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May 27, 2020 | Canadian Credit Cycle Starting to Bite

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

As Canadian banks begin reporting their second-quarter earnings this week (for Feb thru April), Bank of Nova Scotia was first on deck with a 39% drop in profits and a 111% increase in loan loss provisions. Since business lockdowns and layoffs only surged in the latter half of March, half of this quarter was still pre-COVID-19.

It is important to note that the millions in loan payment deferrals presently in place are not yet counted as defaults.  We will have a better sense of how many deferred loans will be defaults and ‘bad debts’ for lenders after the emergency deferral period ends.  Presently, that is to happen in September, but there could be a further extension granted.

The segment below offers a good overview of the issues unfolding for the Canadian banks.

Nigel D’Souza, financial services investment analyst Veritas Investment Research, joins BNN Bloomberg to discuss what the Canadian banks will likely report as the quarter is set to reveal the beginning damage of COVID-19 to the financial sector. Here is a direct video link.

The problem is that many Canadians are missing large chunks of their income even with massive government support, so debt payment deferrals have slowed but not helped the insolvency crisis spreading through many households and businesses today.  Moreover, lost income is not bouncing back soon for many as spending remains subdued and companies look for ways to keep costs down.  Some of the millions of jobs lost will not be coming back at all; others, as in past cycles, will take years to recover.

After falling 40% between February 20 and March 23, Canadian financial sector shares (XFN) are today still 27% below the February peak.  We will have a better sense of where loan losses and financial profits lie as we head into the 4th quarter, as well as how all-important home prices are impacting the balance sheets of households and their lenders.

The push for aging owners to downsize expensive-to-maintain real estate was underway in Canada well before 2020.  Now, losses in investment portfolios and the present recession are likely to motivate more sellers to list.

The latest survey from Point2Homes finds that the percentage of Canadians saying they intend to buy a home in the next six months decreased to 24% in April from 31% in March, and 37% of those looking to buy say they are interested in a less expensive home, compared with 27% at the end of March.

If they wait a while, buyers, who are able, may well find the cheaper offers they seek.

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May 27th, 2020

Posted In: Juggling Dynamite

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