Canadian banks are better armed to weather an economic slump thanks to a buildup in their capital positions over the past couple of years, says Moody’s Investors Service in a report published on Wednesday.
Canada’s seven largest residential mortgage lenders have “significantly” improved their common equity Tier 1 capital ratios, bolstering their buffers against losses that could occur in an economic downturn, Moody’s says in a news release.
“Our analysis shows banks’ capital ratios have substantially increased since 2016, which enables them to absorb higher expected losses in their growing mortgage exposures,” says Jason Mercer, vice president at Moody’s, in a statement. “All seven of the largest mortgage lenders have higher end-point CET1 ratios in our updated stress test despite increased stress losses, which is credit positive.”
Moody’s latest stress tests found that aggregate losses for the seven largest mortgage lenders would be an estimated $14.3 billion, which is up from the $12.1 billion estimated in stress test that were carried out in 2016.
“The largest driver of increased residential mortgage losses is portfolio growth,” Mercer says.
“Banks today have more mortgage exposure in Ontario and British Columbia and fewer insured mortgages compared to 2016,” Moody’s says.
The rating agency reports that residential mortgage debt increased at a compound annual growth rate (CAGR) of 6% between 2014 and 2017, and that home equity lines of credit (HELOCs) grew at a CAGR of 4% over the same period. At the same time, the average house price in Canada grew almost 10% per year.
“Solid employment alongside an easing debt burden are positive signals for residential credit quality, which remains strong. Canadian consumer debt to income is still high at 168%, but has tempered in the past several quarters as a strong labor market helps raise income levels,” Moody’s says.