Rising consumer debt has left Canadians as well as the banks vulnerable to economic shocks, but some banks are better protected than others, says Moody’s Investors Service.
The biggest single asset on the balance sheets of the big banks is residential mortgages.
While all the banks have taken advantage of insurance from the Canada Mortgage and Housing Corp., some of them remain heavily exposed to potential defaults.
According to Moody’s, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.
Consumer debt especially home loans has been steadily increasing for the past decade as Canadians took advantage of low interest rates and availability of mortgage insurance.No doubt has household credit exploded in the past decade.
“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Moody’s analyst David Beattie, the author of the report. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”
Total household debt has exploded by 135% between 2000 to 2010.
Mortgage debt has exploded by 131% between 2000 to 2010.
Consumer debt has exploded by 146% between 2000 to 2010.
This is at a time when the average weekly wage increased by 30%.
“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Moody’s analyst David Beattie, the author of the report. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”
If Canadian banks have any uninsured loans from over indebted Canadian consumers, it does not take a rocket scientist to figure out that the banks will take a hit. The good thing for the banks is that most of the loans are insured, but because they are insured by the taxpayer, guess who will pay if there are any substantial defaults by Canadian consumers?
The CMHC-insured borrowers will pay, of course! Banks, suffering losses on the uninsured stuff, will merely raise rates on the insured loans, to make up the losses and to keep profitability intact.
ReplyDeleteOf course, this nukes the housing market, and causes a death spiral at the CMHC....but that was a foregone conclusion to their irresponsibility.
Canadian Imperial Bank of Crack!
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