Despite those risks, many larger lenders are equipped to deal with such setbacks
Canada’s Big Six banks and other large lenders have become more exposed to losses stemming from economic volatility, amid mounting risks from red-hot housing markets and the dialling down of government-backed residential mortgage default insurance, according to Moody’s Investors Service.
“Our view is that there will be an uptick in residential mortgage delinquency once all support measures are exhausted,” said Jason Mercer, vice president and senior analyst at Moody’s.
However, current signs indicate that the lending segment might be well-positioned to answer these challenges: Moody’s reported that all of the major mortgage lenders that it has surveyed had higher “ending” capital ratios compared to previous cycles.
The Office of the Superintendent of Financial Institutions (OSFI) has previously required Canadian banks to maintain capital surpluses during the pandemic to soften the blow of economic shocks.
“Capital ratios at these lenders are historically high, so their post-stress capitalization is better than in previous stresses,” Mercer said. “And the banks have all taken provisions for losses in their earnings since the crisis began. As such, we believe there will be a minimal, if any, impact on banks’ earnings.”
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And while mounting mortgage defaults might be another risk factor for lenders, Mercer said that the economy’s stronger fundamentals would more than make up for the threat that defaults pose.
“While we believe there will be a modest increase in residential mortgage delinquency, the economic recovery will support sales activity in the housing market,” Mercer said “We don’t believe there will be a sufficient number of foreclosures to negatively affect house prices.”
