Credit cards 'next shoe to drop' for Canadian banks

Bloomberg News - Excerpts

Credit-card delinquencies and losses have risen with higher unemployment and personal bankruptcies, according to Moody’s Investors Service. Those trends will continue through 2009, even as issuers reduce credit limits and scale back on offers to entice clients.

Rising Losses

Canadian card losses in the third quarter rose to 3.1% of average balances, the seventh straight period of year- over-year increases, according to Moody’s. By comparison, U.S. card losses rose to 6.6% of balances.

Canadian Imperial Bank of Commerce (CIBC), the country’s No. 5 bank, set aside $152-million for card losses for the period ended Jan. 31, nearly double a year ago. Royal Bank of Canada earmarked $83-million, a 28% increase, while Bank of Montreal reserved $56-million for losses in its MasterCard portfolio, up 47%.

CIBC has the most consumer credit-card loans among Canada’s five-biggest banks with $10.5-billion, representing 6.3% of total loans, according to filings. Royal Bank of Canada has the second highest, followed by Toronto-Dominion, Bank of Nova Scotia and Bank of Montreal.

Royal Bank CEO Gordon Nixon said he’s more concerned about rising defaults from credit cards than mortgages in the recession. Royal Bank had $8.93-billion in credit-card loans as of Jan. 31.“There is a natural deterioration in credit in a recessionary environment,” Nixon said on Feb. 26. “Credit-card deterioration always happens much sooner and much more dramatically than you’d have in a mortgage portfolio because they are unsecured loans.”

Canadian banks will see “earnings headwinds” from significant increases in provisions for card losses, Dundee Securities Corp. analyst John Aiken said in an interview. A deteriorating credit-card business is a sign of worsening credit among consumers, which will hurt the banks’ other businesses, he said.

• Credit-card balances at Canadian banks have risen by almost 40% since 2004 to $49.9 billion as consumers took on more debt, Deloitte said in a report last month. Banks and issuers may post an additional $800-million in credit-card losses this year, rising to about $4-billion, the consulting firm said.
  
  
• Canadians owned 71.6-million cards issued by Visa Inc., MasterCard Inc. and American Express Co. at the end of 2007, according to The Nilson Report, an industry publication.

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