Wednesday, February 4, 2009

Credit card losses soar Debt Climbs Faster Than Income

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Could climb by as much as $800 million this year
February 04, 2009

Business Reporters

Amid fresh evidence cash-strapped Canadian consumers are taking longer to pay off their credit cards, another major financial institution has moved to tighten up its lending practices.

Amex Bank of Canada said in a note to cardholders recently that the rates of interest on some American Express cards will rise between 1 and 3 percentage points to as much as 21.99 per cent, effective Feb. 11.

The move comes as a new report projects credit card losses in Canada could climb by as much as $800 million this year if present trends continue.

"Canada's not really immune from the issues we've seen south of the border," said Pat Daley, a partner with Deloitte & Touche. "We're starting to see some indicators from a debt load point of view that credit card debt is becoming more of a problem for the issuers."

Canadians' debt-to-disposable income ratio, now at 130 per cent, exceeds U.S levels, Daley noted, quoting figures published earlier by the Bank of Canada.

As well, Canadians' love of credit cards means the value of all outstanding balances has climbed 40 per cent since 2004, Daley also said.

Meanwhile, a slowing economy and rising job losses mean more consumers are taking longer to pay off their debt, raising the risk of defaults to lenders, she said.


Based on interviews with executives representing more than half the outstanding credit card balances in Canada in December, Deloitte & Touche concluded write-offs were rising by as much as 1 per cent, or $800 million on an annualized basis.

"As recently as October-November they had started to see a change in behaviour in the way Canadians were paying off credit card debt. We found an increase in delinquencies. That's when a customer misses a payment after a certain point of time. And delinquencies can turn into write-offs," Daley said.

Delinquencies were up between 5 per cent and 10 per cent last fall, which translates into a 0.5-1 per cent higher write-off rate, she said.

Based on the $80 billion in outstanding balances in Canada a year ago at all financial institutions, not just the federally regulated banks, according to Nilson Report data, that translates into an $800 million increase in write-offs annually for the whole industry, Deloitte said.

Like other card issuers, including Canadian Tire Corp. and Toronto-Dominion Bank, which have tightened their lending practices, Amex Bank explained its rate hike by saying the costs of borrowing have increased "substantially" in recent months. It also said these changes are "in line with the market" and the majority of its cardholders pay their balance in full on time.

The Deloitte & Touche study comes as controversy over such practices grows while Ottawa pours billions into the financial system to ease lending and the Bank of Canada slashes its trendsetting rate.

Critics have accused the federal government of bungling an opportunity to provide meaningful relief to consumers through measures in the federal budget.

The Canadian Community Reinvestment Coalition, an Ottawa-based bank watchdog group, said the government should require "banks to prove through an independent audit that their credit card and other consumer and small- and medium-sized business loan interest rates and fees do not amount to gouging."

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