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‘Debt Fear’ Means Slower Lending for Canadian Banks

Bank of Canada Governor Mark Carney’s plea for households to cut debt, which surpassed the U.S. for the first time in 12 years, is starting to get through to homeowners like Gary Taitt. That may crimp earnings at the country’s biggest banks.

Taitt, a Toronto realtor, said he plans to cut his C$40,000 ($40,000) credit line at Toronto-Dominion Bank in half and pay off the C$25,000 balance on his CIBC Aerogold Visa this year.

“We try every year,” said Taitt, 46, who shaved C$20,000 off the credit line in 2010. “I’m bound by fear with my debt.”

Taitt is among a growing number of Canadians paring debt, a shift that will pressure lending revenue this year at companies such as Royal Bank of Canada, forcing them to rely on asset management and other products to boost profits.

Annual growth in personal credit lines slowed by more than half to 8.9 percent in November, from 21 percent in August 2009, according to Bank of Canada statistics. Personal loan growth dropped to 11 percent from a July 2009 high of 17 percent. Growth in credit-card balances plunged to 7 percent from a seven-year peak of 23 percent in February 2008.

Inflation-adjusted growth in household credit was the slowest in almost a decade in the third quarter, while the month-on-month increase in October was the smallest in more than 15 years, according to Canadian Imperial Bank of Commerce.

“Credit is slowing down, and I think that people are getting the message,” said Benjamin Tal, a senior economist at CIBC in Toronto. “Banks are a bit more careful.”

Central Bank Warnings

Consumers are curbing borrowing after Carney and Finance Minister Jim Flaherty urged households last year to be wary of taking on too much debt with interest rates poised to rise.

Household debt was a record 148 percent of disposable income in the third quarter, according to Statistics Canada data, exceeding the U.S. level of 147 percent.

Flaherty tightened rules to restrain record household borrowing on Jan. 17, the third time since 2008 he’s used regulatory steps to rein in mortgage borrowing.

Canada will shorten the maximum amortization period for government-insured mortgages to 30 years, from 35 years, and lower the amount homeowners can borrow against their homes.

The efforts are cutting into the most profitable business areas for the lenders. Consumer banking represented about 63 percent of the C$20.5 billion in combined profits at the country’s six-biggest banks last year.

“Credit in 2011 will not be as strong as 2010,” Tal said. “That definitely will have a negative impact on the profitability of banks.”

Stocks Rise

Canadian banks rose today in Toronto Stock Exchange trading, led by Bank of Nova Scotia. Scotiabank rose 97 cents, or 1.7 percent, to C$57.43 at the 4 p.m. close of trading, while Toronto-Dominion rose C$1.15 to C$76.11. Royal Bank rose 65 cents to C$54.33, while Bank of Montreal rose 35 cents to C$58.13 and CIBC rose 79 cents to C$77.06.

Growth for mortgages and personal lending will be about 3 percent to 5 percent for the next two years, down from “high-single-digit” growth in recent quarters, RBC Capital Markets analysts Geoffrey Kwan and Andre-Philippe Hardy wrote in a Jan. 17 note.

“It is slowing down, but we’re coming off lofty levels,” Toronto-Dominion Chief Executive Officer Edmund Clark said during a Jan. 11 conference. “It may be that Canada, having slowed down, is still growing faster than the U.S.”

A consumer lending slump will prompt banks to shift to debt reduction advice, and investment or retirement planning, Cormark Securities Inc. analyst Darko Mihelic said. Banks may also curb branch growth.

Cutting Costs

“The way the banks are responding is by more aggressively seeking wealth management and savings products, and controlling costs,” Mihelic said.

Bank of Montreal, the country’s fourth-biggest bank, is looking for increased commercial lending to make up for weaker demand from consumers.

“The potential for commercial growth to offset what we hope is a plateauing of consumer debt for some period of time ought to keep everything in balance,” CEO William Downe said at the Jan. 11 conference.

The strategy shift may allow the banks to boost profits even as consumer lending slows. Canada’s eight publicly traded banks will have average earnings growth of 12 percent this fiscal year, according to Sumit Malhotra, an analyst at Macquarie Capital Markets. That compares with about 2 percent growth for the year ended Oct. 31.

Subprime Collapse

Canada is attempting to avoid a repeat of the U.S. subprime collapse that was sparked by consumers taking on mortgages they couldn’t finance. Canada’s banks, ranked the world’s soundest for three straight years by the World Economic Forum, had only a fraction of the $1.48 trillion in writedowns and losses recorded by banks and brokers worldwide. Mortgage delinquencies are 0.43 percent of the total in Canada, compared with more than 9 percent in the U.S., according to industry figures from both countries.

“We’re seeing a shift in consumer behavior,” said Lynne Kilpatrick, senior vice president of personal banking at Bank of Montreal. “We are seeing customers shift to less expensive debt products, they’re behaving in a really rational way.”

Canadians had about C$865.7 billion in household debt as of November, according to Bank of Canada. Of that, 60 percent was mortgages, 25 percent credit lines, 7.2 percent from personal loans, and 7 percent from credit cards. That’s more than doubled since 2000, when Canadians had C$349.7 billion in debt, with 70 percent from mortgages.

“When I moved back to Canada three years ago, the one thing I was surprised to find was that Canadians were acting a lot more like Americans,” said Peter Aceto, president and CEO of ING Groep NV’s Canadian banking unit. “The use of consumer credit in general had skyrocketed.”

Banks are paring back lending for overextended Canadians, according to Laurie Campbell, executive director at debt counseling agency Credit Canada.

“There’s been a lot of taps turned off,” Campbell said. “Trying to get consolidation loans or home equity loans, or especially lines of credit not secured on a mortgage, are tougher now.”

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