Monday’s fiscal update gave us a pretty good look at how much red ink has been spilled on the federal government’s finances — and just how long it might take to clean it up.
A series of pronouncements from Canada’s biggest lenders this week should give us a similar glimpse of how things are doing in the real economy.
The so-called Big Six banks are slated to reveal their fourth-quarter earnings starting Tuesday morning. Bank of Montreal and Scotiabank will kick things off, followed by the Royal Bank of Canada and National Bank of Canada on Wednesday. Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank close things out on Thursday.
All of those sets of numbers will be closely scrutinized by investors and policy-makers for signs of how the consumers and businesses that borrow and save with the banks are doing. If banks report that businesses are taking out new loans to invest and grow while paying back their existing debts, that’s a good sign for the economy.
And if Canadian consumers are tapping banks to borrow money for such things as buying homes and other investments, that, too, is a good sign of confidence that the economy may be recovering from COVID-19.
One of the biggest dark clouds hanging over banks is the billions of dollars worth of mortgages that borrowers asked to defer interest payments on earlier in the pandemic.
It’s been estimated that roughly three-quarters of a million borrowers applied to defer their mortgage at some point this year, which is roughly one in six people with a home loan — buying every one of them a few months’ relief from interest payments even as it added to the cost and length of the loan in the long run.
Most of those deferred loans were for between three and six months, which means they either recently expired or are about to — prompting fears that a wave of mortgage delinquencies could be coming. But based on what the banks have suggested recently, that worst-case scenario doesn’t seem to be coming to pass.
Scotiabank recently revealed that among the borrowers on its books with a mortgage deferral that has already expired, 99 per cent of them are up to date on their payments. The bank had about $39 billion worth of deferred loans on its books as of the end of August, so that payback rate is an encouraging sign, as most of that debt is slated to come due again in the period Scotiabank will be reporting on this week.
“Our customers continue to make their payments on time after their deferrals have expired,” CEO Brian Porter said in a statement. “We expect the vast majority of the remaining balances to expire this quarter.”
Most of the other big banks said similar things at a recent banking conference.
When asked about the status of deferrals, BMO’s chief financial officer, Thomas Flynn, said: “The vast, vast, vast majority of customers [are] returning to a status where they are making payments to us … and the existing deferrals will run off largely over the balance of the year.
“I would say we’re not expecting a radically different outcome,” he said of the loan deferrals that have yet to expire.
Rod Bolger, Flynn’s counterpart at RBC, said similar things at the same event, noting that most of the people who asked the bank for a loan deferral had lots of equity in their homes, had very high credit scores and were dual-income households — all things that would suggest they are safe bets to pay it off.
And so far, it seems as though they are: “We’re not looking at seeing a big spike in foreclosures,” Bolger said. “We expect that these mortgages, as they come off the deferral program, to remain the homes of our clients” in most cases.
This week will be our first chance to see if those early trends are playing out in the numbers.
Savings are up, too
So, that’s the likely good news. And there could be some more of it on the books of the big banks, depending on your definition of “good.”
It may seem counterintuitive in a pandemic, but the amount that Canadian households are saving has skyrocketed during COVID-19. Statistics Canada reported over the summer that the savings rate shot up to 28 per cent in the second quarter, the highest level in decades.
While many people lost their jobs and income during the pandemic, the unprecedented level of government support programs, such as the Canada emergency response benefit, helped millions of them keep their heads above water.
The spike in savings suggests that many people took that government cash and stashed it away for a rainy day, which is not as good as you might think for the big banks.
Cash in the bank may feel good for the person saving it, but the banks don’t make any money from that — it actually costs them a minuscule amount in terms of interest payments every month.
Economists Benjamin Tal and Katherine Judge with CIBC recently estimated that Canadian consumers and businesses are currently sitting on a record high of $170 billion in cash.
While the savings rate was 28 per cent in the spring, CIBC estimates it likely fell to about 13 per cent since then, which is still high by historical standards. “We suspect that the vast majority of excess cash is parked in the chequing accounts of mid- and high-income households,” they said in a recent report.
Rainy-day money feels great to those who have it, but cash in the bank does little for everyone else — including the banks. Unless that cash gets put to work by being spent at businesses, it’s going to be hard for the economy to fully recover — and based on where it is, it’s unlikely to move any time soon.
“With the happy days of summer over, it is reasonable to assume that mid- and high-income households will, in fact, reduce consumption of nonessentials again,” Tal and Judge said in their report.
So it will be important to look at how much cash the banks say they have in accounts right now and remember that every dollar they have there is one less in the actual economy.