Debt-deferral cliff yet to be big issue for Big Six lenders
Most previously deferring customers are back to paying down their debts
If there's a debt-deferral cliff, Canada's biggest banks are only seeing a small percentage of borrowers go over it so far.
Canada's Big Six lenders all reported this week that the majority of loan-payment deferrals they provided to clients amid the coronavirus pandemic expired by the end of October, and that most of those previously deferring customers are back to paying down their debts.
Toronto-dominion Bank reported on Thursday that as of the end of October, 13,000 Canadian accounts were deferring payments on about $3.7 billion in residential mortgage and home equity line of credit balances, or 1.4 per cent of the lender's portfolio. Those deferral numbers are down from 14 per cent of the portfolio as of April 30, $36 billion in balances and 126,000 accounts. TD had provided deferrals on such loans for up to six months, and most of them have run their course.
What's more is 98.7 per cent of TD'S expired Canadian debt deferrals are back to regularly scheduled payments, according to the bank's fourth-quarter investor presentation.
“In terms of deferral-related credit impact, the significant majority of clients that have graduated from deferral programs are current with their payments, and graduated deferral delinquency rates are elevated relative to our broader portfolios, but remain within expectations,” said Ajai Bambawale, TD'S chief risk officer, during a conference call on Thursday.
TD is “not seeing very substantial levels of requests” for deferral extensions, either, chief financial officer Riaz Ahmed said in an interview.
The potential issue of a debt-deferral “cliff” was flagged by Canada Mortgage and Housing Corp. president CEO Evan Siddall in May, with the worry being that those who deferred payments may not be in a position to start making them when the deferrals ended. Household debt was already a closely watched issue before the pandemic hit; as it took hold, more than 796,000 people opted to skip or defer a mortgage payment, representing around 16 per cent of mortgages in bank portfolios, according to the Canadian Bankers Association.
The deferral periods for more than 686,000 of banks' deferred mortgages, or approximately 86 per cent, had run out as of Oct. 31, the CBA notes.
The Bank of Canada, though, found recently that more than 99 per cent of households whose debt deferrals had expired started making payments again. And Daniel Moore, the Bank of Nova Scotia's chief risk officer, said earlier this week that they don't see a “cliff effect” lurking in their deferral numbers.
Still, some borrowers have fallen behind on their debt payments following a deferral. More could follow suit as the pandemic drags on.
“It is too soon to be definitive, though, especially about mortgages,” Bank of Canada deputy governor Toni Gravelle said in a Nov. 23 speech, according to a transcript. “Many mortgage deferrals ended only in October, so we may not have a full picture of how many homeowners have fallen behind on those payments until the end of the year or early 2021.”
However, the decline in deferrals comes as Canada's Big Six banks are seeing their earnings impress again, after they were hit earlier this year by the pandemic and its associated economic effects. Those conditions prompted banks to build their loan-loss reserves, eating into their profits, and as interest-rate cuts by central banks put pressure on lending revenue.
TD reported on Thursday an 80-per-cent increase in profit for its fourth quarter compared to a year earlier, to $5.1 billion, as the lender booked a $2.3-billion after-tax net gain tied to the Charles Schwab Corp.'s acquisition of TD Ameritrade Holding Corp.
Before that Us$22-billion deal, TD had owned approximately 43 per cent of TD Ameritrade, an Omaha, Neb.-based broker. It now owns around 13.5 per cent of Schwab, a San Francisco-headquartered financial-services firm.
When adjusted for the TD Ameritrade deal, TD'S net income was up one per cent for the three-month period ended Oct. 31, to just shy of $3 billion. Even so, the bank's adjusted earnings per share were $1.60, up one cent from a year earlier and above the $1.28 consensus estimate among banking analysts.
Canadian Imperial Bank of Commerce also reported fourth-quarter earnings on Thursday, announcing net income of just over $1 billion for the three months ended Oct. 31. The bank's profit was 13 per cent lower than the previous quarter and 15 per cent lower than a year earlier.
CIBC'S adjusted profit for the fourth quarter was $1.28 billion, up three per cent from the third quarter and down two per cent from a year earlier. The Toronto-based bank's adjusted earnings per share were $2.79, higher than the $2.53 average of banking analysts' estimates.
CIBC also reported that its debt deferrals were trending similarly to its peers.
“Most of the deferrals have now run their course, repayments are within expectations and we believe our allowance coverage reflects the current risk in the portfolio,” CIBC chief risk officer Shawn Beber said during a conference call on Thursday.
The two beats on Thursday made for a clean sweep for Canada's Big Six banks, as all of them managed to top analysts' expectations for their fourth-quarter earnings.