The chief executive of alternative lender Equitable Group Inc. said Thursday that they are bracing for higher loan defaults this year, even with borrowers being allowed to defer mortgage payments because of COVID-19.
Toronto-based Equitable has provided mortgage deferrals of up to six months to 14,547 customers as of April 30, with those customers making up 17.9 per cent of its portfolio and $81 million in postponed payments.
We expect higher levels of defaults in the loan book in 2020 than we have historically experienced
Andrew Moor, Equitable’s president and CEO
While interest is still accruing on those loans, Andrew Moor, Equitable’s president and CEO, suggested mortgage deferrals only represent a relatively modest increase in risk so long as home prices don’t change drastically and given economic and employment figures could improve during the deferral period.
“But nonetheless, we expect higher levels of defaults in the loan book in 2020 than we have historically experienced,” Moor said during a conference call with analysts and investors on Thursday.
Moor’s comments came after Equitable announced $25.97 million in net income for the three months ended March 31, down from the $41.66 million it reported for the first quarter of 2019.
Profit was hit by a tripling of the amount of money the lender set aside for potentially bad loans, which was driven by concerns about the economic blow caused by the coronavirus pandemic. Provisions for credit losses for Equitable’s first quarter were nearly $35.7 million, up from almost $9.7 million a year earlier.
National Bank Financial analyst Jaeme Gloyn wrote in a note to clients that Equitable’s first quarter provisions, which were equal to 0.54 per cent of total loans, were nearly three times what they had forecasted.
“The company increased provisions in all loan books, primarily on downward revisions to macroeconomic forecasts as well as a material migration to stage 2 loans (performing but significantly increased credit risk) which now make up 24 per cent of the loan book (up from 11 per cent),” Gloyn said.
Loan-loss provisions are influenced by economic forecasts. Equitable said they should come down in subsequent quarters, barring any worsening of the economic forecast or borrower struggles, as the first quarter allowance for loan losses already reflected its estimate of future expected losses because of those choppy economic conditions.
The need for a loan deferral isn’t being taken at the moment as the sign of increased risk of default, and more than 700,000 Canadian customers have opted to defer or skip payments so far, according to the Canadian Bankers Association.
While some customers could have lost their jobs and be in true financial distress, others could be looking for “insurance,” Moor said, to try to just preserve some of their savings.
“We believe that the longer-term impact of these programs will be positive,” Equitable said of its mortgage deferrals in its latest filings. “Some proportion of these borrowers will likely still default but it is too early to determine what the increase in impaired loan balances will be over the course of the year.”
A similar warning was issued by the Bank of Canada on Thursday in its latest review of the financial system.
Canada’s central bank said the deferrals have helped keep debt-servicing costs down for many households, but after the deferral period ends, those costs could rise again.
“The proportion of households with debt-service payments of more than 40 per cent of their income, an indicator of household vulnerability, is likely to rise,” the review stated. “This will be particularly the case for households whose incomes do not fully recover.”
Furthermore, even with the deferrals and additional borrowing, some households are likely to fall behind on their payments, which usually starts with credit card and auto loans, according to the Bank of Canada.
“The longer the income shock lasts, the greater the risk of a rise in consumer insolvencies,” the review added.
Equitable, however, sees something of a silver lining to the COVID-19 crisis. The lender operates through its branchless subsidiary, Equitable Bank (and its digital-only EQ Bank platform), which is one of Canada’s larger independent lenders.
“We believe that COVID-19 will likely cause changes in consumer behaviour and accelerate the shift towards digital banking, a trend for which we are well positioned,” Equitable said.