Quarterly Review: Loan Book Watchlist
Ontario’s 2020 macroeconomic results tell us that the worst has been avoided. Initial estimates suggested contraction in the GDP by 9.0% vs. 5.7% (realized). Better than expected results can partially be attributed to red-hot real estate market as was evidenced by growth in housing starts. Housing starts went up by 16.8% as opposed to initial estimates of negative 16.0%. Subdued inflation and lower mortgage rates mitigated the spillover of COVID risks into the residential real estate market.
Going forward, economists consider Ontario’s real GDP is likely to climb by 4% in 2021. That said, risks to recovery remain elevated and highly dependent on successful roll-out of mass vaccinations, consumer and business sentiment. Factors such as pent-up demand, open borders, and increased immigration quotas are likely to act as growth catalysts.
However, growth drivers can be tempered by strong Canadian dollar and surge in inflation. We are carefully monitoring yields on benchmark bonds for inflationary signals.
The following tactical action are recommended in this quarter’s Watchlist:
- Identify vulnerable segments in the loan book. For example, drawn out recovery can exacerbate the debt repayment and servicing capabilities of accommodation and food services
- Manage exposure by cancelling undrawn lines, and re-rate frequently. Also consider rating, provision and capital overlays to offset ‘event risk’
- Consider restructuring options. However, carefully weigh the benefits of over-collateralization as near-term valuations can drop and demand in the secondary market for this type of exposure can also dry-up
- Consider cross-collateralization and diversification as mitigation strategies
- Also consider some longer term actions such as the development of statistically-based rating tools, combined with early warning signals, these tools can pro-actively detect standalone vulnerabilities and concentrations
Helping you build a resilient loan book,
Economic conditions affect the performance of firms and also impact the credit portfolios of lending organizations. Quarterly Review: Loan Book Watchlist (the “Watchlist”) highlights the trends due to changes in macroeconomic factors. The Watchlist presents forward-looking statements about the future economic conditions and its near term impact. The statements made are illustrative and subject to risk and uncertainty. Readers should consider limitations of this analysis and should not place undue reliance.