Canadian banks say borrowers showing strain of higher for longer interest rates

Even when the Bank of Canada begins cutting rates it will take months before it helps consumers

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Borrowers whose mortgage amortization periods lengthened as interest rates soared are making lump-sum payments to get back onside, but the pace has slowed at Canadian Imperial Bank of Commerce, one of several signs from Canada’s biggest banks that borrowers are feeling the strain.

On a conference call Thursday following the release of second-quarter earnings, CIBC chief risk officer Frank Guse said 90-plus-day delinquencies were rising on credit cards and unsecured lending. He also agreed with an analyst who noted that while the amount of negatively amortizing mortgages continued to be reduced through the end of April, the pace of those reductions had slowed.

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Some who declined to make these voluntary payments recently would have been the ones who could not afford to do so, Guse said, but the bank also noticed that some borrowers appeared to be holding back in anticipation of interest rate cuts.

“We also see some more sophisticated clients in that portfolio that are just saying, ‘I want to wait it out,’ and are waiting for interest rates to drop and helping on that part,” he said, adding that some mortgage clients have built up deposit cushions and other liquid assets that could carry them through at least six to seven months of payments.

Royal Bank of Canada’s financial results released on Thursday also shone a light on the impact of higher interest rates on some Canadians, with credit cards contributing heavily to a $24-million increase in provisions for credit losses in RBC’s domestic banking operations, even as the bank did better than analysts were expecting on the back of strong capital markets.

Despite the signs of stress, executives at both banks said they were comfortable with earlier guidance on loan loss provisions for the year.

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“We have been very cautious and had put very moderate interest rate cuts into our plans,” Guse said. “We also expected it will take some time before the impact of the interest rate cuts will fully migrate into some of our losses. As such, we feel very comfortable with our mid-30s guidance (for PCL ratios) under a variety of scenarios.”

Graeme Hepworth, RBC’s chief risk officer, said there were signs of weakening credit quality, downgrades and elevated delinquencies across the bank’s operations, but “these outcomes are in line for where we are in the credit cycle.”

Bank of Montreal, however, ratcheted up expectations for impaired loan provisions over the remainder of 2024 after outstripping analyst estimates for credit loss provisions in the second quarter reported earlier this week.

A 24 per cent sequential increase in gross impaired loan provisions for the period ending April 30 marked the second big spike for BMO over the past three quarters, National Bank Financial Inc. analyst Gabriel Dechaine said in a note to clients on Wednesday, a day on which BMO shares fell by almost nine per cent.

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Dechaine said rate-cut expectations were different when BMO set its outlook for the year.

On Wednesday, BMO chief executive Darryl White said the bank now expects “somewhat fewer and delayed rate cuts this year” in both Canada and the United States, with the Bank of Canada expected to begin lowering rates this summer and the United States Federal Reserve in the fall, and a moderate pace in those rate declines.

“Interpretation of macroeconomic outlook is more of an art than a science,” John Aiken, director of research for Canada at Jefferies Group LLC, said, adding that there are differences between the banks when it comes to product mixes that can also affect their outlook.

“CIBC is more retail based, with residential mortgages largely impervious,” the analyst said, referring to the long-established expectation that Canadians will cut back on pretty much everything else to keep their home.

BMO, on the other hand, faces the potential for “larger absolute and relative losses” due to its concentration in commercial lending, both in the U.S. and Canada, Aiken said.

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Dechaine called BMO’s revised credit guidance “a disappointing outcome,” but added that a more conservative outlook might pay off down the road.

“We believe credit expectations have become more realistic for BMO than they may have been for other banks,” he said. “As such, the risk of negative surprises in coming quarters should be lower.”

Nevertheless, other banks are preparing investors for a potentially bumpy road, particularly with both the Bank of Canada and the Office of the Superintendent of Financial Institutions warning of a wave of mortgage renewals over the next couple of years that will hit borrowers with monthly payment increases of as much as 60 per cent.

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On a conference call Tuesday, Bank of Nova Scotia chief risk office Phil Thomas cautioned that even once cuts begin, full relief won’t flow through for at least a few quarters, depending on whether borrowers have fallen behind on credit-card payments or other unsecured borrowing such as auto loans.

“There’s some talk about rate decreases in June and July,” he said. “I’m of the opinion that even with those decreases … it’ll take a few quarters, maybe one, two, three quarters, for it to start to really support the Canadian consumer.”

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