Mortgage lenders’ results show ‘pockets of concern’

Earnings results from alternative mortgage providers including Home Capital Group Inc. and EQB Inc. show that lenders are turning more cautious on Canada’s rapidly cooling housing market and the economy.

Home Capital and EQB both missed analysts’ profit estimates as they stockpiled more capital than expected to protect against future loan losses. EQB’S chief executive said the firm is tightening lending standards, while Home Capital’s top executive said inflation, softening home prices and a possible recession may cause “stresses to the financial system.”

The comments and the earnings highlight “pockets of concern” arising among lenders, said Jaeme Gloyn, an analyst at National Bank of Canada. Investors will be watching to see what top executives at the country’s largest banks say about housing and the economy when they report fiscal third-quarter results this month. “The provisions for credit losses generally came in a little bit higher than what was expected,” Gloyn said of the mortgage lenders’ results. Some of that is due to loan growth, he said, but it’s also because of changes in the economic models that Canadian lenders use to estimate expected credit losses.

EQ Bank, in a disclosure of the variables it uses to determine expected credit losses, reduced its base-case forecast for Canadian home-price growth over the next 12 months to 4.8 per cent last quarter from 5.6 per cent in the previous quarter. Home Capital was even more cautious, reducing its housing-price outlook to a seven-per-cent decline, from a one-per-cent drop.

Canadian home prices have started to retreat, dropping 1.7 per cent in July and bringing the cumulative drop from February’s peak to nearly six per cent.

Canada’s six largest banks begin reporting their results for the quarter ended July 31 on Tuesday, and analysts are expecting them to take larger provisions for credit losses than in the previous quarter as the economic outlook worsens.

The variable that most directly affects loan losses is unemployment. Canada’s jobless rate is at a record low 4.9 per cent. That’s translating into a level of loan arrears that EQB CEO Andrew Moor said is the lowest in his 15 years leading the company.