Big Six banks face acute risk from office exposure, says analyst

This factor accounts for approximately 12% of commercial real estate portfolios at the Big Six banks

Big Six banks face acute risk from office exposure, says analyst

Canada’s bank earnings are exposed to significant risk brought about by the office segment's ongoing struggles with the remote-working revolution, according to Gabriel Dechaine, analyst at National Bank Financial.

This is especially because commercial real estate loans account for approximately 10% of portfolios, making them the second largest lending product among Canada’s Big Six banks.

“Not only is the portfolio large, but it has also grown faster than the overall wholesale portfolio over the past seven years,” Dechaine said, as reported by the Financial Post. “Office exposures are particularly worrisome and represent 12% of the average Big-Six CRE (commercial real estate) book.”

And while Canada’s financial system isn’t as exposed to CRE volatility as the United States, Canadian institutions do not have the transparency in CRE provisions that their US counterparts offer.

“Despite the stellar (Canadian) credit metrics today, investors are undoubtedly questioning coverage ratios, in the event of an actual CRE downturn (particularly in the office category),” Dechaine said.

“With the CRE overhang and the ongoing turbulence in the US regional banking sector that could trigger a recession, we believe most investors will maintain a cautious stance towards the Big Six banks.”