A warning about long-term car loans from Canadian regulators is credit negative for the banks, as it signals a greater risk of credit defaults, says New York City-based Moody’s Investors Service in a new report published on Monday.
Last week, the Financial Consumer Agency of Canada (FCAC) issued a report warning about an increase in auto loans with negative equity at Canadian banks due to longer terms and frequent refinancings.
See: FCAC raises concerns about longer car loans
The warning is “credit negative for Canadian banks because negative equity increases auto loan defaults and default losses,” the Moody’s report says.
Auto loan growth has outpaced other forms of consumer debt, such as residential mortgages and credit card debt, at the big six banks since 2005, Moody’s notes.
“A combination of low interest rates and longer loan terms encourage consumers to purchase more expensive vehicles, leaving many consumers exposed to the risk of overextending their finances and increasing their debt burden,” the Moody’s report says. “In the event that consumer delinquencies in auto loans rise, negative equity will increase losses to Canadian banks.”
Data on the auto lending of specific banks is hard to obtain, the report notes, but Bank of Nova Scotia, National Bank of Canada and Toronto-Dominion Bank have the largest exposures to loans secured by assets other than residential property, “which we believe are primarily consumer auto loans.”