the global recession have proven to be of great value amid the pandemic, billions of dollars that were set aside to cover loan losses, which failed to materialise during the global health crisis, saw Canada’s Big Six banks blow past earnings expectations earlier this year.
However, the outlook for a recovery in lending for these firms have now been clouded by uncertainty around inflation and rate hikes, according to experts. As pandemic-induced lockdowns and increased savings slowed consumer and business borrowing amid the Coronavirus, the loan growth of banks apart from mortgages have all but disappeared. And while consumer spending has begun recovering after lockdowns were lifted, they are yet to translate into robust credit growth, analysts say.
Meanwhile, the uncertainty around when rates will increase and how persistent inflation will be continues to overshadow hopes for a lending recovery into next year.
“If (the Bank of Canada and U.S. Federal Reserve) raise rates too quickly, that would stifle economic growth, and loan demand will decline. […] That would be a negative for the banks and have a negative impact on profitability,” Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service, said.
Analysts have issued warnings on the risks associated with an aggressive response by monetary policy regulators, as it would increase loan servicing costs, thereby raising the potential for defaults. This would force lenders to increase their bad loan provisions, which would result in a weaker profit growth. On the other hand, a rapid rise in rates would also make borrowers more vulnerable, considering the recent hike in demand for variable-rate mortgages. This in turn would also lead to loan losses for banks.
Accordingly, experts do not anticipate any quick or abrupt increases in interest rates, which could derail the ongoing economic recovery. However, some investors say that if inflation persists and price pressures begin to seep into wages, the Bank of Canada may be forced to act in response.
