UPDATE 2-Canada to phase out special capital treatment of deferred loan, premium payments

(Adds portfolio manager comment, share prices)

TORONTO, Aug 31 (Reuters) - Canada’s financial regulator said on Monday it will begin reversing some of the measures adopted at the onset of the coronavirus pandemic to ensure adequate liquidity, adding to challenges facing financial firms as other government aid programs wind down.

The Office of the Superintendent of Financial Institutions (OSFI) said it will begin phasing out the measure introduced in March and April to treat deferred loan and premium payments as performing loans. All deferrals approved from Oct. 1 will be considered non-performing, it said in a statement.

The timing could make for a tougher environment for financial companies over the next few quarters, as accommodations for workers and businesses also end, said Bryden Teich, portfolio manager at Avenue Investment Management.

“What lies ahead is a much more normal recessionary environment,” Teich said.

Even so, he said, “The more things can go back to normal... the better it will be. The longer these things go on for, the more distortion they can lead to.”

The Canadian financials index lost 1.3% on Monday, compared with a 0.9% decline in the Toronto stock benchmark .

Last week, most Canadian banks reported better-than-expected quarterly profits, but lenders warned of an increase in loan impairments ahead.

The OSFI decision “will ensure that reporting requirements remain accurate in reflecting credit risk,” OSFI said in a statement.

Deferrals granted before Monday will remain eligible for the special capital treatment for six months, while those approved between Aug. 30 and Sept. 30 will be treated as performing for three months, OSFI said.

OSFI also said it is lifting a temporary freeze on portability transfers for private pension plans, which allow members to transfer the total value of amounts accrued when they leave a plan. (Reporting by Nichola Saminather; Editing by Steve Orlofsky and Leslie Adler)