Canadian Home Lenders Collapsing: Telling For The Future?

Canadian tier two financial firms who are engaged in deposits, mortgage lending, retail credit, and credit card issuing services in Canada collapsed two days ago…  Is this the first signs of risk in a very leveraged real estate and lending market?  We will provide a link to a series of 8 free newsletters on the Canadian Economy and real estate market. First, a look at two major tier 2 lenders who are collapsing today:

First, let’s have a look at the Equitable Group that operates through its wholly owned subsidiary, Equitable Bank. They are Canada’s ninth largest independent Schedule I bank, serving Canadians coast to coast. They offer a diverse suite of residential lending, commercial lending and savings options, including high-interest savings products and GICs. Equitable Bank has grown to approximately $22.3 billion in assets under management, so they are a reasonable size bank.

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The bank collapsed over 30% a couple of days ago due to fears of undercapitalization of the sector. It lost 3.5 years of growth in one day. That is how rapid markets can move when fear takes hold. More on that after looking at the next major collapse, Home Capital:

The stock collapsed by more than 60%, yes in one day. The reason is that it is lining up expensive emergency funding to offset a run on deposits.  There is clearly significant pressure on tier 2 lenders, including Equitable Group above. Home Capital Group Inc. is a holding Company and operates through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering deposit, mortgage lending, retail credit and credit card issuing services.  The stock is now lower than it has been in the 2000’s.  It is a massive collapse and cannot be ignored. Yes, depositors have $100,000 guaranteed under the CDIC, as does Equitable Bank, but clearly, there are major concerns about the viability of such lenders.

Home Trust has total loans under administration of $26.4 billion at the end of 2016, up 5.5% compared to the end of 2015. They have been growing at a healthy pace, as has the Canadian mortgage and real estate market.  Could this be the first sign of major stress on the Canadian real estate market, especially the bubble markets of Toronto and Vancouver?  Time will tell but this is not a good sign, as firms like this are needed to deal with borrowers who do not qualify from the major banks.

The Canadian major banks are down around 3 to 4% over the last few days. Nothing significant, but clearly the sector will be assessed closely now, as there have been ongoing concerns about the aggressive lending in the mortgage, auto and lines of credit over the last few years.  Canada has the highest personal debt to income levels in the entire G7 as of today:

This chart shows how Canada’s household debt level has surpassed the US peak in late 2007, just prior to their real estate and the world stock markets crash.  Yes, carrying loads are not as bad today due to zero interest rate policies but the Canadian market is incredibly vulnerable to rising rates and the next recession, which by the way, always comes.
We will be watching this sector closely. If the real estate and mortgage sector are peaking and potentially reversing course, it would put significant pressures on the Canadian economy overall.

We are in the process of completing a detailed review of the Canadian economy and real estate market, an 8 report series.  We offer this free through our FREE Fortrus 4-Minute subscription. Sign up now if you want to get a feel for Toronto, Vancouver and Canadian real estate as well as a visual and analytical look at the economy.

Matt Sammut
Founder & Chief Investment Strategist
Fortrus Financial Coaching