Ballooning debt ratio poses risk, report says

Tue Feb 3, 2009 6:57pm EST
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OTTAWA (Reuters) - Canadians now carry more debt as a percentage of their disposable income than American consumers, according to a report released on Tuesday, posing new risks for lenders and challenging Canada's reputation for financial prudence.

The ratio of debt to disposable income has increased to more than 130 percent, the Deloitte & Touche consulting group report said. It is a troubling sign for Canadian banks, which have seen their credit card balances increase by almost 40 percent since 2004, it said.

The global credit crunch in placing unprecedented stress on Canadian credit card companies, which could ring up similar losses to their U.S. counterparts, the report warned.

The message is in stark contrast to the opinion of analysts at rating agency DBRS in October. At that time, the Toronto-based agency said Canadians tended to rack up less card debt than their American counterparts, paid it back more consistently and avoid delinquency, making for a stable domestic credit card market.

Credit card executives interviewed for the report said that starting in October and November 2008 delinquencies jumped 5 to 10 percent. That resulted in more writeoffs and losses, which could surpass C$800 million ($645 million) for the sector annually, the report calculated.

Traditional loss rates for Canadian credit card issuers are less than 4 percent, well below the U.S. rate of 6 percent, the report said.

Credit card losses are seen as a harbinger to further defaults, with Canadian consumers likely to default on cards before their mortgage payments.

Lenders need to increase customer reviews and tighten restrictions to protect against losses, the report said.

Accounts with heavy cash advance activity should be closely monitored, for example, because of the high correlation between the percentage of a credit line being used and the likelihood of default.

($1=$1.24 Canadian)

(Reporting by Susan Taylor; Editing by Frank McGurty)