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Rising household debt a threat for Canadian banks: Moody’s
The rising trend in household loans is credit negative for the Canadian banking system, says a new report from Moody’s Investors Services, particularly for Canadian Imperial Bank of Commerce, which has relatively high Canadian consumer credit exposures.
“We are concerned that Canadian consumers are relying on low interest rates to support high debt loads,†the ratings agency said.
“The creditworthiness of Canadian banks depends on the continued financial health of the Canadian consumer. While robust growth in consumer credit has driven strong systemwide earnings year-to-date, this trend will be constrained as households reach borrowing limits at the same time the economy shows few signs of anything beyond tepid growth.â€
Last Tuesday, Statistics Canada reported that household debt as a share of personal disposable income rose to a record 150.8% at the end of June. The increase, which leaves the ratio slightly higher than in the United States where it was 148% in the first quarter of this year, is largely due to strong house price appreciation, particularly in Vancouver and Toronto.
While robust growth in consumer credit has driven strong systemwide earnings year to date, this trend will be constrained as households reach borrowing limits at the same time the economy shows few signs of anything beyond tepid growth, Moody’s said. Canadian banks will, as a result, see revenue growth diminish, as the prospect of increased provisions for credit losses looms, the rating agency said.
“Current asset quality trends are benign for the six largest Canadian banks, with a third-quarter 2011 median ratio of non-performing assets to gross loans of 1.01%, a level that remains healthy compared to global peers, Moody’s said. “However, we expect those loss trends to increase as a result of the rising household debt and a possible house price correction.â€
CIBC, is the bank most exposed to the Canadian consumer, with both the largest relative revenue and credit exposures, Moody’s said. National Bank of Canada and The Toronto-Dominion Bank are the next most exposed on the revenue front, while Bank of Nova Scotia follows CIBC in current consumer credit exposure.
“While we continue to view the strong retail franchises of these banks as supporting their current high ratings, the banks face challenges if a combination of housing price corrections, economic/employment downturn or increased interest raes materialize.â€
