Economic and financial context
From the Country Report document, Box 2:
The banking system remains sound but exposure to the oil and gas sector will require higher provisions against expected losses (Figure 4 and Table 6). Canada’s banking system is dominated by six banks accounting for 93 percent of bank assets.2 These banks are among the most profitable in the world, averaging 16 percent return on equity. They have stepped up the pace of business lending in recent years, but household credit which grew by double digits in 2010–11 has slowed to 5 percent today. The expansion in business credit and increase in non-interest income have offset declining interest income margins. As a result, the big six banks have continued to build up capital, with their common equity Tier 1 ratios rising above 10 percent, while non-performing loans (NPLs) remain below ½ percent. The banks’ mortgage book is also secured by government guarantees on high risk mortgage loans (those with loan-to-value (LTV) ratios above 80 percent) some of which are pooled to raise financing in the securitization market. Insured mortgage loans account for 50 percent of banks’ mortgage loan portfolio.
In terms of these banks’ exposure to the oil and gas sector, credit quality has deteriorated since 2014. Oil companies’ stock prices have fallen by 35 percent, their operating margin has declined by almost 15 percentage points, and their >median probability of default has increased sharply (Box 2).
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