Canadian Banks Get Case of HELOC Indigestion

Royal Bank of Canada (TSX:RY)(NYSE:RY) is first to report third-quarter earnings. Will Canada’s voracious appetite for HELOC’s put a damper on festivities?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In the midst of earnings season for the Big Five banks, a storm cloud is brewing that could put a damper on rising bank-stock prices.

Simply put, home equity lines of credit (HELOC’s) could be their undoing in the weeks ahead despite the good news we’ll hear over the next week.

Here’s why…

Rising interest rates a double-edged sword

We’ve heard for a long time how rising interest rates will put more money in bankers’ pockets, as everything from credit cards to mortgages and all other loan products cost consumers more.

Fair enough. That’s Business 101.

A stronger economy should be able to support higher interest rates.

However, what happens when HELOCs as a percentage of consumer credit reaches levels not seen since 2009 when they accounted for 57% (they’re around 45% today) of the total?

“The sharp appreciation in home prices in Ontario and British Columbia fuelled by [very low interest rates] have undoubtedly encouraged some homeowners to tap into their home equity in order to support a spending binge,” National Bank chief economist Stefane Marion wrote in a client note.

Marion’s colleague economist Krishen Rangasamy added to the discussion August 22 suggesting that the short-term effect of this spending binge is to stimulate the economy temporarily; the long-term effect possibly causing consumer financial instability.

In the last 12 months, National Bank estimates that $20 billion in HELOCs have been added to the debt heap with three million Canadians racking up loans totalling close to $222 billion dollars or  $74,000 per HELOC.

Real estate experts suggest that parents are using the equity built up in their homes to take out HELOCs to provide their kids with the funds to make a downpayment on a home.

That’s great if Toronto and Vancouver home prices remain high but if they dip by 40% in real, inflation-adjusted terms as they did between 1989 and 1996, not only are the parents and kids going to have a problem, so too will the banks.

Big Five Canadian Banks – HELOCs and Residential Mortgages Outstanding – Q2 2017

Bank

HELOCs

Residential Mortgages

%

Royal Bank of Canada (TSX:RY)(NYSE:RY)

$45.0B

$259.9B

17.3%

Toronto-Dominion Bank (TSX:TD)(NYSE:TD)

$81.4B

$217.1B

37.5%

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS)

$19.5B

$228.3B

8.5%

Bank of Montreal (TSX:BMO)(NYSE:BMO)

$35.1B

$113.0B

31.1%

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM)

$21.0B

$192.9B

10.9%

Source: Bank’s Q2 2017 reports

Which banks have the biggest problem?

Well, I’m not an underwriting specialist, but from where I sit, if things get ugly, Bank of Montreal and TD appear to hold the greatest exposure to HELOCs.

Invest accordingly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned.

More on Bank Stocks

Hand arranging wood block stacking as step stair with arrow up.
Bank Stocks

The Most Valuable TSX Stock Out There Is up 10% This Month!

This TSX stock is the best value stock out there, expanding even during a downturn and setting itself up from…

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Change Your Future: What to Hold in a TFSA in 2022

Holding dividend growth stocks in a TFSA long-term can change the financial futures of worried Canadians.

Read more »

work from home
Bank Stocks

Where Should Canadians Invest $500 Right Now? How About the “Best Bank for Your Buck?”

TD Bank (TSX:TD)(NYSE:TD) stock is a Dividend Aristocrat that looks too cheap to ignore as rates surge.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Growth from coins
Dividend Stocks

What’s More Effective: 1 Growth Stock or 1 Dividend Stock for High Returns?

Let's settle the age old debate. If you had invested in a huge growth stock or a solid dividend stock,…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Why I Prefer Banks to Oil Stocks for 2022’s 2nd Half

Right now, I like bank stocks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) more than oil stocks.

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Stocks for Beginners

2 Big Bank Stocks to Own for Lifelong Income

These two Big Bank stocks are ideal staple holdings for newbie investors seeking a lifetime of passive income.

Read more »

Dial moving from 4G to 5G
Tech Stocks

TFSA Investors: 2 Canadian Stocks With Unbelievable Staying Power 

Amid economic uncertainty, investors look for stocks that can thrive in any crisis and grow long term. Here are two…

Read more »