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Sky high household debts put banks in a corner

Canadian household debts are at record levels, and that's spooked big figures like Mark Carney and chief bank economists into sending dire warnings about the country's economic future.

But their lines have been spewed for about a year now, and average household debt levels have continued to set new records, climbing higher than 150 per cent of disposable incomes. Consumers just aren't buying it. They want proof that this will all come crashing down before they change their behaviours. (Or worse, they need to experience it before they change.)

The banks, however, have already been forced to adjust. Their chief executive officers know that these debt levels can't be sustained for much longer, and that's forced them to revamp their growth strategies. The problem is, there aren't many other options. Household borrowing – credit cards, mortgages, lines of credit – are the banks' core businesses. Capital markets may grab all the headlines, but personal and commerical banking is their bread and butter.

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This isn't to say the banks aren't trying. Over the past 18 months, they've all made wealth management a hot sector, hoping it would be their saving grace. Except they all piled in, as have the independent brokerages, so it isn't easy for any of them to grow market share.

Same goes for retail banking – not loans and mortgages, but physical branch banking, the one thing that everyone said was going to be dead 10 years ago. Canada's population growth is dependent on new immigrants, and the banks are doing everything they can to cater to the minorities. Again, though, they're all doing it.

Then there are costs. If you can't grow your top line, why not find a way to preserve more of it? This area has been a real focus of late, and there are definitely savings to be found. But implementing new strategies that cut costs without reducing service or quality is very hard.

All of that puts the banks in a corner.

If you manage your debts, you may think that this doesn't affect you. In fact, you might think that the banks are due for some slower growth after lending money out so easily for so many years. But the truth is, here in Canada, we depend on our banks. Financial institutions make up 29 per cent of the S&P/TSX Composite Index. And the Big Six combined have a market capitalization of $262-billion. That represents a good chunk of Canadian savings and if the banks can't perform, pretty much everyone gets hurt.

But keep in mind that it's not as though the end is near. Far from it. Royal Bank of Canada made $4.8-billion in 2011, Toronto Dominion Bank made $5.9-billion, and Bank of Nova Scotia made $5.3-billion. It's just that keeping these profits up has become a whole lot harder.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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