RBC Sees ‘Single-Digit’ Gain in Canada Retail Banking

Royal Bank of Canada sees an extended period of slower growth in domestic consumer lending as Canadians cut debt amid the potential for higher interest rates.

Chief Executive Officer Gordon Nixon said growth will decline significantly from the “double-digit” increases in previous years, when record low interest rates fueled borrowing and helped the nation’s lenders post record profit. The slowdown will last “for an extended period,” particularly if interest rates rise, Nixon said.

“Our expectation is that we will have mid single-digit growth” in consumer lending, Nixon, 56, said today at the Canadian Bank CEO Conference in Toronto, sponsored by RBC Capital Markets. “Interest rates will go up at some point in time and as a result we are probably going to go through a period of slower growth of consumer leverage and debt.”

Canadian banks, ranked the world’s soundest for six straight years by the World Economic Forum, have been weathering a slowdown in Canadian retail lending as the pace of growth slowed while over-indebted consumers reined in borrowing.

Total household credit in November expanded by 4.1 percent from the same month in 2012, less than half the growth of five years earlier, according to Bank of Canada data. The growth of residential mortgage credit fell to 5.1 percent in November from its 23-year high of 13 percent in May 2008, the data show.

“The slowdown on the Canadian side in consumer debt formation is a good thing,” Bank of Montreal (BMO) CEO William Downe, 61, said at the conference. “It’s a shift on the part of the consumer from borrowing and spending to saving and investing.”

‘Slower Rate’

Downe said he’s confident Bank of Montreal can increase domestic mortgages faster than the market average. The bank is well-positioned because of its exposure to commercial lending and ties to the U.S. through its BMO Harris consumer-banking unit, he said.

“We’ll see a moderation, but at a slower rate than competitors,” Downe said.

Canada’s low-interest-rate policies, along with a commodities boom that helped the country escape an economic downturn, created pressures on assets such as real estate and elevated concerns of a housing crisis, according to Toronto-Dominion Bank CEO Ed Clark. Making sure prices don’t get out of control is a big concern, he said at the conference.

“I don’t think it’s going to collapse, but I do think that if you run a bank, you should be worried,” Clark, 66, said. “It’s something we should watch.”

Bank of Canada Governor Stephen Poloz said in an interview last month a rotation of demand from indebted consumers is taking longer than expected and predicted the world’s 11th biggest economy won’t reach full output for two years.

Following the Jan. 10 jobs report, traders increased their bets the Bank of Canada will cut interest rates by the end of the year, according to Bloomberg calculations based on overnight index swaps.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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