Bad news, bank investors: Credit growth may well have peaked

Posted on 03-25-2014 01:03
Summary: It's too early to state definitively that Canadian credit growth has rolled over. But, for investors in domestic bank stocks, it's not too early to start worrying about it.

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It's too early to state definitively that Canadian credit growth has rolled over. But, for investors in domestic bank stocks, it's not too early to start worrying about it.

The accompanying chart compares the year over year growth of total Canadian loan activity to the performance of the S&P/TSX Bank Index.

The financial crisis messed up the chart a bit - the stocks cratered as the problems became evident while it took a year for Canadians to realize this and stop borrowing. But, in November, 1991, April, 1998, and October, 2000, a rapid slide in loan growth confirmed or predicted significant slides in bank stocks.

Investors are aware of the onerous debt burdens carried by the average Canadian household. Current levels of consumer debt make it more likely that domestic loan growth has hit a peak and is now set to decline.

The chart also includes the effects of corporate loan growth, which is more of a wild card. It is possible that corporate Canada will resume borrowing and partially offset the lack of credit demand from consumers.

There is reason to be skeptical, however, about the prospects for increased borrowing and investing for two of the country's largest industries - mining and energy. Slower economic growth in the developing world is already having a chilling effect on mining investment - hence the long faces at this year's Prospectors and Developers Association of Canada (PDAC) conference.

The prospects for energy are brighter, but the rapid growth of U.S. oil and natural gas production means Canadian firms will be less likely to risk their balance sheets to expand production capacity.

Bank stocks have been easy money for domestic investors for a long time and, given their financial strength and diversification, it's foolish to get super-bearish on the sector. Still, it is likely that Canadian credit growth is already past its cyclical peak, which means both profit growth and stock prices for Canadian bank stocks are likely to hit the pause button.

SCOTT BARLOW

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