U.S. mortgage insurer Genworth Financial is looking to sell some of its smaller divisions.Moe Doiron/The Globe and Mail
Desjardins Group is dealing with a perplexing problem. Despite hustling to grow its loan book, the cooperative is making less on the overall portfolio.
During the first nine months of 2012, Desjardins' loan book grew by 7 per cent, yet total net interest income actually fell 1 per cent from the same period last year, settling in around $2.9-billion. That's a frustrating 8 per cent gap.
Desjardins said there are two distinct reasons for this. Low interest rates continue to plague the market, and there's also "fierce competition" for mortgages, something the cooperative has been saying all year. At first, it was hard to tell how dramatically this battle would hit their bottom line, but enough time has now passed to see the effects.
The scary thing is, there's a decent chance this is just the tip of the frustration. As Royal Bank of Canada noted today, Canada's household debt is growing at its slowest pace since 2002. Mortgages are the biggest component of household debt, and it appears that the only way the banks are going to be able to convince more people to borrow is to keep offering extremely low rates.
That spells trouble for the country's biggest financial institutions. Even though the Bank of Canada has warned about the threat of too much household debt, the banks continue to grow their mortgage books to drive profits. As Streetwise noted last week, mortgage balances rose 0.74 per cent in August from July, and 0.54 per cent again in September. None of the banks want to admit it, but they desperately need their mortgage books to grow because they can't rely on divisions such as capital markets to prop up their earnings in such choppy markets.
Add to that the prospect of a prolonged low interest rate environment and the near future actually looks pretty gloomy. As HSBC Bank Canada reported this week, its retail profits fell by a third this quarter because of falling net interest margins.
All hope is not lost for the banks, however. While the growth rate of household debt is slowing, the total amount outstanding isn't falling. Household debt still increased by 5.6 per cent last quarter.
But all of this is certainly a warning sign.
Tim Kiladze