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Housing downturn no match for Canada’s resilient banks, yet

Business and finance concept, looking up at modern office building architecture in the financial district of Toronto, Ontario, Canada.
Executives from Canada's biggest banks say they're not seeing pressure in their mortgage portfolios despite the higher interest rate environment.

Even as higher borrowing rates take a toll on the real estate market, Canada’s biggest banks aren't seeing any major signs of housing-related stress on their balance sheets.

“So far, what we're hearing is that there has not been any meaningful deterioration. We've heard some banks talk about how their customers, even the ones with a variable-rate mortgage, have a pretty good personal balance sheet or their financial situation is still okay,” Mike Rizvanovic, a research analyst at KBW, told Yahoo Finance Canada in a phone interview. Though he did acknowledge it’s still “early stages.”

“From what they're telling us so far, there are really no signs of major credit issues at this point.”

Executives across the largest five banks touted the strength of their mortgage portfolios and stable or low delinquency rates among their customers on their fourth-quarter earnings conference calls with analysts.

“Our late-stage delinquency rates across these portfolios continue to remain low and stable, with the Vancouver and Toronto portfolios outperforming our Canadian average. We will continue to take a prudent approach and are closely monitoring if interest rates rise and markets evolve,” Frank Guse, senior executive vice-president and chief risk officer at Canadian Imperial Bank of Commerce, said on the company call.

CIBC says it has $28 billion worth of mortgages renewing over the next 12 months, with only $20 million of that being at a higher credit risk.

“We actively monitor all portfolios and proactively reach out to clients who are at high risk of financial stress,” Guse said.

Many Canadians with variable-rate mortgages have seen their amortization periods lengthen beyond the 25-year maximum as rates increased.

At some of the banks, including Bank of Montreal and Royal Bank of Canada, nearly a third of their residential mortgage loans now have an amortization of longer than 30 years.

However, that doesn't necessarily mean those customers are financially stressed.

Bank of Nova Scotia executives said the credit worthiness of the variable-rate mortgagors is actually higher than fixed-rate borrowers, and that it believes many of its customers could withstand payment increases of $300 to $400 per month.

It’s unclear if there are any legal restraints against these longer amortizations, but many bank executives said their firms have been working with customers on a case-by-case basis and were aiming to bring amortizations back in line with the original term, or refinance the customer into a new 25-year term.

“Ideally, they want you to stick to that initial amortization commitment. But what I took from that commentary was, 'absolutely, we are very flexible, and we will make sure that we help our clients get through it,'” Rizvanovic said.

“It's a function of the risk management process. They don't want to obviously take possession of homes. And so as long as the person can carry that debt, there's no reason to go to the extreme. And it sounds like what they'll do is they'll just extend amortizations to the point that's necessary.”

Mortgage market slowdown to continue

Bank executives expect the slowdown in the mortgage market to continue into next year as higher rates take a toll on the real estate market. Activity will likely remain suppressed for some time as the Bank of Canada gears up for another widely-expected interest rate hike on Wednesday.

But Rizvanovic doesn’t see that changing how the banks handle the housing downturn just yet.

“I think if you had more time and if the unemployment rate was starting to get worse, if the job market was going to get worse, it might be more concerning,” he said.

“Rates moving up is probably not enough to do it, you also need some deterioration on the job front. When people lose jobs, that's when they get in trouble.”

Regardless of the mortgage slowdown, the banks remain focused on cross-selling their customers, meaning they try to get their mortgage borrowers to buy other banking products.

When a customer has multiple products with the bank, it also provides greater insight into their financial health.

“The final thing I would say is on a big picture basis strategically, we've been focused on the mortgage business and cross selling into the deposits. We've been doing that year on year now for the last three years,” Dan Rees, group head for Canadian banking at Bank of Nova Scotia, said on the call.

“Fifty per cent of our mortgage holders have a deposit account with us and within the first six months of opening, variable-rate mortgage customers now have three or more products, so our visibility into their health and strength is good.”

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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