As the economic downturn continues, lenders expect increases in their non-performing loan levels and in their credit risk exposure. Delinquencies and defaults on mortgages, loans, credit cards, and other forms of consumer borrowing tend to spike during economic instability.
Ultimately, loan performance will depend on the job numbers, which in turn hinge on the shape and speed of the economy's rebound. Whether that recovery looks like a "U", "V", or "L", the economy will take time to return to its pre-crisis 5.5% unemployment rate. Canadian banks have set aside billions of dollars in loan-loss provisions.
When opportunity knocks
The credit risk triggered by the COVID-19 outbreak is an opportunity for financial services organizations to bolster their core practices and values.
This opportunity may require a balancing act. On the one hand, risk appetites may wane among lenders. At the same time, the COVID-19 crisis has underlined the critical role of financial services in the Canadian economy. Canadians—and their governments—are looking to financial services for support during this crisis. It is an opportunity to strengthen customer relationships.
Opening the door
To fully assess their credit risk, financial services organizations should conduct a detailed loan portfolio review. This review will identify not only current vulnerabilities but also potential areas of weakness for the future. In a fast-changing economic crisis, spotting these scenarios in advance can save time. The loan portfolio review often teases out trends from which to extrapolate.
Moving forward, financial services organizations should also take this opportunity to reaffirm their credit due diligence and assess their control systems.
As a group, these steps will help organizations develop a risk baseline as they prepare to shoulder a critical load in the recovery of the Canadian economy.