Canadian banks: mortgaging the future Oh, Canada. The country and its banks emerged from the financial crisis unscathed compared with their neighbours to the south. But there is concern that consumer indebtedness in the ensuing years, largely from mortgages, has risen to potentially inglorious levels. At the end of September household debt to personal disposable income reached a record 165 per cent, from 137 per cent in June 2007, according to Moody's Investors Service, which cut creditworthiness ratings on six Canadian banks last week. House prices have jumped 20 per cent in five years. About a quarter of the total assets of banks in Canada are residential mortgages. And, since the financial crisis, the banks get lots of state support for these portfolios. About 65 per cent of their home loans are insured by the government through the Canada Mortgage Housing Corporation and other government-supported insurers, Moody's says. The amount of capital that banks are required to hold against the government-insured loans is de minimis, a welcome boost to profitability. Stonecap Securities forecasts that the median return on equity for Canadian banks this year will be 15 per cent compared with 9 per cent for their US counterparts. Canada's banks, on average, trade at 2.5 times their tangible book value. That is more than double their US peers. In a world littered with messy banking systems, Canada's is widely viewed as clean. The World Economic Forum ranks Canadian banks as the soundest in the world. The risk to earnings is that the housing market stumbles, mortgage defaults rise, Ottawa rethinks its generous insurance underwriting, and banks need to hold more capital. On the other hand, governments tend to be reluctant to withdraw support mechanisms in a downturn. At current valuations, investors in Canadian banks should be on guard.