Con­sumer credit qual­ity ‘un­der threat’

Con­cern over credit cards, auto loans, mort­gages

National Post (Latest Edition) - - FP INVESTING - Ge off Zo chodne Fi­nan­cial Post gzo­chodne@ na­tion­al­post. com

TORON TO • Cana­dian banks are see­ing the cred­it­wor­thi­ness of their cus­tomers be­sieged by ex­ter­nal forces, ac­cord­ing to Moody’s In­vestors Ser­vice.

“The strong credit qual­ity of Cana­dian con­sumer loans, thanks largely to record low un­em­ploy­ment in re­cent years, is un­der threat on sev­eral fronts: debt- ser­vic­ing costs are in­creas­ing be­cause of in­ter­est rate hikes, the pro­por­tion of riskier unin­sured mort­gages is on the rise, and longer auto loan terms point to greater bor­rower vul­ner­a­bil­ity,” Moody’s said in a re­port re­leased Tues­day.

But the rat­ings agency said that the real har­bin­ger is un­se­cured credit card port­fo­lios, pre­dict­ing that “the first bite” into the as­set qual­ity of the banks would be taken out of that area.

“Banks will have higher losses on credit card de­faults be­cause the loss given de­fault is higher than se­cured forms of lend­ing, but the card port­fo­lios of rated Cana­dian lenders are small,” the re­port said. “Credit cards lack sup­port­ing col­lat­eral and have a lower re­pay­ment pri­or­ity than res­i­den­tial mort­gages or auto loans; there­fore, credit card loan losses tend to oc­cur be­fore, and are more se­vere, than for other forms of con­sumer lend­ing.”

The re­port was re­leased amid re­cent con­cerns about debt lev­els in Canada, in­clud­ing the Swiss-based Bank for In­ter­na­tional Set­tle­ments sin­gling out the coun­try for el­e­vated risk indi­ca­tors, such as its debt ser­vice ra­tio. Equifax Canada said Mon­day that con­sumers owed $ 1.821 tril­lion as of the fourth quar­ter of 2017.

Moody’s warned that debt ser­vic­ing costs are likely to rise in the af­ter­math of the Bank of Canada’s three rate hikes since last sum­mer, which would put con­sumers in a tight spot in any eco­nomic down­turn.

And while Moody’s said that the cur­rent qual­ity of credit for mort­gages, au­tos and cards re­mains strong, it raised con­cerns about all three ar­eas.

In home loans, Moody’s said bor­row­ing had skewed more to­wards unin­sured mort­gages, in­clud­ing home eq­uity lines of credit, which the com­pany said was “a di­rect re­sult” of the Cana­dian gov­ern­ment’s moves to try to tame the hous­ing mar­ket.

“The pro­por­tion of unin­sured mort­gages, in­clud­ing home eq­uity lines of credit, has in­creased to 60 per cent from 50 per cent five years ago, with an in­ter­est rate re­set loom­ing,” said the agency. “And al­most half of out­stand­ing mort­gages will have an in­ter­est rate re­set within the year, which will in­crease the strain on house­holds’ debt- ser­vic­ing ca­pac­ity.”

In auto loans, Moody’s said the longer terms were a sign of ris­ing risk.

“Longer con­sumer au­toloan terms in­crease ‘ neg­a­tive eq­uity’ – the amount by which the re­main­ing loan bal­ance ex­ceeds the col­lat­eral value — be­cause ve­hi­cle val­ues fall faster than the loan is re­paid,” said the re­port. “This short­fall is of­ten rolled into the ini­tial bal­ance of a new car loan, com­pound­ing the neg­a­tive eq­uity and credit risk.”


Credit cards are the first debt sec­tor in which de­faults oc­cur as rates rise, says Moody’s In­vestors Ser­vice.


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