So far, government support measures are shoring up Canadian households and asset quality. However, the duration of the Covid-19 crisis, coupled with government and household responses, will dictate how well they hold up in the months ahead, says Moody’s Investors Service.
In a new report, the rating agency said that the federal government’s response to the pandemic has supported banks’ consumer asset quality during the economic disruption.
“Basic income and wage subsidies, loan deferrals and interest rate relief have reduced insolvencies, stabilized escalating consumer debt and prevented mass loan charge-offs,” it said.
Moody’s reported that, despite record unemployment, personal insolvency levels dropped well below average levels in April and May.
At the same time, savings rates increased and credit card losses declined, it said, thanks to government transfers and lower retail spending.
Moreover, residential mortgage credit quality “has remained exceptional,” Moody’s said.
The housing markets are particularly important to the Canadian banks, Moody’s noted, as residential mortgages are the banks’ largest asset class and home equity lines of credit represent almost two-thirds of their total loan portfolio.
“Government support measures are helping consumers and bank asset quality to bridge the immediate coronavirus stress,” said Jason Mercer, vice president at Moody’s.
Moody’s also estimated that about 16% of Canadian mortgage payments have been deferred.
However, once the support measures dry up and loan deferrals expire, consumer loan quality will deteriorate “as workers struggle to adapt to the post-pandemic economy,” Moody’s said.
It also noted that Canadian households began the pandemic from a position of weakness, given high debt levels.
“Canadian consumers entered this crisis with higher household debt than many other developed countries and at levels above the last recession in 2007-08,” Mercer said. “As a result, they were more vulnerable entering this crisis.”
On the other hand, the banks are better prepared than in past crises due to their more robust capital positions.
The report noted that the Canadian banks have higher capital buffers to absorb consumer loan losses than they did before the financial crisis in 2007.
“Strong recurring earnings and capital preservation will help banks absorb consumer credit losses during the current crisis,” Moody’s said.