S&P negative outlook on Canadian banks forecast rises
By Bruce A Stewart
Canadian banks are the strongest in the world, right?
Compared to the mess you see in most other countries, yes.
Compare to a standard of prudence, on the other hand, there’s some reasons to be concerned.
Standard & Poor’s, one of the three ratings agencies that judge credit quality, reaffirmed the current ratings of Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Banque Nationale du Canada, Laurentian Bank of Canada, Home Capital Group (which operates as Home Trust) and the Central 1 Credit Union (which acts as the exchange agent for BC and Ontario’s credit unions) but downgraded the outlook to negative, warning of probable trouble ahead.
The reason? Too much debt of worrisome quality. Too many home ownership lines of credit (HELOCs), too many high leverage mortgages, too many credit card balances where only minima are being paid.
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Here’s how the system works: the banks are constantly issuing debt investments — bonds and preferred shares — to raise capital for lending. We borrow far more than our deposits alone could support.
The interest demanded to sell these goes up and down based on the perception of risk, both in the markets as a whole (if an investor can get 7% buying a bond from Citibank or Barclays, why buy a 5% one from CIBC?), and at that institution (if VanCity, Envision, Coast Capital and other BC credit unions are chock-a-block already with mortgage debt and HELOCs in a real estate market that the air is coming out of, why would Central 1 Credit Union’s debt be likely not to suffer defaults).
Debt can still be bought — ask the Greeks and Spaniards, there’s a price for everything — but the bank has to offer more interest to place the paper.
That, in turn, gets passed on. Your mortgage renews at a higher rate. Your variable rate goes up. Credit cards get tightened: the interest rate rises even with a one day late payment.
Some debt, too, will be called. Bankers are only brain-dead when times are good and anyone with a pulse can get credit. Once rates start to rise and things turn downward, they’re analysing every business loan, every callable loan, every credit line for the ones at risk, and making sure that if anyone’s going to trigger this borrower’s trouble it’s going to be them. “Front of the line” and all that.
So mortgages not only go up in price — they get harder to get. HELOCs get squeezed. Credit card interest rates rise (Americans pay as much at 35% now on a Visa or Mastercard thanks to the troubles there in 2008).
Most of all, lending to business gets curtailed, so more jobs are put at risk.
If you take a look at debt accumulation in Canada during the last ten years, it wasn’t just our profligate, deficit-loving governments racking it up.
We all did. Canadians have out-borrowed people in Europe, in the United States, in Australia.
We live in a country where over 30% of the economy’s production of goods and services goes to exports. In other words, our prosperity is deeply tied to the world’s prosperity.
The global forecast? Storm clouds, no growth, falling demand.
S&P put our banks’ willingness to lend, lend, lend to us — well, it is where their massive profits come from! — together with that and warned accordingly.
As always, interest rates aren’t set in Ottawa. Act accordingly.