Canada’s Big-Bank CEOs weighed in this week on the current state of their mortgage clients, including those they consider “vulnerable” in the event of a recession.
None were quite as forthcoming as Scotiabank’s new President and CEO Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.”
These are borrowers that have a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.
“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.
However, he added this represents a “manageable-type situation for us on mortgages.”
RBC is also keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.
“We look at incomes, we look at the stress of inflation on expenses in a household and we monitor cash flow to interest payments, as you would in any corporation,” RBC President and CEO Dave McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”
Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.
Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”
For clients that start to have difficulties making their payments, mortgage lenders have a number of options to first try and assist borrowers before the situation progresses to the point of them needing to sell their home.
“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.
In terms of clients with cash flow challenges in addition to a collateral problem, where the sale of the property wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group, but one the bank is actively monitoring.
“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing.”
Overall mortgage arrears remain at record lows
The latest data available show mortgage arrears remain at record-low levels. Since arrears are a lagging indicator (requiring at least 90 days of missed payments), the latest data available from the Canadian Bankers Association is from September.
Even so, there were just 7,305 Canadian mortgages in arrears out of over 5.1 million, representing just 0.14%. In the midst of the pandemic in 2020, the arrears rate was nearly double.
Given the sharp rise in interest rates over the course of 2022, and growing expectations of a recession in 2023, most mortgage lenders have been preparing for arrears to trend higher.
Over the last several quarters, all of the big banks have increased their provisions for credit losses—in other words, setting money aside for bad loans.
Even so, TD Bank President and CEO Bharat Masrani doesn’t believe the next recession will be comparable to, say, what was experienced during the Global Financial Crisis of 2007-08.
“I am not suggesting there’s a 100% chance [of] no recession,” he said during Monday’s conference. “When rates go up so much, is there a slowdown to be expected? Yes.”
But when looking for indicators of what to expect in terms of mortgage arrears and loan losses, he said you have to look at employment.
“The job market has been remarkably strong and continues to be strong,” he said.
Featured image by Ting Shen/Bloomberg via Getty Images
Reading this article just affirms my belief that the world is completely disconnected to reality. No matter how strong the job market is, if the income level does not match the cost of living, people will not be able to afford housing or food. Interest rates increase. Prices increase on everything from housing right down to food yet, income levels remain the same even though businesses and large institutions continue to report increased profits year over year. The world needs a serious reality check.
Now, I don’t mean to get on a rant here…
But let’s just thank god that the jackass’s at BOC are using 1980’s tools to fight a 2023 inflation problem. I’d rather blind firefighters trying to rescue me in a house fire.At least they would have other senses working… including “Common”.
This is not the same situation as in the past. This is not over demand. Or a lack of supply which is controllable.
Energy. Gas. Fertilizer. Crops. Supply chain …. All these have been heavily affected by Russias war in Ukraine.
Higher interest rates are not going to do a damn thing. Other then allowing people who are paying more for necessary expenses(food, gas and heat… all those luxuries) and then crushing them with what is affecting every bodies biggest problem.
My food bill went up $200-$300 a month. Inflation caused by supply disruptions caused by Russia is not going to be tamed by raising my mortgage payment by $700.00!
BOC has been short sighted and reactionary with inflation. From initially dismissing it, to working towards crippling the economy.
Yes. Recession and high unemployment will lower some prices in still competitive markets perhaps… But taking Canada into a recession as a solution is ridiculous.
Are we really taking off our nose to spite our face?!
It takes 6 to 9 months for an interest rate to work through the economy have make a difference.
Let’s be generous… BOC’s 1st and 2nd interest rates are now affecting inflation and moving it back to reasonable levels.
But you do not raise your rates historically fast and with abandon without evaluating results.
When BOC’s foolish increases really start depressing the economy then it will be to late and damage will have been done.
BOC will immediately gloat that they tamed inflation(by putting people out of work and out of their Homes… Arn’t rental prices skyrocketing because BOC just arranged to ensure no one can purchase a home ?) The fact that they have taken Canada into recession will conveniently be forgotten..: and THAT is going to take a lot longer to repair the damage done.
BOC was slow to react at the end of 2021.
Realizing how badly they screwed up, they immediately jumped into action…. And totally over reacted…. Then didn’t bother to evaluate the results of what they had done.
By the time that the BOC’s rate hikes get through the system and show the affects… it will be to late… and BOC will again have to be reactive and not proactive… they will be forced yo bring rates down or continue to destroy the economy and delay recovery.
Using the 40 year old tools from a different age and entirely different circumstances is not how to fight inflation today. Taking Canada into economic peril will do more damage then good. The root problems of demand and supply go to far beyond interest rates.
But BOC has been successful in taking families from financial discomfort to the edge of ruin through there actions.
I’ll pay $2.00 a litre for gas if I can get my $700/month mortgage or rental overpayment back.
BOC needs new leadership immediately.
Perhaps bank CEO’s should be sending that message to the government instead of worrying about the bottom line and how to manage the consequences of BOC’s actions.
Just my thoughts.
Sorry for any typos or incorrect grammar. I blame Siri entirely.