Europe tops housing among bank concerns

While there is a prevailing sense of caution among Canada’s big banks over the domestic real estate market, it’s the situation in Europe that’s keeping the CEOs awake at night.

“It’s the unknown consequences of events that could occur in Europe and what it would mean to the systemic issues across financial services that I worry about most,” said Gordon Nixon, president and CEO, Royal Bank of Canada, speaking at the RBC Capital Markets Canadian Bank CEO Conference this morning in Toronto.

A default of a European sovereign, he said, is not going to have a meaningful impact on his bank, but managing the uncertainty around a possible breakdown of the euro and the massive systemic issues facing the financial services sector which are reflected back on global economic growth” remains very challenging.

While expecting zero growth in Europe in the near term, Nixon says, in his personal view, “Europe will find a way to muddle through” the sovereign debt crisis.

On the home front

Closer to home, Nixon singled out the condo markets in Vancouver and Toronto as being most vulnerable, having constructed beyond capacity.

“When you look at markets like Vancouver and Toronto, there is a level of caution from a risk perspective that is higher today than it would have been a few years ago,” said Nixon.

With an overall exposure of $2 billion to condo development markets and high lending standards, Nixon is confident the bank’s lending operations will be able to withstand a downturn.

“We have stress tested against numerous scenarios, including a 25% decline in housing prices [and] are very comfortable from a portfolio perspective,” said Nixon, adding the bigger concern would be “the overall economic impact on Canada and ancillary businesses as a result of a significant decline in housing.”

The bank, however, doesn’t expect such a dire scenario will come to pass. Nixon asserted a slowing real estate market in Canada doesn’t mean a U.S.-style collapse in prices.

“Notwithstanding the fact that, yes, there is a concern about consumer credit levels [in Canada], I think it’s also very important to constantly reiterate the structural differences between markets in Canada and markets in places like the U.S.,” he said.

“When you look at the overall Canadian bank lending levels, when you look at the presales, when you look at the customers we’re dealing with, we feel pretty comfortable that, notwithstanding that there’s vulnerability, we can manage through it.”