Interesting article below about banks increasing rates on consumer loans/lines of credit amidst increase pressure from the government to lend more. How will the banks deal with a potential rate cut from the Bank of Canada when they meet shortly…
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· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Tight credit starts to bite consumers
TARA PERKINS AND LORI MCLEOD
From Saturday's Globe and Mail
January 16, 2009 at 9:10 PM EST
The credit crunch, which has already squeezed corporate borrowers, is now trickling through to consumers, with higher interest rates and tighter lending terms.
Some borrowers are being notified that rates on their credit lines and cards are going up, and others are having borrowing limits scaled back.
Home buyers taking out a variable-rate mortgage, meanwhile, will find a premium over the prime rate of 70 to 80 basis points, rather than the discount they might have found just six months ago. (A basis point is 1/100 of a per cent.)
While financial institutions in the United States took similar measures last year and banks in Canada have been charging their corporate customers more, the competitive consumer-banking environment in Canada has made it more difficult for Canadian lenders to pass their higher costs along to individual borrowers.
But signs are mounting that financial institutions are going to raise prices on consumer loans, even as the federal government attempts to tackle the thorny issue of credit in its Jan. 27 budget.
Ottawa wants to grease access to credit at reasonable prices to keep the economy churning through the downturn.
The price of bank loans is also likely to hit the spotlight Tuesday, when the Bank of Canada is expected to cut interest rates again.
Banks are under pressure to reduce rates and lend more at a time when they are worried that more borrowers will struggle with their debts, a concern reflected in their increased provisions for troubled loans.
Bank of Montreal is sending letters to customers notifying them of a 1 percentage point increase in interest on lines of credit. The prime rate has been declining in recent months while the cost of borrowing has risen dramatically for all banks, the letters say.
BMO's increase, which affects customers who obtained credit lines before Oct. 15, does not make its products the most expensive in the industry. “From our survey of the market which was confirmed as recently as today, our personal line of credit offering is competitive and in fact favourable compared to some of our major competitors,” a spokesman for the bank said earlier this week. But the move signifies a new willingness among banks to raise rates.
“I think we'll see the rest of the competitors follow suit in some fashion,” said Edward Jones analyst Craig Fehr. “I think this is going to be the first of many product lines that will get repriced.”
The banks, which fund more than half of their loans through deposits, are seeking to loosen the vise grip that lower interest rates have placed on their profits.
“Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed,” said National Bank analyst Robert Sedran. “Increasing the borrower's spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall.”
Canadian Tire is raising the rate on its Options MasterCard credit cards by 2 percentage points, effective in March. A number of competitors have already raised rates, said spokeswoman Lisa Gibson.
“In this case, just given the economy and so on, we made the decision to raise it,” she said.
Canadian Tire has also reduced the spending limits on accounts that were inactive in order to reduce risk in the company's portfolio, she added. “We also stopped credit limit increases for riskier customers.”
American Express sent letters to a number of Canadians last month informing them the limit on their card had been cut. The company recently tightened some of its criteria, and has increased scrutiny of customer limits in light of the economic environment, said spokeswoman Lauren Dineen-Duarte.
One cardholder, who says she has never missed a payment and has a good job and credit rating, was surprised to receive a form letter from Amex Dec. 24 scaling back her credit limit by more than $16,000.
“These regular reviews are undertaken to protect card members' interests by helping them avoid taking on additional debt that they may not be able to support,” said the letter, which informed the cardholder her limit had been reduced to $1,000.
Ms. Dineen-Duarte said that although “this is an area that is being given increased scrutiny at this time, we have currently only had to take action like reducing credit limits for less than half-a-per-cent of our total card member base.”
She added that Amex carries out its assessments based on the financial information it has on record, including the card holder's spending and payment patterns, and external information it obtains from credit reference agencies.
As Toronto-Dominion Bank chief executive officer Ed Clark pointed out at an industry conference recently, there is new evidence that more Canadian consumers will have trouble repaying their loans. Personal bankruptcies and unemployment are on the rise, and soured loans are expected to follow.
As a result, financial institutions are stepping up efforts to reduce risk in their lending portfolios, and protect profits.
“Will we be able to start to recover, in the lending markets, our cost of lending?” Mr. Clark mused. “I think every bank is trying to do that, but this is a highly competitive market.”
He later added, “We're going through every line of business and saying, ‘Okay, would you make this loan if you assume we're going to have 8 per cent or 9 per cent unemployment?'”
Discounts on variable-rate mortgages, which had become standard during the housing boom but evaporated late last year, are showing no signs of a revival. Lenders are charging about a percentage point above prime on open, variable-rate mortgages with a five-year term. The best current deal is 60 basis points over prime, according to a mortgage broker.
In October, banks and other lenders stopped offering discounts off the prime rate on variable mortgages, and shortly thereafter began charging their mortgage customers a premium over prime.
While rates are historically low, the difference between receiving a discount and paying a premium above prime can translate into a 20-per-cent difference in the biweekly payment amount on a $300,000 variable-rate mortgage.
Monday, January 19, 2009
Friday, January 16, 2009
Financial Update for Jan. 16,2009
Plan offers tax credit for home renovations
The Harper government has been floating the idea of a tax credit for home renovations - an idea that could deliver significant stimulus for Canada's residential construction industry in the Jan. 27 budget.
- TSX +191.25 to 8879.61
- DOW +12.35 to 8212.49
- Dollar 0.7988 USD
- Oil -1.42 to $35.40 per barrel.
- Gold -1.50 to $806.70 USD per ounce
- www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Next week’s outlook: The Bank of Canada meets on Tuesday January 20th and 3 key questions will be answered:
1. By how much will the BOC reduce their overnight target rate?
2. Will the Big Banks follow?
3. If so, by how much?
Plan offers tax credit for home renovations
Flaherty floats idea before meeting with premiers today
STEVEN CHASE AND BRIAN LAGHI
From Thursday's Globe and Mail
January 15, 2009 at 4:00 AM EST
OTTAWA — The Harper government has been floating the idea of a tax credit for home renovations - an idea that could deliver significant stimulus for Canada's residential construction industry in the Jan. 27 budget.
Deliberations continue as Canada's premiers meet today in Ottawa to put the final touches on a budget request for Prime Minister Stephen Harper - one that sources say will include more cash for employment training, more benefits for the jobless and extra funding for infrastructure.
Finance Minister Jim Flaherty, meanwhile, has been conducting his own consultation on the looming budget, expected to deliver up to $30-billion in stimulus to soften an economic downturn.
During a closed-door session in Montreal last week, Mr. Flaherty asked participants' opinion on a partly refundable tax credit for renovations. Some economists among the more than 20 attendees criticized the proposal while representatives of the building-trades sector lauded it.
Tax credits can be used to reduce the amount of taxes a person owes to the government, but refundable tax credits can benefit filers even if they have no taxes to be paid; in that case, they could get a refund based on the credit.
The federal Finance Department looks favourably on stimulus spending that helps builders, in part because so many of their materials are made in Canada. This ensures more benefits of stimulus spending remain in this country than if the money goes to taxpayers in the form of rebates to spur consumption. There's a good chance that consumer spending would leak the benefits of stimulus to foreigners: 50 per cent of durable goods bought in Canada are imported.
"[By] contrast, only 20 per cent of investment in residential and non-residential buildings is imported through such inputs as building materials," the Finance Department said in its recent paper on stimulus.
One important decision Mr. Flaherty will have to make should the Tories proceed with this idea is whether to offer a tax credit for home renovation in general, or merely for retrofits and upgrades that increase energy efficiency.
Toronto Dominion Bank chief economist Don Drummond said stimulus for home renovations would be helpful because there's a limit to how many public works projects Ottawa can kick start soon.
"There's only so much of the big infrastructure stuff you can get going in 2009 and 2010," Mr. Drummond said.
"We are past the peak of employment in the construction industry, and those people are going to be getting laid off."
One drawback of programs such as subsidies for retrofitting and house refurbishment is that they are typically difficult to administer, hard to monitor and susceptible to fraud.
In Ottawa, the premiers plan to ask Mr. Harper when they meet with him tonight and tomorrow for more infrastructure money and increased flexibility in spending it.
The Harper government has committed itself to $33-billion over seven years, and is pledging to accelerate that spending. But premiers want the government to add to the overall global total.
Governments also appear close to an agreement to streamline environmental requirements for infrastructure projects. Ontario is particularly concerned for Ottawa to find a way to increase benefits for the unemployed and not just money for worker training. Toronto wants more workers to be able to access benefits.
Premiers will not put a price tag on their requests. "Most premiers are not looking to jam up the feds and put an astronomical number they can't meet," the source said.
Canada's municipal governments yesterday released a list of more than 1,000 infrastructure projects that they say could start this spring if federal funds become available.
Combined, the projects would create more than 150,000 jobs, the Federation of Canadian Municipalities said in a release.
The Harper government has been floating the idea of a tax credit for home renovations - an idea that could deliver significant stimulus for Canada's residential construction industry in the Jan. 27 budget.
- TSX +191.25 to 8879.61
- DOW +12.35 to 8212.49
- Dollar 0.7988 USD
- Oil -1.42 to $35.40 per barrel.
- Gold -1.50 to $806.70 USD per ounce
- www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Next week’s outlook: The Bank of Canada meets on Tuesday January 20th and 3 key questions will be answered:
1. By how much will the BOC reduce their overnight target rate?
2. Will the Big Banks follow?
3. If so, by how much?
Plan offers tax credit for home renovations
Flaherty floats idea before meeting with premiers today
STEVEN CHASE AND BRIAN LAGHI
From Thursday's Globe and Mail
January 15, 2009 at 4:00 AM EST
OTTAWA — The Harper government has been floating the idea of a tax credit for home renovations - an idea that could deliver significant stimulus for Canada's residential construction industry in the Jan. 27 budget.
Deliberations continue as Canada's premiers meet today in Ottawa to put the final touches on a budget request for Prime Minister Stephen Harper - one that sources say will include more cash for employment training, more benefits for the jobless and extra funding for infrastructure.
Finance Minister Jim Flaherty, meanwhile, has been conducting his own consultation on the looming budget, expected to deliver up to $30-billion in stimulus to soften an economic downturn.
During a closed-door session in Montreal last week, Mr. Flaherty asked participants' opinion on a partly refundable tax credit for renovations. Some economists among the more than 20 attendees criticized the proposal while representatives of the building-trades sector lauded it.
Tax credits can be used to reduce the amount of taxes a person owes to the government, but refundable tax credits can benefit filers even if they have no taxes to be paid; in that case, they could get a refund based on the credit.
The federal Finance Department looks favourably on stimulus spending that helps builders, in part because so many of their materials are made in Canada. This ensures more benefits of stimulus spending remain in this country than if the money goes to taxpayers in the form of rebates to spur consumption. There's a good chance that consumer spending would leak the benefits of stimulus to foreigners: 50 per cent of durable goods bought in Canada are imported.
"[By] contrast, only 20 per cent of investment in residential and non-residential buildings is imported through such inputs as building materials," the Finance Department said in its recent paper on stimulus.
One important decision Mr. Flaherty will have to make should the Tories proceed with this idea is whether to offer a tax credit for home renovation in general, or merely for retrofits and upgrades that increase energy efficiency.
Toronto Dominion Bank chief economist Don Drummond said stimulus for home renovations would be helpful because there's a limit to how many public works projects Ottawa can kick start soon.
"There's only so much of the big infrastructure stuff you can get going in 2009 and 2010," Mr. Drummond said.
"We are past the peak of employment in the construction industry, and those people are going to be getting laid off."
One drawback of programs such as subsidies for retrofitting and house refurbishment is that they are typically difficult to administer, hard to monitor and susceptible to fraud.
In Ottawa, the premiers plan to ask Mr. Harper when they meet with him tonight and tomorrow for more infrastructure money and increased flexibility in spending it.
The Harper government has committed itself to $33-billion over seven years, and is pledging to accelerate that spending. But premiers want the government to add to the overall global total.
Governments also appear close to an agreement to streamline environmental requirements for infrastructure projects. Ontario is particularly concerned for Ottawa to find a way to increase benefits for the unemployed and not just money for worker training. Toronto wants more workers to be able to access benefits.
Premiers will not put a price tag on their requests. "Most premiers are not looking to jam up the feds and put an astronomical number they can't meet," the source said.
Canada's municipal governments yesterday released a list of more than 1,000 infrastructure projects that they say could start this spring if federal funds become available.
Combined, the projects would create more than 150,000 jobs, the Federation of Canadian Municipalities said in a release.
Thursday, January 15, 2009
Financial Update for Jan. 15,2009
Holiday sales: Much worse than feared
Retail group says combined November-December sales fell 2.8%, after expecting a modest gain.
· TSX -273.19 to 8688.36
· DOW -248.42 pts to 8200.14
· Dollar 0.8017 USD
· Oil -.46to $36.82 per barrel.
· Gold -16.30 to $808.20 USD per ounce ·
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
By Parija B. Kavilanz, CNNMoney.com senior writer
Last Updated: January 14, 2009: 2:10 PM ET
NEW YORK (CNNMoney.com) -- The retail industry's leading trade group blamed a "deep recession, severe winter weather and five fewer shopping days" for a 2.8% drop in 2008 holiday sales - a far worse outcome than the industry expected.
The National Retail Federation had originally forecast holiday sales for the combined November-December shopping months to grow 2.2%, which would still have been the weakest pace of gain in at least six years.
As it was, it turned out to be the first-ever decline in the measure since the group initiated it in 1995.
The two-month holiday period can account for as much as 50% of retailers' annual profits and sales.
"The current economic crisis proved to be more challenging than any had anticipated," NRF Chief Economist Rosalind Wells said in a report. "Consumers showed they were more than willing to wait out retailers this year causing increased pressure on prices."
Also, the group said a shift in the calendar which resulted in five fewer shopping days between Thanksgiving and Christmas in 2008 versus the previous year meant consumers had fewer days to do their gift shopping and merchants had fewer days to log additional sales.
The latest government report on December retail sales, also released on Wednesday, supported Wells' point.
The Commerce Department report showed overall retail sales fell 2.8% last month and declined 3.1% excluding auto purchases, despite a last minute surge in holiday-related purchases in the week before Christmas.
December's sales drop marked the sixth straight monthly sales decline in 2008 and the longest consecutive stretch of monthly declines in the measure in at least four decades.
What's more, last year's ugly holiday sales could force an unraveling of the retailing industry, forcing several chains to go out of business in 2009.
Many retailers, including Circuit City, Linens 'n Things and Whitehall Jewelers already either filed for bankruptcy or liquidated last year. That trend is expected to rapidly pick up pace in the weeks and months ahead.
The latest casualty - regional department store chain Gottchalks, which operates 58 stores in six Western states - filed for bankruptcy Wednesday. But analysts warn that given the credit market freeze, it's highly unlikely that any merchant who files for bankruptcy in this environment will come out alive
Retail group says combined November-December sales fell 2.8%, after expecting a modest gain.
· TSX -273.19 to 8688.36
· DOW -248.42 pts to 8200.14
· Dollar 0.8017 USD
· Oil -.46to $36.82 per barrel.
· Gold -16.30 to $808.20 USD per ounce ·
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
By Parija B. Kavilanz, CNNMoney.com senior writer
Last Updated: January 14, 2009: 2:10 PM ET
NEW YORK (CNNMoney.com) -- The retail industry's leading trade group blamed a "deep recession, severe winter weather and five fewer shopping days" for a 2.8% drop in 2008 holiday sales - a far worse outcome than the industry expected.
The National Retail Federation had originally forecast holiday sales for the combined November-December shopping months to grow 2.2%, which would still have been the weakest pace of gain in at least six years.
As it was, it turned out to be the first-ever decline in the measure since the group initiated it in 1995.
The two-month holiday period can account for as much as 50% of retailers' annual profits and sales.
"The current economic crisis proved to be more challenging than any had anticipated," NRF Chief Economist Rosalind Wells said in a report. "Consumers showed they were more than willing to wait out retailers this year causing increased pressure on prices."
Also, the group said a shift in the calendar which resulted in five fewer shopping days between Thanksgiving and Christmas in 2008 versus the previous year meant consumers had fewer days to do their gift shopping and merchants had fewer days to log additional sales.
The latest government report on December retail sales, also released on Wednesday, supported Wells' point.
The Commerce Department report showed overall retail sales fell 2.8% last month and declined 3.1% excluding auto purchases, despite a last minute surge in holiday-related purchases in the week before Christmas.
December's sales drop marked the sixth straight monthly sales decline in 2008 and the longest consecutive stretch of monthly declines in the measure in at least four decades.
What's more, last year's ugly holiday sales could force an unraveling of the retailing industry, forcing several chains to go out of business in 2009.
Many retailers, including Circuit City, Linens 'n Things and Whitehall Jewelers already either filed for bankruptcy or liquidated last year. That trend is expected to rapidly pick up pace in the weeks and months ahead.
The latest casualty - regional department store chain Gottchalks, which operates 58 stores in six Western states - filed for bankruptcy Wednesday. But analysts warn that given the credit market freeze, it's highly unlikely that any merchant who files for bankruptcy in this environment will come out alive
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