Although the recent quarterly financial releases for the largest Canadian Banks show that although in aggregate, gross impaired loans and provisions for credit losses have increased somewhat year over year, most of this can be traced to an acquisition by CIBC. The dominant trend for loan losses in Canada is benign, reflecting a general absence of credit stresses. New issue volume is at record levels, and market liquidity continues to be strong, fed by sizable new sources, including cross-border flows. And Moody’s reports that at the end of the first quarter of 2007 the U.S. speculative-grade corporate default rate fell to its lowest level since April 1997….. For the time being, let the good times roll.
The success of the current market is however accompanied by a potentially troubling pattern, while the supply of ‘B’ and ‘CCC’ rated new issue volume new all-time highs in traded leveraged credit markets, credit spreads have remained flat or have declined. While the significance of this has yet to play out, it is worthwhile noting thatÂ in both the US and in Europe, banks have recorded significant increases in the size of their loan loss provisions.