May 11, 2017 / 3:38 PM / 2 years ago

Canada bank downgrade rings alarm bells on consumer debt, housing

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.

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

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

CIBC led the losses, falling C$1.31 to C$107.25, while National Bank declined 95 Canadian cents to C$53.21.

The downgrade also weakened the Canadian dollar in early trade, adding to concern about depressed oil prices and a more uncertain trade outlook with the United States, though the loonie regained ground to C$1.3691 to the U.S. dollar, or 73.04 U.S. cents, by late morning.

Elevated consumer debt and imbalances in the housing market have been repeatedly cited as the most important vulnerability in Canada’s financial system by the central bank, and signs of cooling in Toronto and Vancouver have sparked fears that the correction could be uneven.

Household debt has risen to record levels in recent years, with Canadians owing C$1.67 for every dollar of disposable income in the fourth quarter of 2016.

Still, mortgage defaults and delinquencies remain low despite the high level of household debt, with official interest rates near historic lows and employment growing.

“We haven’t seen loan losses tick up or anything that’s really deteriorating right now,” said Manash Goswami, portfolio manager at First Asset Investment Management Inc, which owns shares of TD, Royal Bank, and Scotiabank. He added that the downgrade did not affect his position on the banks.

“Right now, we’re not very concerned, given strong capital positions,” Goswami said. “Earnings growth might slow down but we don’t think it’s necessarily going to fall off a cliff.”

Executives at the six big banks have long said their mortgage lending has been prudent, and all high-ratio mortgages are insured by the federal Canada Mortgage and Housing Corp or private companies Genworth MI Canada and Canada Guaranty, insulating the banks from defaults.

(This version of the story has been corrected to add that some mortgages are insured by private companies, in last paragraph)

Additional reporting by Leah Schnurr and David Ljunggren in Ottawa and Solarina Ho and Fergal Smith in Toronto; Editing by Dan Grebler

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