In the event of another economic downturn, Canadian banks could be adversely exposed to high levels of unsecured consumer debt, warns a new report by Moody's Investors Service Inc.
While banks insure most of their mortgages, consumers are carrying higher levels of unsecured debt, including credit lines and credit cards.
For the six largest Canadian banks, this unsecured debt represents between 9 per cent and 15 per cent of total managed assets. When uninsured mortgages are factored into the mix, uninsured debt for the banks is between 14 per cent and 24 per cent of total managed assets, the report says.
The impact is different for each of the banks, given their asset mix. Royal Bank of Canada has the highest percentage of uninsured debt compared with assets at 24 per cent; however, just 11 per cent of that is non-mortgage consumer debt such as credit cards and lines of credit, while the remainder is uninsured mortgages.
Bank of Nova Scotia's uninsured debt is 21 per cent of its managed assets, with 9 per cent coming from non-mortgage consumer debt.
Canadian Imperial Bank of Commerce, a large credit card issuer, has 20 per cent of its assets in uninsured debt, with 12 per cent of that non-mortgage consumer debt.
Toronto-Dominion Bank, also a large credit card lender, has 18 per cent of its assets in uninsured debt, with 15 per cent coming from credit cards and credit lines.
National Bank of Canada has just under 18 per cent of its assets in uninsured debt, with 13.4 per cent in uninsured non-mortgage consumer debt.
Bank of Montreal has the lowest percentage, with 14 per cent uninsured, and 9 per cent in credit cards and credit lines.
Should the economy dive, banks could face substantial losses, Moody's says.
"Canadian consumers have become increasingly leveraged in the past few years, leaving themselves and therefore banks more susceptible to adverse macroeconomic developments," the Moody's report says.
Canadian household debt as a share of personal disposable income stood at 150.8 per cent at the end of June, a record, the report said. While many Canadians have been borrowing less and paying down debt amid warnings from the Bank of Canada, Moody's said low interest rates have also encouraged borrowing.
"We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt they may not be able to service when rates inevitably go up," Moody's vice-president David Beattie, the author of the report, said in a statement.
For now, Moody's said the trend does not have immediate implications on its ratings for the banks.
"While our findings do not have any immediate rating implications, an increase in uninsured consumer debt, including uninsured mortgages, approaching about 30 per cent of total managed assets would likely negatively affect banks' asset quality and profitability, particularly in the context of deteriorating economic conditions, and therefore would place downward pressure on their ratings," Mr. Beattie said.