DBRS ON CDN BANKS OFFICE PORTFOLIO “The Big Six’s impaired loans on [commercial real estate] have started to tick up, and a substantial portion of the increase is likely being driven by the U.S. office portfolio,” the report said.
“Significantly higher interest rates and easing but persistent inflation continue to weigh on the industry,” the report also noted. It added that lending growth in the commercial real estate sector “declined sharply” in the banks’ fiscal third quarter (to July 31), as the early signs of credit stress appeared in these portfolios.
“Outstanding office loans declined quarter over quarter as the banks have tightened lending, and appetite for new loans is highly limited, while total [commercial real estate] loan growth slowed considerably, averaging just 0.1% for the quarter, driven by a cautious approach to the industry and a slowing market,” it said.
DBRS also noted that any credit losses that do materialize should prove “manageable” as these exposures remain relatively modest within the banks’ overall loan books.
It reported that total office exposure at the Big Six was approximately $51 billion in the third quarter, “representing just 1.2% of total loans and acceptances on average.”
“Canadian banks have prudently limited new lending in the office space and are closely monitoring and increasing provisions for credit losses on existing [commercial real estate] loans,” said Josh Veenkamp, assistant vice-president at DBRS, in the report. “Conservative underwriting should help mitigate potential credit risks, with generally low loan-to-value levels at origination providing a buffer against collateral value risk.”