Bank of Canada Governor Mark Carney has pushed the country to take a serious look at both personal and national finances, says David Graham, vice president portfolio manager at CIBC Asset Management and manager of the Renaissance Canadian Monthly Income Fund. As a result, we’re in a better position than most developed countries.
On multiple occasions, Carney has stated debt is too high relative to disposable income in Canada.
Thanks to these repeated warnings, more Canadians are aware of the dangers of debt than ever before. Graham’s seen this firsthand: during a trip to Toronto, he even had a detailed discussion about the ratio of debt to disposable income with his taxi driver.
However, we’re not in dire straits — yet.
“Consumer credit is growing more slowly [here] than in the United States,” says Graham.
Plus, the mortgage crisis isn’t as acute here at home.
“If house prices do go down, it doesn’t mean people will stop paying their mortgages. The impact on the banks should be fairly minimal.”
He would be more worried about the economy if employment rates were to dip drastically. In that situation, the impact on the banking system might be negative, with people defaulting on credit cards and other consumer loans.
Graham stresses, however, that the banks have done stress tests based on these possible situations. TD Bank has calculated a 30% decline on house prices, 14% unemployment and a 4% spike in interest rates during its test. Despite that severity, the bank would still profit and remain stable.
“All the banks have done these tests and will survive a drop in house prices,” he says. “It’s also unlikely they would fall at the same time as interest rates would increase.”
Over the last few months, analysts have dropped their profit estimates for the banks to around 5%, down from 10%-to-12% earlier this year.
Canadian banks have historically been conservative and avoided risk, says Graham. Nonetheless, regulators are watching them closely and have tough criteria regarding capital requirements.
“Institutions are currently meeting these criteria and are raising their dividends. We are on solid ground in Canada.”