Downhill credit conditions paving the way for banking crisis

by Ephraim Vecina24 Apr 2019

Worsening credit conditions are pushing Canada’s banks ever closer towards major loan losses, a new CIBC Capital Markets report stated.

Such losses are “hardly apocalyptic, but still noteworthy.” CIBC emphasized that these threats are looming just beyond the horizon.

“Given the age of the current cycle and soft Q1/F19 reporting in which most banks saw notably weaker loan loss provisions, it does feel like the minute hand on our Credit Doomsday Clock moved a little closer to midnight, not to signal that the end of humanity approaches, but that the end of trough loan losses is coming,” CIBC Capital Markets analysts Robert Sedran, Christopher Bailey, and Marco Giurleo wrote in a client note last week, as quoted by BNN Bloomberg.

The warning came in the wake of a recent Veritas Investment Research analysis, which pressed clients to “lighten up” on stock associated with the country’s largest banks.

Steve Eisman, who had previously predicted the U.S. housing market crisis of the last decade, argued that Canada’s bank CEOs are “ill-prepared” for any potential credit losses resulting from an economic downturn.

According to Eisman, the lenders that are most at-risk are Royal Bank of Canada, Canadian Imperial Bank of Commerce, and Laurentian Bank of Canada, along with insurer Genworth MI Canada Inc. and alternative lender Home Capital Group Inc.

In its report, CIBC cautioned further that Canadian banks are apparently headed towards their weakest credit cycle since the oil-price-crash-induced loan losses in 2016.

“While Canada has not seen a meaningful economic downturn in quite some time, [Canadian banks] remain cyclical businesses that are built to absorb the pain when it comes, not avoid it.”

 

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