Canada’s big banks building a ‘capital cushion’ in case of a housing crash: Moody’s

FILE PHOTO: A sign advertises a house for sale on a residential street in midtown Toronto, Ontario, Canada, July 12, 2017. REUTERS/Chris Helgren/File Photo

Canada’s biggest banks are better equipped to weather a domestic housing price downturn than they were two years ago, even though total mortgage-related losses would be larger, and the nation’s two riskiest provinces account for a bigger chunk of mortgage portfolios, according to a new report.

Moody’s Investors Service found that Canada’s seven largest lenders built up more robust capital cushions between 2016 and 2018, reserves that would come in handy during the credit rating agency’s hypothetical housing crash scenarios.

“Our analysis shows banks’ capital ratios have substantially increased since 2016, which enables them to absorb higher expected losses in their growing mortgage exposures,” Moody’s Vice President Jason Mercer wrote in a news release on Wednesday.

Lenders put to the test include Toronto-Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal, National Bank of Canada, and Quebec’s Desjardins Group.

While the basket of lenders may be better prepared to absorb losses from a housing shock, the Moody’s stress test found aggregate losses from the stress tests jumped from $12.1 billion in 2016 to $14.3 billion in 2018.  

The Moody’s analysis also shows a drop in insured mortgages compared to 2016, and more lending growth in two provinces with notoriously hot housing markets — Ontario and British Columbia.

“A shift in portfolio mix toward Ontario and British Columbia also contributed to higher losses,” Mercer wrote. “In addition, the increasing proportion of uninsured residential mortgages is credit negative, since they have higher loss given default than secured residential mortgage debt.”

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