Canada's Big Six banks still unfazed by consumer debt levels

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It's going to take more than early warnings to get Canada's big financial institutions to start worrying about sky-high consumer debt levels.

We've heard the statistics before. Canadians' ratio of debt to personal disposable income is north of 150 per cent. On Tuesday, the International Monetary Fund even called out household debt as a particular reason to be a bit wary of the Canadian economy.

But here's the other side of the coin: the Big Six's provisions for credit losses have been falling for three years now. Today, they've either flat-lined, or better yet, in the case of Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia, returned to their pre-crisis levels.

National Bank Financial analyst Peter Routledge dug through the banks' credit card trust portfolios and found that average loss rates on their cards has fallen back down to about 4 per cent, a level not seen since 2008, and the average value of accounts whose payments are 90 days or more delinquent is just 1 per cent of the portfolio.

"The credit card data demonstrates that delinquencies have returned to pre-crisis levels while the loss rate has nearly normalized," he noted.

While it's true that consumer credit only makes up about 15 per cent of total household debt in Canada (the rest comes from mortgages or home equity lines), keep in mind that the banks themselves have mortgage insurance to protect themselves from housing losses. Even if the market cools and some households run into trouble, the banks will get paid by mortgage insurance providers like Canada Mortgage and Housing Corp.

This isn't to say we shouldn't be worried. We certainly should. If Canadians start defaulting on their mortgages, they're also likely to have trouble paying off their credit cards. Just because we aren't seeing any run-off effects on consumer credit just yet, Mr. Routledge noted the residual effect will likely appear in a few quarters – presuming the housing cooling continues.

Still, the low write-off levels help to explain why you don't see the banks doing much to lend less. With their credit losses in decline, they can lean on their personal and commercial banking arms to drive revenues, helping to offset volatile divisions such as capital markets. Plus, as Mr. Routledge pointed out, the banks can't rely on more accounting gains achieved from lowering their credit loss provisions every three months. Anything that trickles through to their bottom line now must come from hard-earned growth.

Is this mindset prudent? Probably not in the long run. But the banks are in the same predicament as investors. They can make it harder to borrow, helping Canadians to save more, or they can churn out new credit cards with dazzling frequent flier programs to keep juicing their bottom lines.

Individual investors, on the other hand, could take it upon themselves to borrow less, but if they did and the bank earnings fell, where would they turn for juicy, dependable dividend yields?

Streetwise is Canada's source for analysis and breaking news on deals and finance. Find it online at tgam.ca/streetwise, or follow it on Twitter via @StreetwiseBlog