As Bloomberg notes, the banks have increased their leverage substantially over the past several years, with the debt going mostly toward offering more residential mortgages:
The nation’s lenders have more than doubled their external debt since the end of the recession — an amount in excess of C$500 billion ($382 billion), according to international investment position data released by Statistics Canada.
That’s brought total external debt financing of Canadian banks to about C$850 billion through last September, and it’s easy to conclude that at least some of the new foreign debt has helped drive mortgage lending. In some cases, the linkage with residential mortgages is direct.
Much of the mortgage demand is coming from foreign buyers as well, with “an increasing amount of the debt seems to be short-term and denominated in foreign currencies,” according to Bloomberg. That could make banks vulnerable to currency shocks, if, for example, the U.S. dollar surges value.
But for now, the party rolls on — as do the gains for Canadian stocks and the funds that hold them.
The iShares MSCI Canada Index ETF (NYSE:EWC), which offers significant Canadian banking exposure, was trading at $27.15 per share on Monday morning, down $0.07 (-0.26%). Year-to-date, EWC has gained 3.82%, versus a 5.81% rise in the benchmark S&P 500 index during the same period.