Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I’ve finally worked through RBC bank analyst Darko Mihelic’s almost-200 page primer on Canadian bank stocks published July 8.
On page 99, Mr. Mihelic’s outlines his arguments that while potential losses on bank mortgage books might be significant, they are also likely to be limited.
I posted some of these arguments on social media and from some quarters the reaction was blind rage. I had no idea so many Canadians were so emotionally invested in severe financial stress in Canada. Remember, I’m just the messenger on this one.
Here’s the analyst’s reasoning,
“We expect loss rates for mortgages to remain small and well below other types of loans … Recent loss rates on Canadian mortgages on the bank balance sheets have been on average ~3 basis points. As we stated, the worst year a Canadian bank had in terms of mortgage losses in the 1990s was 11 basis points … Interest rates are low by historical standards, making mortgages affordable … For a bank to incur a loss on a residential mortgage, a customer first needs to default on an uninsured mortgage (a default on an insured mortgage does not lead to losses for banks), which normally happens in instances of job losses, and the decline in the value of the house must be at least 20% and in reality usually more than that before banks incur losses. We do not mean to imply that if housing prices declined 20% this would be a non-event for Canadian banks (employment in construction-related sectors, particularly condos, would suffer, condo developers would likely be challenged, and customer confidence would likely be weak, which would affect retail loan growth and consumer sectors, etc.)”
“@SBarlow_ROB Why RBC does not see big mortgage-related losses at Canadian banks” – (research excerpt) Twitter
See also: “@SBarlow_ROB RBC on Cdn bank credit losses: “In the peak year for loan losses in the early 1990s, losses represented 26% of revenues” – (research excerpt) Twitter
Citi economist Igor Cesarec believes that equity market bulls and bears have reached a statemate,
“A range of financial projections indicate increased uncertainty. Global equities are projected to be around current levels in 12 months, as the bulls and the bears seem to be in a stalemate with uncertainty around the question if either side can prevail. Bears are wary of an economic trajectory that continues to look very uncertain. We recently downgraded growth projections for India, China remains on a bumpy road, and the US faces a slowdown in reopening efforts…Additionally, debt overhang could have an adverse impact on the real economy. Bullish arguments rest on positive data surprises and ongoing policy support in the form of central bank purchases of financial assets. However, the tapering of these purchases – when it is eventually realized – or the realization of adverse economic scenarios, could pose challenges to the V-shaped recovery. "
UBS strategist Bhanu Baweja notes that global mobility trends – essentially transportation traffic as it recovers from the pandemic – are no longer improving,
“1) Global mobility improvements flattening out: The improving trend in mobility since April 10th seems to be getting exhausted, and in some cases reversing. 2) Global credit impulse strongest since 2007: The strength in the global credit impulse is driven by China and the US. The motivation is likely to buffer up against insolvency. 3) Small-cap stocks tracking mobility, Tech off on its own: The dissonance with smallcap stocks makes us worry for Tech here.”
Mr. Baweja also specified that credit growth, which is normally a sign of impending economic growth, might this time be large corporations drawing down their bank loan allowances to protect against weaker demand.
“@SBarlow_ROB UBS: “The improving trend in mobility since April 10th seems to be getting exhausted, and in some cases reversing” – (research excerpt) Twitter
Diversion: “I’m an epidemiologist and a dad. Here’s why I think schools should reopen” – Vox
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