High number of deferred mortgages may damage Big Six earnings

Canada's top lenders are postponing mortgage payments at an alarming rate

High number of deferred mortgages may damage Big Six earnings

Over the past three months, Canada’s Big Six banks have offered mortgage deferral options to a consumer base burdened by reduced working hours and job losses.

Market observers said that this might sabotage the institutions’ near- and medium-term prospects, however. The Big Six have deferred mortgage repayments at nearly double the rate of banks in the United States, according to a Thomson Reuters analysis.

The trend will make the Canadian lenders’ post-COVID-19 situation harder, especially if they are operating under the assumption that the economy will bounce back rapidly.

If the banks are forced to extend deferrals due to slower recovery, “they’d have no choice but to increase provisions,” said Greg Taylor, chief investment officer of Purpose Investments.

Taylor said that this may well lead to even lower earnings in an already troubled year.

“There’s going to be limited earnings growth coming through, if any” said Sadiq Adatia, chief investment officer at Sun Life Global Investments.

Adatia estimated that bank earnings will begin showing signs of recovery only when national employment reaches 80% to 90% of pre-outbreak levels.

In late May, the Bank of Canada projected that while the national economy is still on track to decline at least 15% this year, “you should see a very rapid return to production” once the economy restarts in late 2020.

“We have to be able to manage the risks around those things, so I’m not going to dismiss [the worst scenarios],” said Stephen Poloz, the central bank’s former governor. “But, me personally, I do think on balance what I’m hearing, the flow that I’m hearing, is a little too dire, a little bit overblown.”