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Canada’s consumer leverage growth will not end well

By Sober Look

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 for 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.

About 

Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education. Follow him on his blog or twitter.

1 Comment

  1. David_Lazarus says:

    There will be comments from Canadian banks saying that things are different or that we do not have the systemic problems of US banks. Though ultimately they will be proved wrong. It is just a matter of time. For months there have been comments about the strength of the Canadian housing market. Probably all funded with credit rather than equity. More than a couple of years ago there were misgivings about the quality of lending by Canadian banks. It might take some time for the cracks to widen for the majority to see but they are all there already.