Paul Bagnell

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Another Canadian financial institution has taken a distinctly more positive view of credit conditions in the markets it serves. This time it’s alternative mortgage lender Home Capital Group Inc., which released its third-quarter results Wednesday.

Like HSBC Bank Canada and Equitable Group (the latter is also an alternative mortgage lender), Home Capital took money out of loan loss reserves and added it to the profit stream, where it added significantly to the bottom line.  Home Capital took $7 million out of loan-loss reserves, which boosted adjusted net income by almost 13 per cent and adjusted earnings per share by $0.15.  

As was the case at HSBC Canada and Equitable, this was a significant reversal from the first and second quarters of 2020, when all three institutions set aside significant sums of money to cover loans they thought were at risk of not being repaid.  In simple terms, it means these lenders believe their clients – and the Canadian economy – are in much better shape than earlier feared.

One of the big questions in the Canadian stock market right now is whether or not the Big Six Canadian banks are themselves on the cusp of the same trend.  Will they soon begin taking money out of a massive accumulation of loan-loss reserves built up as the pandemic closed down the Canadian economy and likewise add it back to profit?  We’ll get answers on December 1, 2 and 3, when all six of the big banks will report their fiscal fourth-quarter results.

The banks may also confirm that the widespread use of loan payment deferrals – giving borrowers who needed it a period free from repayment obligations – by Canadian lenders has been overwhelmingly successful.  That was certainly the case at Home Capital, where almost all deferrals have now come to an end, and more than 99 per cent of loans that have come off their deferral periods are either back to regular payments or fully discharged.