Greater risk on the part of financial institutions is the major element driving the recent sharp increases in mortgage rates for new loans, Dominion Lending Centres chief economist Sherry Cooper said.
“These disruptive forces of COVID-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk,” Cooper wrote in an analysis recently published by DLC’s online portal.
“That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields,” she added. “Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate.”
The economic shockwaves emanating from the pandemic have proven disastrous, with industry players bearing the brunt of the impact so far.
“The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline,” Cooper explained. “An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.”