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.