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Net worth falls for first time since recession The net worth of Canadian families fell in the second quarter of the year for the first time since the depths of the recession, pushed down by the drop on North American stock markets. Household net worth dipped 0.6 per cent, or $34-billion, to $5.9-trillion, marking the first decline since the first quarter of last year, Statistics Canada said today. "Increases for some financial assets, especially deposits, were more than offset by declines in equities, foreign investment and life insurance and pension assets," the statistics gathering agency reported. "Households equity holdings declined for both marketable shares as well as mutual funds."
Statistics Canada noted the 6.2-per-cent drop in the S&P/TSX composite index, after four quarters of increases.
It noted that liabilities, largely mortgages and consumer credit, increased, though the ratio of household credit market debt-to-personal disposable income fell for the first time since early 2006, to 143.7 per cent. The debt-service ratio also fell, both due partly to an increase in personal disposible income. But debt-to-net worth rose after falling for four quarters. That will be felt, economists say.
"Weak asset growth in combination with still strong liability growth will likely have households feeling buried under more debt than they ever have," said Toronto-Dominion Bank economist Diana Petramala. "Households will likely feel a need to constrain spending and repair the damage done to their balance sheets. As such, quarterly consumer spending growth is expected to remain in a range of 2-2.5 per cent over the next year, well below the 3.5-4 per cent growth registered over the last five years. "
OECD warns on high debt levels The Statistics Canada report came as the Organization for Economic Co-operation and Development warned about high levels of consumer debt and the increasing threat to some people who may be in over their heads as interest rates rise. At the same time, it said, household income growth will probably slow.
As a proportion of disposable income, household debt rose markedly over the past decade, reaching close to the OECD average by 2008, the group said in its annual review of Canada. Levels continued to climb during the recession, driven largely by mortgage debt given the rebound in the housing market.
"Healthy credit expansion" was a goal of the Bank of Canada to fight the recession, and record low interest rates have brought down the proportion of disposable income needed to service debts, the OECD noted. "That being said, the upward trend in the debt ratios implies that households have a growing vulnerability to additional adverse shocks," it added. "For example, if households continue to borrow at the same pace as they did recently and interest rates increase as expected, by mid-2012 about 7.5 per cent of Canadian households could have so much debt that they would be 'financially vulnerable,' up from 6.1 per cent in 2009 ... This group is likely to include many young, first-time home buyers that have been profiting from low mortgage rates."
The real estate sector has been softening but Ottawa may need to do more to cool the mortgage market, the OECD said. It added that it expects house prices to "come under downward pressure" soon as interest rates and income growth slows. "Like other OECD countries, Canada is probably entering a fairly long period of relatively slow household income growth," the group said.
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Bank stocks rally Bank stocks are rallying on global markets today as investors breathe a sigh of relief over proposed new capital rules that are not as severe as some had feared. While the measures agreed to by central bankers and regulators in Basel, Switzerland, will force banks to hold significantly higher levels of capital, the phase-in period is seen to be less harsh than anticipated. "The implementation period is much longer than expected, which is generous to the sector," Credit Suisse analysts said in a research note. "The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst."
What the new bank rules will mean Here are the views of three groups:
"Analysts say the move could increase the cost of capital and reduce profits at some banks, notably European banks that need to raise a lot more capital to achieve the higher requirements. Some banks will need to shrink their balance sheets by selling loans or some business lines or reducing lending. That said, many U.S. and Canadian banks have already raised sufficient capital to meet the requirements, and the reduction in uncertainty about the new capital rules could allow them to begin lending out their excess capital or boosting dividend payouts." Sal Guatieri, BMO Nesbitt Burns
"Regulators argue that this will give rise to a safer, sounder banking system better able to weather future shocks and thus lessen the likelihood of events like what transpired over 2008-09. US bank capital, however, was fairly solid going into the crisis. What was missing was adequate regulatory oversight, and higher capital requirements won't change that. Further, the shadow banking sector once again sidesteps the tighter regulatory push. How the risk of future financial crises can be mitigated by pushing more business away from traditional regulated entities toward unregulated players remains a contentious issue against all of the weekend trumpet playing in favour of a sounder set of bank rules. Derek Holt and Gorica Djeric, Scotia Capital
"While it appears that the Canadian banks could be in compliance today, even if some provisions are tighter than they appear, this generous phase-in period means compliance will not be an issue. With the large Canadian banks trading at a healthy 11.4x our [fiscal]2011 estimates, we do not believe this issue was weighing on the shares. However, since we are nearer to the point at which the banks can begin more freely deploying capital again, we view these developments positively." Robert Sedran, CIBC
And here's what columnist Boyd Erman says today in Streetwise: "Now that the handcuffs are coming off on capital, investors will also get to see just which of the Canadian banks is feeling aggressive. An odds-on favourite to make a big acquisition is Royal Bank of Canada , which has signalled a desire to get bigger in global wealth management. A bigger wealth management arm would bring in steady fee income to offset ups and downs in the bank's trading operations -- something investors felt all to much in the most recent quarter."
Wolf to leave Magna One of the key players at Magna International Inc. is leaving the company this fall. Siegfried Wolf, a major figure in the recent growth of Magna's European business, is stepping down as co-chief executive officer and leaving the auto parts giant effective Nov. 15 to join Oleg Deripaska's holding company Basic Element. Donald Walker will now be the sole CEO. "When Oleg Deripaska recently approached us for permission for Basic Element to make an offer to Sigi, we made it clear that the decision should ultimately rest with Sigi," said Magna chairman Frank Stronach. "Magna's decentralized culture and operating principles ensure that our success is not dependent on any one person."
A spokesman for Basic Element told Globe and Mail European correspondent Eric Reguly that Mr. Wolf will take a lead role in co-ordinating the Basic Element construction projects for the Sochi winter Olympics in 2014. "His role will be bigger than cars and trucks," said spokesman Evgeny Fokin. "Sochi will be in his portfolio. His role will be strategic development of that sector and may bring in a international partner."
Analysts like BCE-CTV deal Two fresh views for shareholders today on the blockbuster takeover of CTV Inc. by BCE Inc. announced Friday:
"The Right Assets for the Right Price ... Our [earnings per share] estimates have increased by 4 cents for 2011 and 8 cents for 2012, but with rounding to the nearest dollar our target price remains unchanged at $35. We would view any knee-jerk weakness on this announcement as a buying opportunity." TD Newcrest
"We believe the deal enhances Bell's negotiation power in securing content and hedges against potential increases in programming costs. We believe BCE exercised its right of first refusal because management did not want CTV to fall into the hands of Rogers or Quebecor ... We believe BCE provides an attractive yield of 5.55 per cent and represents a relatively low-risk investment in the Canadian telecom sector as we enter a phase of increasing competition. We believe management continues to demonstrate the ability to execute on their strategic imperatives and strengthen company's businesses."
Is that the Chattanooga Choo Choo? The Tennessee city of Chattanooga - lovers of the Swing era will remember it as immortalized in song - is about to become known for something a bit more up to date. Chattanooga's utility, EPB, is announcing today that it plans to become one of the top cities in the world to offer superfast Internet service, up to a gigabit a second, The New York Times reports today. What the utility plans is 200 times the speed of the average broadband service in the U.S., the newspaper says, noting it will cost $350 (U.S.) a month. Hong Kong and some other cities now offer such service.
From today's Report on Business
- Saudi Aramco eyes developing markets
- BCE-CTV deal to ease ownership debate
- Taking Stock: A cold doese of reality from a stimulus critic
- At the Top: Harnessing ambition around the globe
And, read our Streetwise blog and Your Business section