Consumers almost tapped out on borrowing
Bankers expect loan growth to ebb as households cut back
TORONTO — Canada’s biggest banks say consumers are reaching the limit on how much they can afford to borrow, and that’s likely to slow loan growth this year.
Royal Bank chief executive Gord Nixon said Tuesday he expects Canadian households will begin to show more restraint.
“In terms of pure consumer lending (growth), we’ll probably be operating at a much lower rate than we have been over the last few years,” he told a bank industry conference.
“There’s no question that the consumer has been leveraged up.”
Canadians have taken advantage of low interest rates for years by borrowing record amounts that could leave them vulnerable.
Policy-makers have expressed concern that a sudden rise in interest rates would leave many consumers unable to meet their payments, potentially causing a fallout that ripples through the housing market and consumer spending.
Statistics Canada reported last month that household debt touched an all-time high during the third quarter of 2013, inching up 0.6 percentage points to 163.7 per cent over the summer months. The increase means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.
Nixon said he expects consumer lending growth to remain tight, rising by mid single-digit levels, for “an extended period of time” after several years of double-digit increases.
“What would be the most healthy outcome for the marketplace is for there to be a steady, orderly increase in interest rates to a reasonable level,” he said.
A slower increase in the debt levels of Canadians would help shift away from a dependence on the consumer for overall economic growth, said Bank of Montreal CEO Bill Downe.
He expects U.S. business loans will become a more dominant force in the banking industry this year. BMO could gain a share of that growth through the presence of its Harris bank in the U.S. Midwest.
“We’re going to benefit from continued strong commercial and industrial loan growth and I think that’s going to spill over into Canada,” he said.
Downe said as consumers borrow less they will focus on financial planning, like saving for retirement, which will help grow its wealth management business.
While Canadians may take on less debt in the future, more of them will be struggling to pay off overdue bills rather than saving for the long term, a new survey of risk professionals in the financial services industry suggested.
A poll from credit score analysis firm FICO said 32 per cent of respondents expect credit card delinquencies will rise over the next six months. About 60 per cent of bankers expect average credit card balances to go up, with much of the debt likely to come from unpaid auto loans.