January 10, 2012 / 9:29 PM / in 6 years

Canada bank CEOs warn on housing, not Europe

TORONTO (Reuters) - Top executives at Canadian banks say they don’t expect Europe’s troubles to spill over into the North American market in a meaningful way, but caution they are concerned about a downturn in the domestic housing market.

“My personal view is I think Europe will find a way to muddle through,” Gordon Nixon, chief executive of Royal Bank of Canada, (RY.TO) said at a financial services conference hosted by his bank.

Nixon’s comments were echoed by Bank of Montreal (BMO.TO) CEO Bill Downe, who called Europe a “tangled ball” of competing interests for two or three years, but one that will likely not balloon into a global crisis.

Nixon and other CEOs allowed that Europe might fall into recession as it works through it sovereign debt crisis, but they pointed to dangers closer to home - notably the booming condominium market - when asked about areas of concern in the Canadian economy.

“There’s no question that if you sort of say which markets are more vulnerable, its going to be condo, and it’s probably going to be condo Vancouver and condo Toronto,” said Nixon, adding that the risks in the business were higher now than a year ago.

The two cities, Canada’s third and first most populous respectively, have experienced a massive surge in condominium building over the past decade, part of a broader housing boom that has been fueled by historically low interest rates.

Government data on Tuesday showed that Canadian housing starts climbed at an annualized rate of 200,200 units in December, higher than expected, helped by soaring condo construction.

While analysts don’t see Canada going through the same kind of housing crash that hit the United States during the subprime crisis, many warn of a real estate bubble that could burst at any moment, sending home prices tumbling.

With consumer debt levels at record highs and plenty of housing capacity on the market, some of the banks have begun taking a more cautious approach to their mortgage business.

“There’s no question that the warning signs around the Canadian housing market have been visible for more than a year,” said BMO’s Downe.

“We’ve been quite focused on ensuring that our underwriting in those sectors was conservative and I think it’s paid off,” he said, referring to the Toronto and Vancouver condo markets.

Nixon said RBC has about C$2 billion ($1.96 billion)in exposure to the Canadian condo market and has run stress tests to judge the impact of a price drop as steep as 25 percent.

WEAK PROFIT GROWTH

Even absent a housing crash, the prospect of a cooling lending market has steeled the banks for what could be a couple of sluggish years of profit growth.

Narrow interest rate margins have made consumer lending - their biggest businesses - less profitable, and relief on that front is likely some time away.

Gerry McCaughey, head of Canadian Imperial Bank of Commerce (CM.TO) said he was concerned that consumer loan growth could fall to zero.

Toronto-Dominion Bank (TD.TO) CEO Ed Clark was more optimistic, but he said the bank will have “work hard” to achieve its annual profit growth objective of 7 to 10 percent over the next two years.

However, he said the financial crisis overall has been a positive for the bank, which has bought up distressed lenders in the United States to build a branch network there that is now larger than its Canadian presence.

“I’d say generally the crisis has turned out to be net quite positive for us right across the board because the crisis took out competitors all across the board. In the U.S. we couldn’t have conceived I think of being as successful as we have been absent the crisis,” he said.

Reporting By Cameron French; editing by Rob Wilson

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