Business is Booming

Steve Saretsky -

The big six banks are flush with cash. At least that was the headline promoted by BNN Bloomberg this past week. Adding, “When shares of the banks began rallying on Oct. 29, investors were buying because they believed the banks’ outlook on credit quality was about to take a sharply positive turn.  And they were right. Each of the big banks decided to set aside – or “provision” – much less money than they did just a quarter ago for an anticipated wave of loans slipping into default because of the economic shock from COVID-19. In fact, each of the banks cut provisions for credit losses (PCL) by more than analysts had forecast. Because every dollar of a PCL is a dollar lost to the net income line, earnings per share topped expectations in every case.”

This crisis has become a classic coin toss for the banks, heads I win, tails you lose. Through federal government support, and generous asset purchases from the Bank of Canada, the Canadian banks are in a significantly better spot than initially feared at the start of the pandemic. In fact, they have become the cornerstone for the remarkable housing boom underway across the nation.

Canadian banks are pumping out residential mortgages at an impressive pace. Residential mortgage credit growth is now humming near 6%, a rate of growth we haven’t seen since just before the introduction of the mortgage stress test back in 2017. It makes perfect sense though when you think about it. Issuing residential mortgage loans is viewed as the safest loan a bank can make. The residential housing market has become so large and so important to the Canadian economy that it has an implicit backstop from policy makers, whether they admit that or not. Remember, commercial banks create over 95% of our money through loan origination. The bulk of that origination is mortgage credit. Housing is the collateral on that credit. Therefor, It’s in the banks and the governments best interest to support that collateral. Once you figure that out, things become a bit more clear.

So here we are, national home sales are running at record levels, and prices are up double digits so far this year. Meanwhile, HSBC just undercut the big six, launching Canada’s first ever mortgage rate below 1%. HSBC will offer a 0.99% mortgage to all new insured (federally guaranteed) borrowers. HSBC summarized the milestone, noting “We view mortgages as a key relationship product. We look at the customer relationship as a whole, not on an individual product level. And, Mortgages are a good way to acquire and retain customers.”

If you want to figure out what direction the housing market is heading, just watch the bankers responsible for creating the loans. The mortgage business is booming, even in a pandemic.

Three Things I’m Watching:

1. What pandemic? Consumer insolvencies are plunging.

2. Printing prosperity? Canadian households are flush with cash.

3. There’s over $320 billion in federal support programs, here’s how it breaks down.

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The Saretsky Report. December 2022