Though the country fared relatively well during the global financial slump, some fear Canada is now facing a homegrown mortgage crisis. Danielle Myles analyses the country's exposure to the housing market.

The Canadian banking sector’s reputation as the world’s safest has been tarnished a little of late. The country slipped to third place in the World Economic Forum’s (WEF's) latest bank soundness rankings, after claiming the top spot in eight of the past nine years. In 2015 the WEF expressed concern about the sector’s "exposure to a potentially overvalued housing market". 

Data from the Organisation for Economic Co-operation and Development (OECD) suggest these fears are not groundless. It shows that since 2002 Canada’s real house price index has risen 222%, while US and UK prices rose 78% and 186%, respectively. This has set alarm bells ringing at various national and international authorities. The OECD cut Canada’s 2017 growth outlook, citing a possible disorderly housing market correction, while the country’s central bank has named high loan-to-value mortgages a key vulnerability in the domestic financial system. The Bank for International Settlements recently described Canada’s high credit-to-gross domestic product gap as "a reliable early warning indicator of banking crises or severe distress".

Exposure at the big five

Data collected by The Banker reveals the exposure of Canada’s so-called big five banks – Royal Bank of Canada (RBC), Scotiabank, Toronto Dominion Bank (TD Bank), Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce (CIBC) – to any housing bubble. The total value of retail mortgages on their books peaked in 2013, one year after the warnings of a bubble started to emerge. But there are differences in how each bank has responded.

At the country’s biggest bank, RBC, residential mortgage holdings hit a high of $203.14bn in 2013, dropped drastically over the next two years, and rebounded again in 2016 to $190.3bn. CEO Dave McKay has been vocal in his confidence in Canada’s housing market, and in the bank’s earnings call for the fourth quarter of 2016, chief risk officer Mark Hughes said the bank is comfortable with the risk profile of its residential mortgage portfolio.

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Scotiabank has taken a different approach. In 2013 its residential mortgage holdings exceeded RBC’s by $608.31m, but since then these numbers have dropped and stabilised at about $166bn. In June 2016, CEO Brian Porter told Bloomberg TV that the bank “took our foot off the gas over the past few quarters” regarding mortgage growth, because of concerns about housing prices in the Vancouver and Toronto areas. He also asserted that the credit quality of Scotiabank’s mortgage book is high.

TD Bank has followed the same trajectory as Scotiabank, and its retail mortgage book has remained steady in 2015 and 2016. It has tightened mortgage underwriting practices in recent years, but CEO Bharat Masrani told an investor conference in September 2016 that mortgages are still a growth story.

Prepare and protect

BMO’s retail mortgage book has remained relatively flat compared with the other four banks, although its value increased by 3.6% over 2016. The real anomaly is the group’s smallest member, CIBC. Its retail mortgages peaked a year earlier than the other banks, declined year on year from 2013 to 2015, and then spiked by 8.2% last year. Analysts have expressed concern about how big CIBC’s exposure is to the housing market compared with its regulatory capital. The Banker data shows that its residential mortgage book is 7.22 times its Tier 1 and Tier 2 capital. Multiples for the other four banks hover between 2.97 and 4.17.

At all five banks, the value of gross impaired loans (those overdue or unlikely to be repaid in full) rose between 2015 and 2016. RBC saw the biggest increase, spiking 66.99%, while Scotiabank has the highest absolute level of $4.025bn, up 13.21% from the previous year. However, their average non-performing loan ratio (the proportion of their total loans outstanding more than 90 days) is just 0.84%, and with the exception of CIBC they all increased their allowances for loan losses over the past 12 months.

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