Who Wins and Who Loses as Canadian Banks Tighten Lending?


The Bank of Canada released its quarterly Senior Loan Officer Survey a week ago.  It likely slid under the radar of investors getting an early start to the weekend. The news, while not good, wasn’t surprising.

The survey found that Canadian banks are tightening their lending standards, especially in the consumer segment, where higher interest rates have forced financial institutions to scale back their lending for mortgages and other consumer-focused lending products.

“As the level of borrowing costs has risen sharply, our calculations suggest that overall financial conditions in Canada are just as tight as during the global financial crisis,” the Financial Post reported comments made by Stephen Brown, deputy chief North America economist at Capital Economics, in a note to clients.

“That is one reason to expect the economy to struggle this year, even if recent developments such as the jump in consumer confidence seemingly reduce the risk of an outright recession.”

In its Financial System Review – 2023, published earlier this year, the central bank noted that “the reliance of Canada’s large banks on wholesale funding makes them vulnerable (see chart below) to deteriorating conditions in global financial markets. If the cost of wholesale funding were to rise significantly due to a persistent period of global financial stress, it could lead to Canadian banks tightening lending conditions, making it more difficult and expensive for Canadian households and businesses to access credit.”

There will be winners and losers in this type of lending environment.

Among the Winners…

One company that’s already benefiting from higher interest rates and stubbornly high inflation is discount retailer Dollarama (CA:DOL). The discount chain reported healthy revenue and earnings growth in its latest fiscal year, which ended on Jan. 29.

We covered Canadians’ love of the Montreal-based company in March, as DOL stock investors got a dividend boost while the shares remained cheap. They’re still cheap, trading at a forward price-to-earning ratio of 18.7 and price-to-sales multiple of only 1.07x

On the top line, sales grew nearly 17% over last year, with same-store sales growth of 12%. On the bottom line, earnings per share grew more than 26% to $2.76 (All figures in Canadian dollars unless otherwise specified.). The business is so good that Dollarama hiked its quarterly dividend by 28% to $0.071. The annual payment of 28 cents yields 0.34%. Its shares are up 26% over the past 12 months.

“In these inflationary times, with interest rates being so high, a lot of Canadians are feeling the economic pinch, and so Dollarama is looking very much like their salvation,” Ken Wong, associate professor in marketing at the Smith School of Business at Queen’s University, told the CBC in an interview. “Customers believe that Dollarama is going to have lower prices.”

Another possible Toronto Stock Exchange-listed company to benefit is Brookfield Asset Management (CA:BAM), the Toronto-based alternative asset manager.

CEO Bruce Flatt spent a significant portion of his Q1 2023 letter to shareholders discussing the company’s push into direct lending and other credit-focused investment funds. The direct lending strategy will see it originate senior secured loans of $500 million or more to U.S. companies backed by private equity firms.

Although it won’t be lending to Canadian businesses — the Bank of Canada’s survey showed that business lending in Canada remains healthy relative to the U.S. — there is the possibility that some of the loans it makes south of the border are with companies that operate in Canada.

As for the Losers…

Without question, the biggest losers from the banks tightening their lending standards for mortgages and other consumer loans will be companies selling to homeowners and consumer-focused construction businesses such as homebuilders, etc.

There are very few if any, publicly traded homebuilders in Canada. However, one area of real estate that might be affected by belt-tightening is residential real estate investment trusts.

For example, while RioCan Real Estate Investment Trust (CA:REI.UN) owns, manages, and develops retail-focused real estate across Canada, much of its development has been on mixed-use properties with a significant residential component in recent years.

That segment of its business is known as RioCan Living.

RioCan’s Q1 2023 report noted that the division had 2,575 condominium and townhome units under construction as of March 31. These units are expected to generate more than $860 million in revenue over the next four years from sales to homebuyers.

And while 86% of the units at its six active condominium projects are pre-sold, there is the possibility that number could drop should buyer financing fall through as a direct result of tighter lending standards.

Another casualty of the changing lending environment could be Canadian Tire (CA:CTC.A), whose main banner is leaking oil. In Q1 2023, the Canadian Tire brand, which accounted for 58% of the company’s retail revenue in the first quarter, saw its sales fall by 10.0% to $1.93 billion.

Canadian Tire has raised prices over the past 12-24 months to the point where it’s hurting its sales growth. Should fewer people buy homes in the current environment, it’s hard to see its sales engine reigniting soon.

Even Fintel’s Quant models are turning on CTC stock. A week ago, we noted that Fintel’s Value score for the Canadian retailer’s stock was 85.13. As of this writing, that score has slipped to 80.13. The proprietary scoring model ranks companies based on their relative valuation. Scores range from 0 to 100, with 100 being the most undervalued.

This article originally appeared on Fintel

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