Growing debt and higher interest rates will impact credit quality, institutions warn
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Canada’s mountain of consumer debt is garnering multiple alarms about the threat to the country’s banks.
Moody’s Investors Service joined the Bank for International Settlements and S&P Global Ratings, which have all warned in the last month that Canada’s banking system, dominated by 5 giants, is facing a growing threat of soaring consumer loans amid rising interest rates.
The country’s ratio of household debt to disposable income reached a record 171% in the 3rd quarter of last year. The proportion of uninsured mortgages has increased to 60% from 50% five years ago, including home equity lines of credit, amid government efforts to reduce taxpayer exposure, according to a Moody’s report released earlier this week.
Almost half of outstanding mortgages, many of them on fixed-rate terms, will have an interest-rate reset within the year, increasing the strain on households’ debt-servicing capacity, Moody’s said.
Read more: Consumer debt hits $1.8trn in 2017 – Equifax
Further aggravating the situation are auto loans which are getting offered at terms as long as 68 months, Bloomberg reported.
However, it’s the unsecured credit-card portfolios that will be the first to feel the pinch as their repayment tends to have lower priority for financially strapped borrowers, Moody’s warned.
All of these consumer loans have so far performed well in Canada as the country boasts the lowest unemployment rate in four decades. The arrears rate is only 0.24% for residential mortgages, 7 basis points below the 10-year average, while the auto-loan delinquency rate is only 1.5%, Moody’s said. Canadian banks have also earned a reputation of being well-managed, conservative institutions after passing through the global financial crisis relatively unscathed.
The warning from Moody’s came after the Bank for International Settlements placed Canada among the economies most at risk of a banking crisis, alongside Hong Kong and China. S&P Global Ratings last month lowered a key risk metric for Canadian banks after evidence of mortgage fraud.
The Bank of Canada held interest rates steady this month after increasing them 3 times since the middle of 2017. The central bank said it will continue to monitor the economy’s sensitivity to higher rates.
