RBC Warns Cracks "Starting To Show" In Canadian Credit

One often wonders if the government will ever realize that, due to its policies, its "solutions" often wind up turning into bigger problems than the ones they set out to address initially? Not only that, but this has been the case for decades, and it will continue to be the case until we "engineer" ourselves into a crisis that is too big to fix or too overwhelming to print our way out of.

Every day we discuss various aspects of a system that ends up far worse off due to a government apparatus that is convinced it knows best and that intervention and interfering are the solution to the problem. In essence, much of the financial crisis of 2008 was a result of the government interfering in the housing market in years prior, combined with the Fed not being able to forecast the crisis, despite widely ostracized skeptics such as Peter Schiff stating repeatedly that the housing market was heading into the abyss.

Today, we face a new set of challenges as a result of the way governments and central banks dealt (or rather, didn't) with the 2008 financial crisis. In the United States there are bubbles forming in student loans and subprime auto lending,  while mortgage debt and consumer credit both look to soon be out of control yet again.

Meanwhile, the problem is spreading geographically and today we are presented with yet another "solution turned into problem", and as Bloomberg reports, RBC now sees "cracks" in consumer credit becoming a problem yet again, this time in Canada. The combination of low interest rates and the cheap and easy access to capital has yet again gone from being a solution to a problem, as Canadian lenders are seeing delinquency rates "roll" out in time and duration.

RBC analyst Vivek Selot wrote in a Monday note to clients that "cracks are starting to show in more and more places."

The quality of Canadian consumer credit is beginning to deteriorate, according to Royal Bank of Canada credit analyst Vivek Selot.

The roll rate -- the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies -- reached the highest since 2008 for one credit card program, while delinquencies for another program were above the 10-year average, Selot said in a monthly analysis of credit securitization programs.

As we have discussed previously, strong labor markets and historically low borrowing costs have allowed Canada’s households to amass one of the highest debt-to-income ratios in the developed world.

However, amid rising interest rates and a cooling real estate market, there is growing speculation the debt burden poses a threat to the financial system even as Canadian housing prices remain one of the world's true bubbles.

As RBC adds, roll rates in National Bank of Canada’s Canadian Credit Card Trust program are at the highest since 2008, while for CIBC’s CARDS II program, early stage delinquencies, 60-89 day delinquencies and roll rates are all above the 10-year average, Selot said.

Of course, this would not be a problem if supply and demand as it relates to credit and borrowing were simply allowed to operate freely, thus establishing a free market interest-rate versus a central bank mandated cost of money. Meanwhile, Bloomberg is quick to attempt to mitigate the adverse consequences of what the above implies and quotes none other than the RBC analyst, who - perhaps worried about keeping his job - notes that these trends are really quite benign and that the rolling out of delinquencies isn’t necessarily a problem yet because they haven’t "rolled' all the way to becoming actual charge-offs:

To be sure, Selot pointed out “consumer credit quality seems benign,” with charge-offs -- or recognized losses -- remaining near cyclical lows. The average payment rate in February fell about 600 basis points from January to 41.1 percent but was up 162 basis points from the same month a year earlier.

Which reminds us of an analysis we put together in February 2018 ,detailing discrete trends within U.S. consumer credit, and identifying where the next major problem could be hiding. 

Net Charge-Off Rate on Credit Card Loans, All Commercial Banks

Why the very gradual increase in aggregated NCO, and thus why the lack of economist concerns about the state of the US consumer? Simple: the larger banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP.  The problem here is that the vast majority of bank assets is held by a small minority of individuals as in most 80/20 distributions. Meanwhile, smaller banks - those where the bulk of the population holds its meager assets - starting to panic, as charge-off rates are back to financial crisis levels.

Net Charge Off Rate on Credit Card Loans, (Banks Not in Top 100 by Assets)

Canada is about to experience something very similar, and as Selot concedes "considering that fragile household balance sheets could be a precipitating factor for the credit cycle to turn, any signs of consumer credit quality deterioration seem worthy of attention."

A few more rate hikes by the BOC should do it.


pitz Wed, 04/11/2018 - 21:52 Permalink

Why would the BoC hike?  Inflation is practically non-existent in Canada, and with the housing market clearly rolling over, the 'real economy' has very little to drive it.  If anything, give it a year or two Canada will be, like Switzerland, in NIRP and fighting a very strong Canadian dollar.

skbull44 gmak Wed, 04/11/2018 - 23:19 Permalink

I second your observation. Our family has experienced price increases in almost everything. Percent increases well above the manipulated, er, I mean 'official' CPI of 1.6%. For example: 4.6% increase in physiotherapy, 13.2% increase in chiropractic, 3% increase in municipal taxes, 46.7% increase in internet (had to renew package and previous one no longer available)...



In reply to by gmak

ldd karenm Wed, 04/11/2018 - 23:29 Permalink

my travels around europe, asia and north america have shown me an unbelievable amount of empty condos and commercial properties and growing. what has been happening ever since nirp is people pinning hopes on leveraging gains in property to offset their (inflation, investments, etc.) losses in other areas. and you hear of individuals owning hundreds of properties. go to any popular locale and many of the properties are investment homes. what is happening in japan and now in korea and china with an aging population and kids moving out is a growing amount of unoccupied homes. travel around and you see many empty decaying homes all over many countries while many condos in prime locations sit empty because they are investments. and prices are relative. sell a small condo in hong kong and buy a big house in toronto or vancouver.

a home is only worth what you are willing and comfortable with if yo plan to use it as a home. if you choose to invest in property you are gambling. in good times great but in all the rest of times... the music will stop and many will be wiped out. most of my friends in vancouver and toronto all own homes in nice areas but they complain about the cost of traveling. they do not have much disposable income. my home sits empty and can for a long time as there are no property taxes and i choose to rent where i spend more time. the numbers did not make sense to buy. there is a lot of pain coming.

In reply to by karenm

pitz ldd Thu, 04/12/2018 - 01:33 Permalink

Yup Vancouver and Toronto's RE scene (as well as that of Seattle and San Francisco) is dominated by "landlord families", often of subcontinental ethnicity, Canadian (or American) citizens, who have, since the mid 1990s, built portfolios of 30-50 housing units per extended family, sometimes more.  Since the 2013 peak of Canadian RE, they've had very powerful incentives collectivity to create the allusion of rising prices and solvency to keep their bankers satisfied and their credit lines from being called.  But negative cashflow ultimately forces asset prices to revert to more sane values, and that's what we're seeing now.

In reply to by ldd

Pareto ldd Thu, 04/12/2018 - 01:46 Permalink

+100 you nailed it.  one need only do the math.  my rent is super cheap.  but then again, my accommodations super modest.  i know many people who would not accept it.  And yet I love it.  The freedom one enjoys when not tied to a fucking insane mortgage, high maintenance costs and property taxes that forever go up, which if you think about it - is just as bad as the mobile home owners paying lot rent in addition to a mortgage for trailer.


I often wonder why more people haven't figured this out.  I couldn't imagine being cash poor just to own something.  Home ownership is a perpetual sink hole for cash to go.  And the opportunity cost adds salt to such a festering wound.  But, its all about appearances I guess.


Still, I try to imagine if I would ever own again and under what circumstances that might be.  The answer is always the same.  The prices have to come down - way down.  Otherwise I'm just another slave to another cycle of debt servicing and permanent compromise of my freedom.  And the worry of risk - shit - just this alone makes me cringe.  Say, you're carrying $300K paper (and thats a cheap shitty place in Canada) and rates rise 200 basis pts.  Boom.  You're fucked.  Its simply not worth it.


Home ownership - meh.  there are better experiences in life....IMHO

In reply to by ldd

pitz karenm Thu, 04/12/2018 - 01:59 Permalink

Sure, and the public has a choice, whether to own housing (on credit), or to buy banks.

In the 1990s, when Canadian RE crashed, owning the banks was an awfully smart move as a decade later, most of them went up 400%, while house prices declined on the decade.

I expect this time around to be no different.  After all, banks have done very poorly relative to returns on home ownership in the 1998-2013 era.  

In reply to by karenm

The Real Tony pitz Thu, 04/12/2018 - 00:31 Permalink

The Chinese have driven home prices to the moon. Now that surgeons, olympic gold meadalists, lottery winners and millionaires can't afford a house Poloz sits there twiddling his thumbs not knowing what to do. Maybe he should consider raising interest rates before everyone ends up living in tents or in their car.

In reply to by pitz

LetThemEatRand Wed, 04/11/2018 - 21:52 Permalink

"In essence, much of the financial crisis of 2008 was a result of the government interfering in the housing market in years prior, combined with the Fed not being able to forecast the crisis"

Seriously?  The Fed (which is owned by private banks) did not know that making bad loans (on which it made money before the bailout and then after when former Goldman Sachs CEO Treasury Secretary Paulson said "we need $750B to save the world) would cause a problem?  These are common criminals who knew exactly what they were doing.

Davidduke2000 Wed, 04/11/2018 - 21:53 Permalink

it is funny, one would think with these numbers the bank should raise interest rates on credit lines and credit cards, yet the same Royal bank keep sending me zero% interest offers with 1% processing fee on my visa cards with them, the same from the 2 other banks I have.

I think they took a risk on some wobbly people and they are regretting it.

pitz MrNoItAll Thu, 04/12/2018 - 01:28 Permalink

Nearly all Canadian mortgage debt is domestically financed, as is the case for Canada's government debt.  External debt is rather minimal.

Contrast this with the United States, for example, which has massive external debt, and actively had its banking sector selling its subprime mortgages to foreign investors.

In reply to by MrNoItAll

JoJo Kracko Wed, 04/11/2018 - 22:00 Permalink

Wow is chart 4 ever misleading.   Stretch it back further in time and you get a different picture.   Add 2017 and you get a different picture.   Plus, what it doesn't tell you is Canadian home prices are still playing catch up to US home prices.


Heck, add 2017 numbers to all of the charts and the directions for both the US and Canada change.


I will concede that Canadians have been racking up credit card debt at a faster rate than Americans.

pitz JoJo Kracko Wed, 04/11/2018 - 22:09 Permalink

Canadian house prices are dramatically above those of the United States, even at the peak.  As is personal credit levels.  The only redeeming quality of the Canadian economy is that large corporations are only minimally leveraged relative to historic levels, and have fairly low P/E multiples.

In reply to by JoJo Kracko

pitz The Real Tony Thu, 04/12/2018 - 01:26 Permalink

Except that there's little to no evidence of "Chinese" or any foreign participation beyond normal historical levels in Canada's RE market.  Less than 5% of the housing stock.  The real culprits are Canadians, of all races, who are willing to leverage to the hilt to buy relatively minimally productive assets.

Why the Canadian public would buy housing at P/E = 50, or greater (>100X annual earnings in Vancouver/Toronto) when they can buy the TSX at 14.5X trailing earnings and 12X current earnings boggles the mind.  

In reply to by The Real Tony

deuce awesome pitz Thu, 04/12/2018 - 06:31 Permalink

I agree the whole HAM thing is overblown. Certain pockets of the big cities have concentrations of it, but outside of those it's just baby boomers trying to dupe anyone into buying overpriced piles of bricks.


I live two hours north of the GTA, its as white as bread up here, and real estate has been climbing like mad. Saw a dip after 2008, but then it just kept marching up.


My parents are convinced that their old house that raised me and my two sisters is worth 700k. You can't talk them out of it, thats what they "need". Its been for sale for almost two years.

In reply to by pitz

MarcusAurelius Wed, 04/11/2018 - 22:31 Permalink

This is not rocket science. Jack the credit and prices rise. Plain and simple. When it gets too much for people to carry it implodes. How this has all been working is 8 year car loans at next to nothing interest, 30 year amortizations at 2-3% fixed rates, and using your home appreciation as an ATM machine. I am a Canuck and I know how inflation has impacted this country. Throw in exorbitant tax rates and broke municipalities or provinces and you have the making of a disaster. It is not "if" but "when". We haven't quite reached the extremes of Japan pre 1995 but it either goes to 50 to 100 year mortgages and 20 year car loans or it explodes. Plain and simple.  

taketheredpill Thu, 04/12/2018 - 00:51 Permalink


I bought my house in Lawrence Park,Toronto, on September 11, 2001.

Also, pretty sure that today my first serious girlfriend turned 70. I'm 60. I was 19 she was 29 and married. dated for 2 years.

It was the 70s sounds like a cliche but...it was the 70s.




ExploitedCitizen Thu, 04/12/2018 - 01:27 Permalink

The Canadian government created this housing bubble, the idiot leftist government locked down all the land around major cities 10 years ago.
Then they cut interest rates to near 0%, and opened the flood gates to the most hurting, low IQ, third world economic migrants I've ever seen.
This forced housing prices to the moon and forced everyone to live in these shitty 500 sq-ft condos. They claimed it was better for the environment to 'intensify' urban centres.

Well, fail, leftists always lose, remember that. The condo's require massive amounts of energy to run, expensive non-stop maintenance and window panels that need constant replacing. And most people just buy 1+ hour outside the major cities and drive a Dodge Ram 1500 in to work. So now our roads are jammed with gas guzzling vehicles idling in traffic all day because the idiot lefties didn't bother to put adequate transit infrastructure before they 'intensified' the cities.

Try to get anywhere in Toronto, it's a nightmare. The transit system is crap, literally crap, it's a poo log on electrified rails that damages your ears.
Also, the people in Toronto are weird, I mean weird. Men wear super tight jeans and ride these crappy bikes with no gears. The women are quasi lesbians obsessed with PC feminist culture, so conversation with them is about as much fun as dental surgery without anesthetic.

pitz ExploitedCitizen Thu, 04/12/2018 - 01:37 Permalink

Canada's labour market is extremely illiquid, and as a result, people are forced into a lot of very poor situations.  The problem is that the "real economy" simply isn't liquid enough as the government and the public sector has favoured pumping of RE and the public sector instead of fostering a vibrant private sector.

As for Toronto traffic, its actually a lot better than it used to be.  As RE speculators don't actually need to drive to 'work' and can do much of their 'work' from home.  

As for land being 'locked down', just WTF are you talking about?  The GTA and GVR continue to grow all the time, and there is enormous amounts of land available for development.  No scarcity whatsoever.

In reply to by ExploitedCitizen