Thanks to a solid economy and robust jobs market, the outlook for the Canadian structured finance sector is strong for 2019, says New York-based Moody’s Investors Service in report published Wednesday.
Canada’s low unemployment rate will help support the credit quality of the assets that underpin the performance of the structured finance sector, including asset-backed securities (ABS), residential mortgage-backed securities (RMBS), covered bonds and asset-backed commercial paper (ABCP), the report says.
However, as the economy slows and interest rates rise over the course of the year, as expected, the performance of the underlying collateral assets will deteriorate, Moody’s says.
“The Canadian economy will begin 2019 in a strong position. Nevertheless, rising interest rates, in tandem with high household debt levels, will constrain consumer spending and dampen economic growth, in turn slightly worsening the performance of assets backing credit card ABS, as well as other types of collateral,” says Richard Hunt, vice president and senior credit officer at Moody’s, in a statement.
Moody’s forecasts that credit card charge-off and delinquency rates will move up slightly in the new year, and rising interest rates will cause the performance of RMBS collateral to deteriorate slightly, as some borrowers struggle with rising debt service costs. It predicts that five-year mortgage interest rates will reach 6% by late 2020, up from about 4.4% today.
“The strong credit quality of covered bond issuers, the new bail-in regime and covered bond regulations are all credit positive for Canadian covered bond performance in the coming year. Similarly, strong bank sponsors, a still-expanding economy and low unemployment will benefit ABCP performance,” it says.