The latest blockbuster results from the banks were driven to a surprising degree by growth in mortgages and other consumer loans. This was not supposed to happen.
Policy makers and government officials have been warning Canadians for the last several years that they need to stop borrowing and start paying down their already record debt loads in order to avoid a day of reckoning. And for the last several years bank officials have been predicting that loan volumes are about to get a lot smaller.
But according to Moody’s, total loans outstanding continue to grow, threatening the health and stability of the entire economy.
Indeed, “the increasing leverage of the Canadian consumer is an issue that seems likely to persist so long as interest rates remain at record lows,” the rating agency said on Thursday. In other words, officials such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty are wasting their time when they try to persuade consumers to be more prudent.
Statistics Canada reported in June that Canadian household debt to income rose to 152%, the highest level ever, from 150.5% in the previous quarter.
There may come a day that — perhaps because of a sharp rise in interest rates or unemployment — consumers find themselves unable to meet their obligations and the banks get hit by a wave of defaults
The issue is a double-edged sword for the banks because consumer lending has always been a key profit driver for the sector, and it’s been especially important since the financial crisis of 2008 as other businesses such as capital markets and securitization slipped into decline. The danger is that there may come a day that — perhaps because of a sharp rise in interest rates or unemployment — consumers find themselves unable to meet their obligations and the banks get hit by a wave of defaults.
Bank officials have predicted on frequent occasions over the past several years that consumer loan growth is about to turn the corner. But despite such comments and despite efforts by policy makers, it has slowed but it has not gone into decline.
The report by Moody’s analyst David Beattie lists a number of potential catalysts including a decline in the price of commodities such as oil, which is already down 20% in the past year. That could result in reduced investment in Canada’s oil sands, leading to falling employment.
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