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Banks equipped to weather housing downturn, report says

A new report says Canada's big banks are capitalized well enough to absorb the impact of a downturn in the housing market.
A new report says Canada's big banks are capitalized well enough to absorb the impact of a downturn in the housing market. Canadian Press

In case you were worried, the big banks will be fine in the event of a major downturn in the real estate market.

That’s the opinion of Fitch, one among a handful of agencies that grade corporate and government debt who investors rely on to make decision on where to park their money. It’s the same group that also listed U.S. subprime mortgages as AAA quality on the eve of the U.S. housing bust a few years back.

But in a statement Tuesday, Fitch said it has applied stress tests to each of Canada’s big banks – RBC, TD, BMO, CIBC, Bank of Nova Scotia and National Bank – and determined each could “withstand a moderate to severe Canadian housing market price shock.”

That said, a downturn would still hurt profits, Fitch says, but at least the major institutions that oversee the Canadian financial system won’t run into the same kind of troubles that U.S. and European banks got themselves into through overzealous lending and disastrous real-estate investments.

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Fitch said the banks are all above regulatory requirements for capital ratios — reserves of money set aside to cover losses on home loans should they start piling up — meaning the banks won’t go bust or require government bailouts funded by taxpayers.

Ottawa has moved recently to limit how much the government-run housing insurer is willing to cover in new mortgages being loaned by the banks.

Read more: As housing market cools, so does riskier lending

Chicago-based Fitch said it doesn’t think home prices here will suffer from a steep correction, though the decade-long sharp run up in prices is poised to be replaced with a period of muted growth.

“Fitch generally believes that Canadian home prices are likely nearing a plateau and could exhibit some weakness over a medium-term time horizon,” the group said.

That best-case-scenario of flat growth for Canada could be why one of the country’s biggest pension funds has shifted cash recently out Canadian bank stocks and into U.S. ones.

The Fitch report suggested as well that because Canadian home values have been rising in the last seven years despite a soft economy, the six banks have been able to appear financially sound while rivals in the U.S. and Europe have struggled.

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In January, Moody’s, another debt rating agency, cut by one notch the credit ratings of the banks, saying that high housing prices and record levels of consumer debt left them exposed in the event of a downturn in the economy.

With a file from Canadian Press