Amid a climate of mounting home prices and unprecedented household debt levels, the alternative lending segment is becoming an increasingly popular option among financially struggling Canadians. But while Home Capital’s current struggles are well documented, another major lender in this category is facing a similar assortment of risks.
With an expanding alternative mortgage portfolio, Canadian Western Bank has been touted as a possible successor to the mantle of Home Capital.
However, veteran markets observer Chris MacDonald warned in his recent piece for The Motley Fool Canada that “loan quality aside … the reality is that given the current overheated markets in Toronto and Vancouver, alternative lenders will likely be the first to take a hit should the market go south.”
“While the [bank’s alternative] portfolio totals only 11% of Canadian Western Bank’s total loan exposure, this segment is significant in that it represents one of the fastest-growing loan segments — a segment with a much riskier pool of loans with loan-to-value ratios exceeding 68% compared to a much lower LTV ratio of its traditional commercial and residential lending portfolios,” MacDonald explained.
He added that the lopsided geographic composition of Canadian Western’s consumer base in its alternative portfolio is concerning.
“Currently, more than 50% of the bank’s optimum loans are generated in Ontario (primarily in Toronto) with 21% of originations taking place in Alberta and 17% in B.C.,” MacDonald wrote. “With economists from around the world noting that some of the largest housing bubbles globally currently exist in the Vancouver and Toronto markets, and the oil market decline still hampering the economic prospects of Alberta, it appears that CWB’s exposure to all of the riskiest elements of the Canadian economy put it at a disadvantage compared to the larger, more diversified Canadian banks.”
Most crucially, Canadian Western—as well as fellow alternative lenders like Equitable
and Home Capital—is laboring under what the analyst called “unrealistically low loan-loss provisions.”
“In the bank’s Q2 2017 financial statements, it notes that impaired loans totaled 0.62% of total loans this past quarter, yet the company has posted an average loan-loss provision of 0.26%, or 26 basis points on a year-to-date basis.”
Given the data, “I am very concerned about Canadian Western Bank’s prospects moving forward. Investors should take extreme caution with this name, given the economic headwinds and huge downside potential with this bank.”
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