Real estate credit risk looms over Canadian banks’ profit picture

Canada’s largest banks could see their profits reduced by nine per cent next year if the commercial real estate downturn is similar to one seen during the global financial crisis, according to analysis by National Bank of Canada.

Commercial property represents about 10 per cent of the loan portfolios of Canada’s six largest banks, surpassed only by residential mortgages. In a 2008-style scenario, that exposure could force them to set aside about $6.3 billion in provisions for credit losses to the commercial real state sector, analyst Gabriel Dechaine calculated. 

“Office exposures are the primary source of investor concerns,” Dechaine wrote, since occupancy rates are hovering around 50 per cent as many workers continue to spend large amounts of time at home. Gross impaired loans on commercial property are already on the rise — jumping by 8 basis points to 0.41 per cent during the fiscal first quarter ended Jan. 31, the analyst said.