The quality of Canadian consumer loans "is under threat," according to Moody's, in light of higher interest rates, longer auto loan terms and an increase in uninsured mortgages.
The relatively weaker asset quality will hit even the largest Canadian banks. And "[a]s debt-to-income levels continue to edge up, the first bite," said Moody's Assistant Vice President Jason Mercer, "will be felt in unsecured credit card portfolios." Card debt repayment tends to be prioritized lower than residential mortgages or auto loans, Mercer noted, and those losses therefore "occur before, and are more severe, than other forms of consumer lending."
But the Moody's report "Banks — Canada: Consumer lending vulnerability increases at multiple pressure points" warns that the risk from those residential mortgages and auto loans is also on the rise. Mortgage servicing costs are expected to increase, as almost half of outstanding mortgages are scheduled to renew their rates within a year. And longer auto loan terms mean a vehicle's value as collateral falls faster than the loan balance is repaid.
