Auto loans in Canada have quadrupled since 2007, putting lenders including Toronto-Dominion Bank and Royal Bank of Canada at bigger risk of losses in an economic slump, Moody's Investors Service said.
"Credit losses have been low, but could rise quickly in an adverse scenario of unemployment increases or rapidly rising interest rates," the New York-based ratings company said today in a report.
Canadian banks made "significant" market-share gains in auto lending and dealer-inventory financing since the 2007 credit crisis, Moody's said. Industry consolidation, shifting preferences to luxury cars, and loans designed to compete with auto finance and leasing companies have contributed to the growth, Moody's said.
Private-passenger vehicle loans increased from C$16.2 billion ($14.4 billion) in 2007 to about C$64 billion at the end of last year, Moody's said, citing Bank of Canada data. The 20 percent compounded annual rate of increase is more than double that of mortgages, credit cards and personal lines of credit in Canada, according to the report. Moody's estimates Toronto- Dominion, Royal Bank and Bank of Nova Scotia are the country's three largest consumer auto lenders.
Loans with extended, lease-like terms are creating negative equity for borrowers and collateral deficiencies for banks, Moody's said. Toronto-Dominion, which breaks out auto lending separately in its financial statements, reported loans with terms of five years or more comprised a third of its auto portfolio in 2013, according to the report.
Canada consumers, already carrying record household debt, are making themselves and banks vulnerable in a slump, according to Moody's. The current ratio of debt-to-disposable income is almost double that of Canada's last severe recession in 1992, when unemployment peaked at 11.7 percent and aggregate nonperforming bank loans hit 6 percent.
"This suggests a sharp increase in nonperforming auto loans will occur in the event of a significant economic downturn," Moody's said.
Toronto-Dominion manages its auto-loan portfolio through a mix of credit-lending policies, pricing and product strategy, said Brian Jantzi, a spokesman for the Toronto-based lender.
"The financing we provide fits within our risk appetite and satisfies our thorough qualification criteria," Jantzi said in an e-mailed statement. "We anticipate no unusual risks associated with this sector as our business grows."
Ron McClure, head of RBC Automotive Finance, said in an e- mailed statement that Royal Bank's "portfolio is stress tested on an ongoing basis to anticipate events in the market place and hence validate our risk appetite assumptions."
Sheena Findlay, spokeswoman for Toronto-based Scotiabank, didn't have an immediate response when asked about the report.