Gradual phase-out of concessions coupled with unwinding of government aid programs could leave financial firms more exposed
The woes on soured consumer loans that Canada’s biggest lenders have been bracing themselves for could accelerate over the next few months as the country’s financial regulator withdraws a key concessionary measure.
In a statement released Monday, the Office of the Superintendent of Financial Institutions (OSFI) announced that it is gradually phasing out a temporary regime under which it permitted loan and insurance-payment deferrals to be treated as performing.
The regulator made that move in March, along with a freeze on portability transfers and annuity purchases from defined-benefit pension plans, in anticipation of difficulties that would arise from financial-market volatility as well as liquidity shocks that would affect Canadians’ immediate ability to fulfil their financial obligations.
“The gradual phase out of this special capital treatment supports the ongoing stability of Canada's financial system by ensuring a smooth transition back to pre-existing requirement,” OSFI said.
The regulator also cited the importance of ensuring that reporting requirements provide for an accurate reflection of credit risk, adding that institutions would continue to have the flexibility to address clients’ needs as appropriate with the support measures they have in place for borrowers.
That development comes as Canadian banks warned that as the government winds down its aid and loan deferral programs in the coming months, lenders will be exposed to the real impact the COVID-19 crisis has had on consumers.
As reported by Reuters, bad loans have so far been contained by a raft of customer relief measures extended by the government throughout the pandemic. “The real test of the recovery will come once government support programs start to wind down,” RBC CEO Dave McKay said on an analyst call. “It may take one or two years for us to get back to where we were before.”
In another call held by BMO, chief risk officer Patrick Cronin reportedly said he expects delinquencies to clock in between 1% and 5% of total loans as deferrals end.
Based on OSFI’s latest guidance, the end will begin on October 1, as all deferrals approved from that date will be considered non-performing. Deferrals granted before Monday will retain eligibility for the special capital treatment for six months, while those approved between August 30 and September 30 will be deemed performing for three months.
“What lies ahead is a much more normal recessionary environment,” Bryden Teich, a portfolio manager at Avenue Investment Management, told Reuters.
