E Canadian Banks Back Away From Mortgage Lending

Investors in Canadian bank stocks have enjoyed a very pleasant start to the new year as bank stocks rose by nearly 10% in January. Equity analysts point to the upswing in bank stocks as a case of reversion to the mean, especially after the dramatic swoon in stock prices in December. Canadian investors have had a long love affair with their major banks and tend to look for any opportunity to buy shares at attractive prices.

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Ironically, the mainstay of Canadian banks is mortgage loans and these have been shrinking from early 2018 to the present. Canadian banks have dominated the mortgage business and currently underwrite nearly 75% of all household mortgages. On the whole, mortgages (including home equity lines) amount to C$ 1.5 trillion or about 65% of total bank assets. By comparison, personal (non-mortgage loans) account for about 20%, business loans about 9% and the balance is comprised of non-residential mortgages and other smaller loan categories. The mortgage business has been very stable, very profitable and has been managed by a very effective regulatory environment. During the U.S. mortgage market collapse in 2008, the Canadian mortgage industry exhibited no cracks and business was as usual.

Now, the banks are shying away from writing new mortgage business in part due to the introduction of tougher lending rules and their own internal risk management policies. The Bank of Canada data for December shows residential mortgage growth rose just 3.1 percent from the prior year, the slowest pace in 17 years, and half the growth rate from two years ago. More significantly, this rate is less than the nominal rate of GDP growth, an indication that mortgage lending is no longer supportive of economic expansion, but is acting as a moderate drag on the economy.

This fall-off in lending was largely orchestrated by the Federal government efforts to slow down the growth in household debt. Especially, it introduced a series of measures, referred to as the “B-20 regulations” which toughened mortgage-qualifying standards. In addition, the commercial banks have taken upon themselves to reduce their risks in the largest segment of their business.

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Arthur Donner 1 month ago Contributor's comment

great column Norm

Gary Anderson 1 month ago Contributor's comment

Guess it all depends on whether lending eventually loosens or stays tight for the foreseeable future.

Norman Mogil 1 month ago Author's comment

Exactly. There is pressure to ease up on the stress test. But the govt is resisting. All governments do not want to admit they over did it.