With most of Canada’s biggest banks exposed to the United States commercial-property market, the deteriorating quality of some real estate loans could lead to nasty surprises as lenders report fiscal first-quarter results this week.
Commercial-property lending accounts for about 10 per cent of the loan books on average at Canada’s five largest banks. With the sector under pressure amid elevated interest rates and plunging valuations, banks have been booking higher provisions for potential credit losses for several quarters now.
The idiosyncratic nature of which particular loans could go bad makes it hard to predict the scale of coming provisions, said Nigel D’Souza, an analyst with Veritas Investment Research Corp. While home-price indexes and an array of monthly data provide insight into the health of residential mortgages, there’s no equivalent for commercial loans, leaving investors looking at higher-level categories of exposure and making educated predictions, he said.
The “U.S. is probably more vulnerable than Canada, office is more vulnerable than other categories, and you are seeing some weakness creep into multifamily residential as well, and that could become an issue both in the U.S. and in Canada,” D’Souza said in an interview.
Unlike some U.S. regional players, Canadian banks aren’t facing a solvency issue over commercial-loan losses, but they will be a “question mark” for profitability, D’Souza said.
“Provisions have an outsized impact on and contribute to a lot of volatility,” he said, adding that other line items, such as margins, loan balances and revenue from fees, don’t move around significantly from quarter to quarter. “But credit provisions do.”
Provisions are likely to keep heading higher this
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