Canadian Banks Keep The Taps Open

With balance sheets less ravaged than those of global counterparts, domestic banks spurring economy by increasing lending

Canada's banks are stepping up to shoulder a costly load, keeping the economy growing with new loans even though the credit markets are still making it tough to finance lending.

Banks around the world are largely unable to sell loans to leery investors, a problem they've had since last summer's credit crunch, and the Canadian market is no exception. Banks are unable to move anything but credit card loans off their balance sheets because, amid concern about the economy slowing, investors have no appetite for other types of loans, such as residential and commercial mortgages and car loans. That forces lenders to raise funds in more expensive ways, such as offering high rates on deposits.

In the U.S., the breakdown of this loan-selling mechanism, known as securitization, is creating a decline in lending and a rise in interest rates that may stymie efforts by the U.S. Federal Reserve Board to fuel the economy.

In Canada, however, government figures published Friday show that banks are still willing to lend. Thanks to balance sheets that took much less of a beating during the credit crunch, Canadian banks have been able to steadily increase the volume of personal, credit card, mortgage and business loans in the year since credit markets imploded. That removes a potential roadblock on the way to improving economic health in Canada.

"It's definitely not a problem to the same extent as in the U.S., so I'm not really too concerned about the Canadian economy," said Guy Le Blanc, a bond fund manager at Calgary-based Bissett Investment Management. "I don't think that someone with a good credit history who can provide a T4 proving their income is going to have a problem getting a mortgage or a loan," he added.

Data through June suggest that residential mortgages grew a respectable 7 per cent, while personal loans were up 14 per cent, according to TD Securities Inc. banking analyst Jason Bilodeau.

"Business loan growth slowed from the strong mid-teens pace of recent quarters, but was a still solid 10 per cent," he added in a note to clients last week.

Instead of selling loans to raise money to lend again, Canadian banks are just using other ways of raising funds such as offering higher rates to draw deposits, selling bonds or taking advantage of government programs. In the U.S., the banks have been so battered by losses that any funds they can raise are usually just used to replace capital that has vaporized because of bad investments.

The market for securitization has been largely shut since last fall, with the exception of sales of bonds backed by credit cards. Investors are willing to buy credit-card-backed bonds because they have a long history that shows that no matter what the economy is doing, Canadians pay their bills.

"The Canadian consumer is still very much disciplined to pay their credit cards," Mr. Le Blanc said.

However, there's little sign that things are getting better for banks and other lenders in other areas of the market. Investors are fearful of buying auto loan or lease bonds because of the beating that auto sales took as gas prices soared, and the market for bonds backed by commercial mortgages remains all but shut because of concern about vacancies.

Auto finance company GMAC attempted to sell loan-backed securities early this year but the market's appetite was virtually non-existent, bankers said.

"Conditions are still pretty tight outside of the credit card space," said Scott Bridges, a senior vice-president at DBRS Ltd. who follows the market.

The government has stepped in to help banks keep making mortgage loans. After pressure from the big banks, Canada Mortgage and Housing Corp. said at the end of last month that it would expand the Canada Mortgage Bond program to include 10-year maturities.

The program, created by the federal government in 2001, is a relatively inexpensive way for banks to finance their mortgage loans, because it allows them to sell large bundles of mortgages to Canada Housing Trust, which issues the bonds. Canadian mortgage lenders have increasingly turned to the program, which has about $136-billion in total bonds outstanding, in the wake of the credit crunch.

Nonetheless, the inability to sell many other types of loans and the reliance on more expensive sources of funding is likely to prove a headwind for banks as they report profits, analysts have signalled. As the economy slows and potential losses rise, analysts expect banks will continue to lend, but they will increase their loan books at a slower pace.

Source: http://www.theglobeandmail.com/