Kroll Bond Rating Agency Releases Canadian Banks: Resilient Despite Macro Uncertainties Report
Kroll Bond Rating Agency (KBRA) has released a report titled “Canadian Banks: Resilient Despite Macro Uncertainties.” The report makes the following points:
- The Canadian banking sector has demonstrated resilience to date and continues to perform better than expected, yet macro uncertainties, including relatively high levels of household debt in Canada and economic vulnerability to declining energy and other commodity prices, persist.
- The largest banks in Canada continue to report solid capital ratios, profitable operations, and relatively low levels of impaired loans despite economic headwinds. In fact, the aggregate level of gross impaired loans has improved for the major banks after peaking in the second quarter of 2016.
- Canada’s banks have reduced direct exposure to oil and other commodities. Energy prices have generally recovered from lows in early 2016, but have been under renewed pressure recently. Banks have already absorbed considerable losses related to direct exposure to commodity and related industries and remaining exposure remains a manageable portion of the credit portfolio.
- The housing market in Canada remains frothy and is susceptible to negative trends in commodities particularly if these developments translate to higher unemployment over time. For the major banks, this is partially mitigated by the high proportion of mortgages insured by the Canada Mortgage and Housing Corporation as well as and the generally sound mortgage underwriting practices among the Canadian banks, especially relative to those of American banks before the 2008 financial crisis. Non-bank mortgage lenders are just a small portion of the overall mortgage market.
- The largest Canadian non-bank mortgage lender, Home Capital Group, Inc. (HCG), experienced a liquidity crunch in April 2017; however, a systemic crisis is unlikely as the causes of the liquidity problems appear to be specific to the company. Just recently, Berkshire Hathaway agreed to acquire a 38% stake in HCG combined with a $2 billion credit facility. This action will likely stabilize the HCG situation and, at least in the short run, boost confidence in the non-bank mortgage sector.
- On June 16, 2017, a proposal for the Canadian bail-in regime and a draft guideline for total loss absorbing capacity (TLAC) standards were released for public comment. The adoption of the bail-in regime is designed to limit the impact of potential bank failures on taxpayers. Banks will have until November 2021 to fully meet TLAC requirements. When these initiatives come closer to implementation, KBRA may have to review our support assumptions for Canadian bank ratings.
Please use the following link to access the report.
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About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).