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There is no question a significant slowdown could put more at risk than the banks’ mortgage portfolios, says Jason Mercer, an assistant vice-president at Moody’s Investors Service who penned a report in June that pegged losses in a severe housing downturn at close to $12 billion for the country’s seven largest lenders including the big banks.

Mercer said Monday that any scenario that leads to a household “cash flow shortage,” such as a rapid rise in unemployment, would trigger a “hierarchy of credit sacrifice” with mortgages at the end of the line.

“Credit cards and autos would go first,” he said, adding that credit card debt is unsecured, which provides less recourse for banks.

The whole consumer credit picture is on the minds of analysts when they assess Canada’s big banks, and anything that could trigger widespread unemployment, even regionally, is closely watched because of the impact of unemployment on unsecured credit and other debt that isn’t backed by government guarantees.

This week, as bulk of the major banks report earnings, the focus is expected to be on the performance of the energy portfolios. Several banks took larger provisions for energy-related losses in the second quarter as a result of persistent low oil prices. And though sequential performance is expected to be somewhat flat, year-over-year comparisons should reflect the tough environment.

Analysts will also be watching how the banks respond to expected tighter net interest margins, which reflect the difference between the cost at which they lend and borrow money, and how they might cut costs to protect their bottom lines.

In a report late last week, Barclays analyst John Aiken noted that the spread between the government Canada’s two-year and 10-year bonds is “the narrowest it has been since the financial crisis,” which is bound to put pressure on the banks’ margins.

The reporting season will be capped off next week by Bank of Nova Scotia, which releases earnings on Aug. 30.

Financial Post

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