Conservative risk management and diversified revenues will help banks survive the prolonged crisis
Canadian banks can weather a likely recession through their cross-border businesses and risk management, according to a recent analysis by rating agency KBRA.
“Major Canadian banks have a high degree of resilience against the economic slowdown from COVID-19 and oil price pressure, even as these factors exacerbate the elevated level of household indebtedness,” KBRA said in a research note. “In addition, the distinct structure of the country’s mortgage market and extensive insurance provided by CMHC and private mortgage insurers go a long way toward insulating the banking system from rising risks in the housing market.”
This is helped by the fact that insured mortgages do not account for the majority of Canada’s total outstanding household debt – 25.7% this year, per Bank of Canada data.
“Major banks have increasingly demonstrated comparatively low earnings volatility, supported by their diversified revenue streams and conservative underwriting standards,” KBRA said.
Canada Mortgage and Housing Corporation is not expecting a quick post-coronavirus recovery for the market, or the economy as a whole. Last month, the Crown corporation said that the housing sector will see pre-recession prices only after three years, at the earliest.
“For Canada and for Ontario, I think, the best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022,” said Bob Dugan, CMHC’s chief economist.
Dugan stressed that any long-term predictions will be inherently unreliable as the coronavirus is turning previously known quantities like income and immigration levels into “unknown variables.”
