Canada banks seen by S&P as vulnerable if housing stumbles

Mon Jul 30, 2012 2:10pm EDT
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By Andrea Hopkins

(Reuters) - Debt-ridden Canadian consumers and a cooling property market are leaving the country's stalwart banks vulnerable, credit rating agency Standard & Poor's has warned, fanning a growing national debate on whether Canada is facing a U.S.-style housing debacle.

While S&P reaffirmed the high ratings of Canada's biggest banks, it dropped its outlook to "negative" from "stable." It was a shot across the bow for banks still considered among the healthiest in the world but now facing the risks of a pullback in consumer borrowing and a downturn in a booming housing market - reminiscent of the forces that derailed their U.S. rivals four years ago.

The warning to Canada's three largest banks -- Royal Bank of Canada (RY.TO: Quote), Toronto Dominion Bank (TD.TO: Quote), and Bank of Nova Scotia (BNS.TO: Quote), as well as smaller rivals National Bank of Canada (NA.TO: Quote) and Laurentian Bank of Canada (LB.TO: Quote) -- cited rising consumer debut and elevated housing prices in Canada, as well as economic risks abroad.

"In our view, this poses a risk for Canadian banks given the importance of each bank's consumer credit loan portfolio," S&P said in explaining the shift to a negative credit outlook.

While Canadian economists and bank analysts alike agree -- by varying degrees -- that the housing market looks set to cool and consumers are likely to pull back on borrowing when it does, they said the deleveraging will affect the profitability, not the stability, of Canada's big lenders.

"It's not the same as the United States," said Peter Routledge, a banking analyst at National Bank and himself a former analyst at credit rating agency Moody's.

Canadian home prices rose to a third straight record high in June, but a slowdown in the pace of price increases suggested the red-hot housing market was cooling, data showed last week. Consumer debt has also risen to record highs similar to levels reached in the United States prior to 2008, prompting policymakers to rewrite rules in July to make it harder for homebuyers to take on too much housing debt.

While many experts predict indebted consumers will soon have to pull back, the move will hurt bank profits, not their ability to service or pay back loans, Routledge said.   Continued...