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Canadian banks credit quality under strain says Moody's report

The Bank of Canada has hiked rates three times since last July. The next rate hike is expected to come after July.


Reuters 13 Mar 2018, 07:36 PM Canada
Canadian banks credit quality under strain says Moody's report
  • Moody’s said longer auto loans flag a growing risk as vehicle values fall faster than the loan is repaid. (Image Credit: Twitter)

Rising interest rates along with strong job growth have led to more uninsured mortgages and longer tenure of car loans, putting a strain on the lending quality of Canadian banks, Moody's Investor Service said in a report released on Tuesday.

"Almost half of the outstanding mortgages will have an interest rate reset within the year, which will increase the strain on households' debt-servicing capacity," analyst Jason Mercer wrote in a report.

The Canadian economy added 15,400 jobs in February. On a year-over-year basis, employment rose by 282,500, or 1.5 per cent, according to data from Statistics Canada.

The Bank of Canada has hiked rates three times since last July. The next rate hike is expected to come after July.

The proportion of uninsured mortgages, including lines of credit for home equity, has risen to 60 per cent this year from 50 per cent five years ago, the credit rating agency said.

An average Canadian household owed a near-record USD 1.35 for every dollar of disposable income in the first quarter last year, mainly because of mortgage debt.

Insured mortgages in Canada have been on the decline due to the country's decision to restrict supply and increase premiums.

Moody's added that as debt-to-income levels rise, the banks will feel the impact on its unsecured credit card portfolios first and hurt the asset quality.

Credit card loans require no supporting collateral and have a lower repayment priority for financially strapped borrowers, making the losses on such loans more severe compared to losses on consumer lending, Moody's said.

Moody's said longer auto loans flag a growing risk as vehicle values fall faster than the loan is repaid.

"This shortfall is often rolled into the initial balance of a new car loan, compounding the negative equity and credit risk," Moody's said.

More than 2 million vehicles were sold last year in Canada, the highest ever in a year, and vehicles sales continue to be on the rise so far this year compared with a year earlier.