Canada bank downgrade rings alarm bells on consumer debt, housing

Thu May 11, 2017 2:41pm EDT
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By Andrea Hopkins

OTTAWA (Reuters) - Concern about Canada's heavily indebted households and hot housing market ratcheted higher on Thursday after Moody's downgraded the ratings for Canada's major banks, sending shares of the lenders lower and weakening Canada's currency.

The ratings agency cited ballooning private-sector debt and unchecked house appreciation as it trimmed the credit ratings for Canada's six largest banks, highlighting the risk of big losses if borrowers get caught in a housing crash.

"Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past," Moody's Senior Vice President David Beattie said.

Canada's household debt-to-income ratio has risen to a record high 167 percent and house prices have more than doubled in the two biggest markets, Toronto and Vancouver, since 2009.

The downgrade is expected to turn banks and investors more cautious about Canada's long housing boom and heady mortgage market, coming just weeks after Home Capital Group, Canada's biggest non-bank lender, faced a sharp withdrawal of deposits after a regulator said it made misleading statements to investors about its mortgage underwriting business.

"We recognize the challenges around housing," Prime Minister Justin Trudeau told reporters in response to questions about the downgrade and high levels of consumer borrowing.

Federal and provincial governments alike have taken steps to crack down on speculation and tighten mortgage lending rules to prevent borrowers from taking on too much debt to get into the expensive housing market as fears of a bubble rise.

Shares of Royal Bank of Canada (RY.TO: Quote), Toronto-Dominion Bank (TD.TO: Quote), Bank of Nova Scotia (BNS.TO: Quote), Bank of Montreal (BMO.TO: Quote), Canadian Imperial Bank of Commerce (CM.TO: Quote) and National Bank of Canada (NA.TO: Quote) fell moderatedly in mid-morning trade, weighing on the Toronto Stock Exchange.   Continued...

FILE PHOTO: Rooftops of houses in the Kitsilano neighbourhood and the downtown core are seen in Vancouver, British Columbia, Canada January 7, 2017.  REUTERS/Chris Helgren