The second half of 2019 could prove challenging for the Canadian mortgage market.
While recent Bank of Canada announcements have been pointing to a stabilizing housing market, there is still pressure that could mean tough times ahead for Canadian banks, according to a new report.
Fitch Ratings indicated recently that Canadian banks saw a rebound in their capital market business and strong international growth, offsetting local weakness in the second quarter of 2019.
However, as we progress into the second half of 2019, that may not be the case any longer.
According to an Investment Executive article, a flattening yield curve and ongoing mortgage market competition could be making the market more challenging.
“The big six banks’ diverse business lines by product and geography, solid asset quality and strong capitalization mitigate broader downside macroeconomic weaknesses,” Mark Narron, director for Fitch Ratings, said in a statement.
The Teranet Market Insights Report has also found that the Ontario mortgage market share of big-5 banks has decreased in recent years.
Teranet data showed that in a post-stress test environment, the big-5 banks were still dominating the Ontario market, but some buying groups were starting to shift away from these lending institutions. For example, with first-time homebuyers in recent years the vast majority have selected the big-5 banks for mortgages since 2012, but from 2017 to 2018 there was a drop from 63.2% to 60.6%.
In addition to mortgage market competition, large financial institutions are also facing the recent decision to increase the capital buffer to 2% in October of 2019. Fitch Ratings spoke to this as well.
In a separate report, about the state of the Canadian housing market, Fitch Ratings called OSFI’s Domestic Stability Buffer a “prudent response”:
“The decision by Canada’s bank regulators to boost the domestic stability buffer … is viewed as a prudent response to concerns over record household debt to income levels and growing corporate leverage. Regulators now have increased protection from downside risk. In addition, by demonstrating sustained willingness to raise the required buffer, regulators are building credibility to lower the buffer in the future when the cycle changes.”
However, as it relates to Canadian banks, Fitch Ratings said the capital buffer increase could also “hamper future international expansion aspirations.”
“The U.S. has been a very attractive market for the Canadian banks, and we could see organic and inorganic U.S. expansion taper off as banks now need to maintain higher capitalization levels,” Narron said.
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