‘Unprecedented’ debt levels could test the strength of Canada’s big banks
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As investors follow the newest quarterly earnings announcements from Canada’s big banks, one ratings agency warns that their dominance in the credit-card market could put them at risk.
According to Jason Mercer of Moody’s Investor Services, the five largest banks in Canada cumulatively make up approximately 70% to 85% of the Canadian credit-card market, reported the Financial Post. That exposure could end up a liability as the housing boom has forced consumer into “unprecedented” levels of debt.
A new report from Moody’s, which Mercer was the lead author on, has highlighted how housing costs have pushed Canadians to the financial brink. In case a downturn happens, it said, the ensuing “cash-flow shocks” would raise the risk of defaults on credit-card debt.
“Consumers are more likely to default on credit cards before their mortgage because they won’t lose an asset such as their house or their car,” Mercer told the Post. Since Canadian banks hold no collateral against credit card loans, he added, banks would have little recourse in dealing with those who default other than to put a black mark on their credit history.
Moody’s anticipates that the next downturn would result in credit-card portfolio losses that are between 50 and 100 basis points higher than the peak charge-offs of 5.8% in 2009 during the previous recession.
“In the event of job loss, consumers will not only prioritize mortgage and other loan payments, but may also increase their credit card borrowing to pay the bills until they find another job,” the Moody’s report warned.
The agency added that rising interest rates could lead to higher servicing costs for refinanced mortgages, which can cause homeowners to further deprioritize credit-card payments.
International organizations and ratings agencies have flagged Canada’s growing debt levels before. Based on a key credit-to-GDP measure used by the Bank for International Settlements, Canada is among several developed countries vulnerable to a financial crisis. Moody’s noted that as of March 31, Canadians owed $1.69 for every dollar they earned — nearly twice the level of debt they carried 30 years ago.
The Moody’s report indicates that problems from high household debt will develop differently across different regions. Steep house-price increases in Toronto and Vancouver have made consumers in those areas particularly vulnerable to cash-flow shocks. Meanwhile, there are hints of rising delinquencies in consumer-debt portfolios in Alberta and Saskatchewan, which were hit hard by plunging oil prices in recent years.
But Canadian banks could have some insulation against potential economic blows. According to the ratings agency, credit cards make up only 5% of the big banks’ consumer loan portfolios, and they tend to charge higher fixed interest rates on credit cards compared to counterparts in the US.
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According to Jason Mercer of Moody’s Investor Services, the five largest banks in Canada cumulatively make up approximately 70% to 85% of the Canadian credit-card market, reported the Financial Post. That exposure could end up a liability as the housing boom has forced consumer into “unprecedented” levels of debt.
A new report from Moody’s, which Mercer was the lead author on, has highlighted how housing costs have pushed Canadians to the financial brink. In case a downturn happens, it said, the ensuing “cash-flow shocks” would raise the risk of defaults on credit-card debt.
“Consumers are more likely to default on credit cards before their mortgage because they won’t lose an asset such as their house or their car,” Mercer told the Post. Since Canadian banks hold no collateral against credit card loans, he added, banks would have little recourse in dealing with those who default other than to put a black mark on their credit history.
Moody’s anticipates that the next downturn would result in credit-card portfolio losses that are between 50 and 100 basis points higher than the peak charge-offs of 5.8% in 2009 during the previous recession.
“In the event of job loss, consumers will not only prioritize mortgage and other loan payments, but may also increase their credit card borrowing to pay the bills until they find another job,” the Moody’s report warned.
The agency added that rising interest rates could lead to higher servicing costs for refinanced mortgages, which can cause homeowners to further deprioritize credit-card payments.
International organizations and ratings agencies have flagged Canada’s growing debt levels before. Based on a key credit-to-GDP measure used by the Bank for International Settlements, Canada is among several developed countries vulnerable to a financial crisis. Moody’s noted that as of March 31, Canadians owed $1.69 for every dollar they earned — nearly twice the level of debt they carried 30 years ago.
The Moody’s report indicates that problems from high household debt will develop differently across different regions. Steep house-price increases in Toronto and Vancouver have made consumers in those areas particularly vulnerable to cash-flow shocks. Meanwhile, there are hints of rising delinquencies in consumer-debt portfolios in Alberta and Saskatchewan, which were hit hard by plunging oil prices in recent years.
But Canadian banks could have some insulation against potential economic blows. According to the ratings agency, credit cards make up only 5% of the big banks’ consumer loan portfolios, and they tend to charge higher fixed interest rates on credit cards compared to counterparts in the US.
For more of Wealth Professional's latest industry news, click here.
Related stories:
RBC releases Q3 earnings results
Dividend slashing a last resort for banks: Moody’s
