Credit cards – ‘next shoe to drop’ for Canadian banks.
by investor on 12/03/09 at 1:53 pm
Conservative lending practices and regulations allowed Canadian banks to escape the worst of the writedowns faced by U.S. banks from the collapse of the subprime mortgage market. The lenders don’t have such protection for credit cards, aside from charging interest rates as high as 19.75% on outstanding balances, compared with a prime rate of 2.5% on loans to their best customers.
Krystal Koglin didn’t think twice when Toronto-Dominion Bank offered to boost the limit on her Visa credit card 11-fold a couple of years ago.
She went on a spending spree, hitting department stores like Holt Renfrew, treating friends at restaurants, splurging on designer jeans and buying “needless things” on eBay Inc.
“Being a young adult and irresponsible, I spent a lot of money that I shouldn’t have,” the 24-year-old salon manager and BCE Inc. employee in Toronto said. “I couldn’t handle having the responsibility of a $5,500 limit.”
Toronto-Dominion and other Canadian banks are suffering from a rise in credit-card losses from clients such as Koglin, who cut up her Visa card in December after skipping payments. Four of the country’s biggest banks set aside 51% more cash on average in the first quarter for card losses, and these costs may rise further this year, bank executives said.
“If there’s another shoe to drop, credit cards are going to be it,” said John Kinsey, who manages about $1-billion including bank stocks at Caldwell Securities Ltd. in Toronto. “It’s probably going to be the Achilles heel this year for the banks.”
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.
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, 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%.
Canadian Imperial, Canada’s largest card issuer, is “slowing growth” of credit cards, says chief executive Gerald McCaughey. Cards were the second-biggest revenue generator for CIBC’s consumer bank in 2008, bringing in $1.75-billion.
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