 billion one year earlier, the rate of delinquencies are expected to climb.
“In the consumer book, as we have been highlighting, there continues to be pressure and delinquency rates have been in an upward trend, reflecting elevated insolvencies and rising unemployment,” said Agrawal.
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“This has translated into higher provisions in the unsecured portfolio.”
Unemployment in Canada was last measured at 6.9 per cent in April, which was 0.2 per cent higher than the previous month, and about 18,000 jobs were also lost.
If someone loses their job, then they may not have an income for a period of time, and if they were also trying to pay down a loan like a mortgage, then a loss of income means they could wind up defaulting on those loans if they’re unable to pay it off.
Agrawal also said the bank is actively working with clients to help them through delinquencies where possible, and that nine out of 10 delinquent borrowers are “self-correcting.”
He continued: “We want to see our consumers in their homes, and we are working with them to find them good handy solutions to come out of the delinquency stage.”
Bank of Nova Scotia is anticipating more loan losses down the line too, as the bank increased its provisions by $1.2 billion. Although that was slightly less than the same period one year earlier ($1.39 billion), it was more than the previous quarter ($1.17 billion).
The bank’s CEO, Scott Thomson, signalled that credit stress may not be confined just to households and other retail loans, as worsening macroeconomic conditions are also pressuring commercial business loans.
“Elevated energy costs, persistent trade uncertainty, and higher unemployment continue to pressure both consumers and businesses across our footprint,” he said in a conference call with analysts and shareholders on Wednesday.
“Prolonged inflationary pressures could further strain already vulnerable client segments.”
Thomson added: “We continue to closely monitor the portfolio given ongoing macroeconomic uncertainty affecting consumers.”
National Bank of Canada also reported earnings for the most recent quarter, and although it increased its loan loss provisions by $233 million, that was less than the $244 million from the previous quarter and less than half of the $545 million from one year earlier.
Still, National Bank expects to increase the amount it sets aside in case of bad loans because of the uncertain outlook for the Canadian and global economy.
“Our outlook for the year on commercial lending remains positive, while acknowledging that the macro context has shifted with the conflict in the Middle East and with heightened uncertainty around the path of inflation and interest rates.”
As of publication, and following these results, shares of BMO and Scotiabank were up roughly one and half a per cent, respectively, while shares of National Bank were down by four per cent.
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