While credit continues to flow to Canadian consumers and business owners who have good credit ratings, banks and other financial services firms across the country appear to be tightening their lending standards and pricing their loans more aggressively as the economy slows into a recession, limiting options for some borrowers.

The Big Six Canadian banks, which took increased loan-loss provisions in the fourth quarter ended Oct. 31, 2008, have said that they will focus on “risk mitigation” in 2009, and have already taken steps to rein in consumer and business lending.

Canadian Imperial Bank of Commerce, which reported $222 million in loan-loss provisions in the fourth quarter, an increase of 146% from the same period a year earlier, plans to continue to curtail the growth of its credit card business, a major area of exposure to unsecured lending on its books.

Bank of Nova Scotia, which set aside provisions of $207 million for expected loan losses in the fourth quarter, an increase of 117% from the same period last year, plans to restrict growth of mortgage and other consumer lending.

These most recent provisions against credit losses by the banks are notable because they are based on the banks’ domestic lending businesses. Earlier writedowns, taken over the past 18 months, were attributable largely to bad bets the banks had made on the U.S. mortgage markets.

And there could well be more to come. In the Bank of Canada’s latest Financial System Review, released in December, the BofC suggests that a deep or long economic downturn next year could result in more credit losses for Canadian banks, which would lead to ever-more restrictive lending: “Market forces could compel banks to restore their capital ratios, leading them to curb balance-sheet growth more aggressively. This could result in a significant tightening of lending conditions for both households and businesses.”

As the BofC, in step with other central banks around the globe, drops interest rates to stimulate the Canadian economy, domestic banks say they are struggling with compressed interest rate margins, affecting their ability to make loans profitably.

Last month, the big banks had a rough ride in the court of public opinion when they failed to pass on to consumers the BofC’s cut of 75 basis points in the overnight rate, choosing instead to drop their prime rate by just 50 bps. The Canadian Bankers Association defended its members, saying that the banks were making individual business decisions in not passing on the full rate drop, and that the banks’ cost of borrowing on international markets and elsewhere remains high.

Despite all these difficulties, Canada’s major banks continue to lend to worthy borrowers.

Industry observers and insiders agree that individual Canadians who have good credit ratings and are in good financial shape may not even notice any or much difference when it comes to accessing credit.

“If you have good credit history and a steady income,” says Jim Murphy, president and CEO of the Toronto-based Canadian Association of Accredited Mortgage Professionals, “you should have no problem accessing credit.”

Retail lending remains a profitable business for Canadian financial institutions. A number of small, aggressive, alternative-lending firms that had popped up during the housing boom have now exited the domestic market, clearing the field for established players.

“Responsible lending is back in vogue, but that’s the model we’ve always had,” says Todd Asman, vice president of banking and mortgage operations at Winnipeg-based Investors Group Inc.

Mortgage lending by Investors Group is up over the past six months, Asman says, attributable mostly to the fact that the firm’s consultants have been proactive in approaching their clients with opportunities to borrow as part of a well-considered financial plan.

Still, most financial institutions appear to be pulling in their horns when it comes to growing their lending businesses.

Industry insiders say that although banks and other lending firms have not necessarily changed their long-standing lending guidelines during this downturn, they are probably applying those guidelines more diligently than in the past — and making fewer exceptions when borrowers don’t quite meet them.

And as a group, lenders are keeping a sharp eye on pricing. For example, while interest rates remain at historical lows, mortgage lenders have now switched to charging the prime rate plus a premium of a percentage point or so on a variable-rate mortgage, compared with prime minus a discount only recently.

@page_break@The banks are also inching up the rates on their credit cards, shortening interest-free grace periods, setting lower limits for some borrowers and charging stiffer penalties for missed payments. For example, in December, Toronto-Dominion Bank began charging a 24.75% rate on its credit cards, five percentage points above its normal rate, for cardholders who miss two consecutive pay periods without making a minimum payment.

Borrowers with good credit ratings may not feel the effects of these moves. But Canadians with spottier credit histories, or rocky financial situations exacerbated by the current downturn in the economy, could find themselves with fewer and more expensive choices for accessing credit.

“There’s no doubt it’s more difficult for consumers to get lines of credit and consolidation loans,” says Laurie Campbell, executive director of Credit Canada, a non-profit credit-counselling service in Toronto.

Troubled borrowers are being forced to turn to finance companies or payday-loan companies — expensive options, Campbell says, that don’t help these borrowers break out of the cycle of debt.

Even payday-loan operators are taking a tougher look at how they lend. “With the economy the way it is, our member firms are being a little bit more cautious,” says Stan Keyes, president of the Hamilton, Ont.-based Canadian Payday Loan Association. “The level of risk they were prepared to take on even three to six months ago isn’t the same level of risk they’re prepared to take on today.”

Business borrowers are also finding it increasingly difficult to access affordable credit. A survey by the Canadian Federation of Independent Business released in November found that 27% of its members were having problems accessing bank financing, up from 13% a year earlier.

“Lending rates are considerably higher than they used to be,” says Ted Mallett, chief economist at the CFIB in Toronto. “Businesses are now being asked to renew at prime plus 3% or 4%, which is a considerable change from what businesses were having to deal with before.”

Banks are still actively lending to businesses, the CBA says, reporting that their data show business credit from the Big Six banks has significantly increased over the past year. However, other lenders are seeing opportunities to pick up new business customers who have found it difficult to access credit from traditional sources.

“We are finding more business owners coming to our door; they are clearly surprised at the conversation they’ve had with their bank,” says Ian Glassford, chief financial officer for Edmonton-based Servus Credit Union, the largest credit union in Alberta. “Sometimes, the bank wasn’t interested [in lending] for good reasons. But, other times, we are finding circumstances in which we think we can establish a good relationship with the business owner.”

Industry insiders say it isn’t only lenders who have become more cautious; borrowers have, too. Lenders are expecting Canadians to become more prudent as the recession takes hold and to borrow less often and for lower amounts.

And all are in agreement that the credit situation in Canada is nowhere near as dire as that which exists in the U.S., nor is it likely to reach those levels.

“The markets’ willingness to help a normal working Canadian buy a house when the time is right is still high,” Glassford says. “Broadly speaking, Canadians are pretty good at managing their debts; they’re pretty good at honouring their obligations. That’s the kind of business you want to do.” IE