Despite a challenging economic backdrop, Canada’s major banks continue to deliver decent results, underscoring the strength of their oligopolistic market structure and operational discipline. Yet, beneath the surface of earnings beats and dividend hikes, a growing undercurrent of risk is emerging — particularly in the housing market.

We’ve noticed that the phrase “cautiously optimistic” has become a staple in the forward guidance of Canadian banks in 2025. While earnings remain robust, management teams are clearly aware of the mounting pressures facing consumers and the broader economy. The banks’ ability to maintain profitability is largely thanks to their scale, pricing power, and relentless focus on what they’ve been calling “operational efficiencies.” These advantages have allowed them to weather rising credit costs and margin compression better than many global peers.

However, there is a looming risk that we’re keeping a very close eye on: Ontario’s real estate market. According to Equifax, the province’s 90-plus-day mortgage delinquency rate surged by 71.5 per cent year-over-year in the first quarter of 2025, the highest level since mortgage tracking began in 2012. In total, 1.4 million Canadians, or roughly 1 in 22, missed at least one credit payment during the quarter. These figures point to a growing strain on household finances, particularly in regions where home prices and debt levels soared during the pandemic.

The situation is further complicated by what the Bank of Canada has dubbed the “mortgage renewal wall.” About 60 per cent of all outstanding mortgages in Canada are set to renew in 2025 or 2026. Many of these loans originated during the pandemic at historically low fixed rates, often below two per cent. Even with recent rate cuts, renewal rates remain in the four to five per cent range.

The impact on borrowers could be significant. A February Royal LePage survey indicated that 57 per cent of renewing mortgage holders expect higher monthly payments, with 22 per cent anticipating a substantial increase. Alarmingly, 81 per cent of those facing higher payments say they will experience financial strain, and 34 per cent describe it as “significant.” This wave of refinancing risk could lead to further delinquencies and a potential softening in home prices, especially in overheated urban markets.

And it’s not just Ontario. British Columbia is showing signs of a sluggish market as well.

In Metro Vancouver, inventory levels have surged to some of the highest in more than a decade, with more than 15,000 listings in April alone. Realtors are reporting that buyers are hesitant, and properties are sitting longer on the market. Sales are down roughly 24 per cent year-over-year and remain well below 10-year seasonal averages, reflecting a broader buyer hesitation amid economic and political uncertainty. In a telling anecdote, a local signpost company is now offering credits to realtors who return used signposts — because demand for new listings has outpaced supply of signage. According to Equifax, the 90-plus-day mortgage delinquency rate increased in British Columbia by 37.7 per cent year-over-year in the fourth quarter of 2024.

That said, Canadian banks continue to remain a pillar of stability in an uncertain economic environment. Their ability to manage costs, maintain capital strength, and deliver shareholder returns is commendable, especially when viewed against the backdrop of financial volatility. These institutions benefit from a well-regulated financial system, conservative lending practices, and a diversified revenue base that includes retail banking, wealth management, and capital markets.

One of the key strengths of Canadian banks is their disciplined approach to risk management. Even as credit conditions tighten, most banks have proactively increased their loan loss provisions, bolstered capital buffers, and maintained strong liquidity positions. This prudence has helped them absorb shocks from rising interest rates and slowing economic growth without compromising their core operations.

However, not all banks are equally positioned. Institutions with greater international diversification, such as the Bank of Nova Scotia with its Latin American footprint or Toronto-Dominion Bank and Bank of Montreal with their U.S. exposure, may be better insulated from domestic housing market volatility. Conversely, banks with heavier exposure to Canadian consumer lending and real estate, particularly in Ontario and British Columbia, could face more pronounced headwinds.

Investors would be wise to monitor several key indicators in the months ahead.

• International diversification: Banks with earnings streams outside Canada may benefit from more resilient or counter-cyclical markets.
• Credit provisions: Rising provisions for credit losses can signal growing concern over borrower defaults and economic stress.
• Delinquency trends: Watch for changes in mortgage and credit card delinquency rates, especially in provinces with high household debt.
• Housing market data: Inventory levels, price trends, and sales volumes in major urban centers will be critical in assessing the health of the real estate sector.

Ultimately, while Canadian banks are not immune to macroeconomic risks, their structural advantages and conservative management culture provide a strong foundation that hopefully should allow for them to weather the upcoming storm.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.