Canadian banks face ‘significant’ risk, report states

‘Employment shock’ poses vulnerability

TORON TO • The percentage of money that Canadian consumers owe relative to their disposable income may have levelled off last year — but the amount borrowed and the way it was borrowed continue to cause concerns, according to Moody’s Investors Service.

“Canadian consumers continue to repay their debts, but remain highly vulnerable to an employment shock, posing significant asset risk to banks in an adverse economic scenario,” says a report from the credit-rating agency, released Thursday.

The level of Canadian consumer debt that’s outstanding “stabilized” at 174 per cent of disposable income in the last three months of 2018, the report says. Furthermore, unemployment is hovering near a 40-year low at 5.8 per cent, helping to keep borrowers from defaulting on their loans, according to Moody’s.

However, the credit-rating agency notes that higher interest rates helped increase the amount of that disposable income going towards paying down debt, hiking it to 14.5 per cent in the fourth quarter of 2018 from 13.7 per cent in 2013.

Mortgage payments rose to 6.6 per cent of disposable income in the fourth quarter, up from 6.1 per cent five years ago.

“Meanwhile, the proportion of riskier uninsured mortgages continues to rise, increasing asset risk for the largest eight Canadian mortgage lenders,” the report adds.

There are also signs that some consumers, facing higher mortgage costs, are agreeing to “longer term manufacturer-subsidized auto loans” with lower payments.

“A s vehicles depreciate each year, longer-term loans result in higher rates of 'negative equity’ where the value of the vehicle is less than the amount of loan principal,” the report says.

The latest from Moody’s comes as the Canadian economy has shown some signs of stalling. Job growth surprised to the upside in Feb- ruary, but economic growth slowed to 0.1 per cent for the fourth quarter of 2018.

In announcing it was holding its key policy rate at 1.75 per cent earlier this month, the Bank of Canada had said the slowdown in the last three months of the year “was sharper and more broadly based” than had been expected.

This could spell some trouble for Canada’s big banks, which still derive much of their business from their home market.

Moody’s report showed that Canada’s Big Six banks still control the majority of the mortgage market in the country, albeit maybe not as much as they used to.

“Smaller lenders have gained market share in residential mortgage lending over the past two years; the largest six banks’ share has fallen almost 1 per cent to just under 69 per cent at the end of 2018,” the report says.

Other banks, such as the Canadian arm of HSBC Holdings Plc, have managed to grow their share of the mortgage market to 6.4 per cent in 2018 from 5.4 per cent in 2016.

The overall mortgage market grew at an annual rate of just over three per cent last year, Moody ’s notes.

“Policymakers have taken a number of macro-prudential measures to slow house-price appreciation in Canada, including stresstest-based mortgage adjudication for banks and reduced availability of governmentsponsored default insurance,” the report says. “The recent price growth moderation in Toronto and Vancouver suggests this is having the intended effect.”