Thursday, August 30, 2012

Canada's consumer leverage growth is not going to end well

Canada continues to face rising consumer debt levels. Since the post on Canadian housing risks (here), we've gotten a number of comments that Canada's housing is not overpriced (for example if measured in terms of gold). And since there is no "subprime lending" in Canada, consumer debt is not a problem because delinquencies will stay low.

The authorities have since taken some steps to curb potential housing speculation (see discussion). But it seems that Canadian consumers have caught the US debt bug as consumer leverage becomes an increasing concern - particularly for BoC (the central bank). And it's not just about mortgages.
The Epoch Times: - The average non-mortgage total debt of Canadian consumers rose once again last quarter, continuing the trend of the highest debt levels seen to date.

According to a report by credit analysis company TransUnion, the average consumer’s total debt (excluding mortgages) rose by $192 in the second quarter of 2012 to $26,221, a 0.74 percent increase compared to the previous quarter, and a 2.41 percent rise compared to the same quarter last year.

Auto loan debts had the highest rate of increase compared to other credit products, with a rise of 13.25 percent compared to Q2 last year, and 3.67 percent compared to Q1 this year. The average credit card borrower debt declined by 0.93 compared to the same quarter last year, but increased by 2.7 percent compared to the previous quarter this year. Lines of credit and installment loan borrower debts also increased in Q2 2012 by 0.4 percent and 0.95 percent compared to Q2 2011, and 1.13 percent and 2.37 percent compared to Q1 2012, respectively.
Canadian consumer leverage - debt as percentage of personal disposable income - has now far outpaced that in the US, as Americans continue the deleveraging trend (discussed here).

Source: BNP Paribas
At the same time Canadian banks, who pride themselves on being quite resilient in the face of the financial crisis in 2008, are really enjoying this demand for consumer lending products. Canadian banks' profits are soaring and they are increasing dividends.
Bloomberg/BW: - Royal Bank of Canada, Toronto- Dominion Bank and Canadian Imperial Bank of Commerce raised their dividends after reporting third-quarter profits that beat analysts’ estimates on consumer lending.

Royal Bank, the country’s biggest lender, said profit for the period ended July 31 rose 73 percent to a record C$2.24 billion ($2.26 billion). Toronto-Dominion, the second-biggest bank, said net income climbed 14 percent to C$1.7 billion, or C$1.78 a share, while CIBC said profit rose 42 percent to C$841 million, or C$2 a share.

The three Toronto-based lenders join Bank of Montreal (BMO) and Bank of Nova Scotia (BNS) in raising dividends this week as gains in consumer lending and higher trading revenue helped the world’s soundest banks report earnings that topped estimates.
All this is happening at the time when the global slowdown and declining demand for resources (which is Canada's strength) are threatening to dampen Canada's economic growth. The combination of rising consumer leverage and easy profits in the banking system (remember the good old days in the US?) have the makings of a potentially nasty economic downturn for Canada.
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