The dangers of taking on too much debt are a constant narrative in Canada, especially as the economy takes a turn for the worst. Today’s environment of high unemployment, low oil prices and tepid growth forecasts prompt a stern warning for consumers to resist borrowing too much, as exposure to credit card delinquency poses risk to both individuals and the big banks.
However, a new report by Canaccord Genuity analyst Gabriel Dechaine questions whether credit card debt really heightens the risk for banks – and that it could actually have the opposite effect. Says Dechaine, “despite the ‘doom and gloom’, most credit metrics for cards are surprisingly resilient,” adding, “While there has certainly been smoke, (e.g. rising unemployment) we have yet to see much fire.”
His report states “Canadian banks have over $60 billion of Canadian credit card receivables, which represents only 3 per cent of total sector loans. Yet we estimate they generate 10 per cent of sector profits,” adding that as some key businesses experience a slowdown (e.g. mortgages), cards are an important source of offsetting growth. His view suggests reality is much better than what many investors perceive.
A Surprise Source of Profit?
This may be good news for big banks with concerns about their exposure to high-risk cardholders. Dechaine says banks are too “preoccupied” with these points and can no longer see the “positive elements underpinning this business.”
He also points to increased profits banks are gaining from growing interchange fees (a processing fee paid by the merchant to the bank each time a customer pays in credit). As more consumers turn to cards for daily purchases (either because cash is tight or in efforts to earn rewards), this increased purchase volume drives margin interchange revenue higher. As a result, banks are seeing incredible growth.
Should We Be More Concerned About Mortgages?
But what about the consistent warnings of high Canadian debt levels? As Statistics Canada recently reported, the ratio of household debt to disposable income has hit a record high of 165.4 per cent. Well, according to CreditCard.com, the problem isn’t credit cards; 46 per cent of Canadian households had credit card debt in 2015, and 60 per cent of Canadians claimed to repay their monthly card balances in full. As well, Canada’s delinquency rate (90 days or more), excluding mortgages, has steadily decreased since 2009.
The data suggests the majority of Canadians seem to be responsible about their credit card spending; it’s mortgages that are the real debt burden right now, accounting for about two thirds of all debt. The availability of record-low mortgage rates have helped fuel real estate prices, as home buyers take on larger mortgages to afford their dream homes at all cost. As Statistics Canada states in its latest report on net worth, total household credit-market debt (mortgages plus consumer credit) rose 1.2 per cent in the fourth quarter. Mortgage debt rose 1.6 per cent. But interestingly, consumer credit (which includes credit cards, car loans, personal lines of credit and other personal loans) rose a modest 0.3 per cent.
What consumers should keep in mind, is that banks will be proactive and cautious when offering loans and borrowing limits to new credit card clients – but it’s up to consumers individually to protect themselves, especially when taking advantage of today’s lower interest products such as mortgages and lines of credit.