Moody's: biggest Canadian lenders could deal with housing crash
While increasing household debt and rapidly increasing home prices in Canada demonstrate conditions similar to the US leading up to the financial crisis, significant structural differences between the Canadian and US mortgage markets mean that the largest Canadian banks would be able to absorb the direct effects of a severe housing crisis without incurring catastrophic losses, said Moody's Investors Service.
Over the past decade, Canada's mortgage debt outstanding has more than doubled, with the index of house prices to disposable income increasing 25% in the same period; faster than comparable OECD countries. The country's household debt levels have tracked closely with this increase, raising concerns of overvaluation and over-extended borrowers.
In a new report, Moody's simulated a historic-level mortgage crisis for rated Canadian banks and mortgage creditor insurers, quantifying losses using historical experience in Canada as a base and the US mortgage crisis experience as a severe scenario. Based on the results of its stress testing, the ratings agency said the largest Canadian banks would be able to absorb a major shock in the housing market without incurring catastrophic losses. The rating agency's stress testing assumptions included an overall house price depreciation of 25% in each scenario to simulate collateral value drop, then an additional 10% house price decline in the provinces of Ontario and British Columbia -- two regions that have experienced significant price appreciation over the past several years. The testing did not include consideration of spillover effects of a house price correction.
While the total direct stress to the system could reach losses almost CAD18 billion, Moody's said the banks would be able to generate internal capital to cover losses within a few quarters. While Royal Bank of Canada (Aa3 negative) would suffer the largest absolute loss under Moody's severe stress scenario, Canadian Imperial Bank of Commerce's (Aa3 Negative) capital is most at risk owing to its operational focus on Canadian retail lending.
Moody's noted that the direct negative effects of such a large, wide-reaching housing downturn in Canada is reduced by a number of important structural differences with US mortgage markets, including explicitly government-guaranteed mortgage creditor and lender insurance, lower rates of subprime lending and lower prevalence of "originate-to-distribute" securitization practices.
"Canadian policymakers have made significant structural changes to the market -- some informed by the US example -- that would help contain the effects that a severe housing shock could have on the country's banks," said Moody's Assistant Vice President Jason Mercer.
Though the country's mortgage debt levels have risen significantly, half of the debt outstanding -- nearly CAD700 billion in residential mortgage loans -- are explicitly supported by the Canadian government. Moody's noted that these backstopped loans have historically been of high quality as stable employment and historically low interest rates have helped to stabilize servicing costs relative to disposable income. Further, legally mandated minimum down payments reduce the risk of collateral value declines.
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Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.