Despite ever increasing consumer debt levels, Canadian bank credit card portfolios are not showing any imminent signs of weakness, says Fitch Ratings.
The rating agency notes that the significant increase in Canadian household borrowing over the past few years was driven primarily by rising mortgage debt. Other forms of consumer debt also played a part, including auto and instalment loans, it says.
“Credit cards, on the other hand, have not played a part in the broader leveraging trend, despite growth in card spending volume, as most Canadians tend to repay their credit card balances in full every month,” it says. Indeed, it reports that Canadian bank card losses have declined meaningfully from their post-crisis peaks.
That said, Fitch indicates that it expects Canadian card losses to rise modestly in 2014, “given an expected normalization of personal bankruptcy trends and increased strain on consumers (represented by a rising debt to disposable income ratio).”
And, it warns that rising consumer leverage, “does expose card portfolios to a greater risk of loss, particularly in the event of shocks to the Canadian economy, given the relatively high government insurance rates on the banking sector’s mortgage portfolios.”
Still, it finds that the banks’ balance sheets would remain robust in the face of rising losses. “We conducted a stress test on the card portfolios of the largest six Canadian banks, using net chargeoff ratios between 7% and 13%, to gauge the impact of a credit shock on banks’ regulatory capital… ratios,” it says. “We found that capital ratios remained solid, even under the most severe stress.”