Canadian banks have had a strong year so far, with consumer loan growth being driven by a rebounding domestic real estate market and commercial loan growth up from 2012. Commercial loan growth is expected to remain strong in the medium term though Canadian consumers may start to deleverage.

“After a surprisingly good spring and summer selling season for domestic real estate, it is no surprise that year-over-year loan growth accelerated in July,” writes Tom MacKinnon in a recent comment from Bank of Montreal’s Equity Research division. Loan growth was up 6.7 percent in July, compared to 6.2 percent in June and 7 percent July 2012, based on Bank of Canada data.

Consumer loan growth was driven mostly by residential mortgages

Consumer loan growth was up from 4.5 percent in June to 5.2 percent in July, though that’s still a drop from the 6.4 percent increase seen in July 2012. The good news is that consumer loan growth was driven mostly by residential mortgages. Commercial loan growth was significantly better, hitting 12.7 percent year on year in July, compared to 12.6 percent in June and just 9.3 percent July 2012.

Canadian Loan Growth

One side effect of new regulations apparent in the data is that they may be pushing some companies away from traditional banking. “Mortgage loan growth at the banks has started to lag industry loan growth reflecting more stringent underwriting standards,” says MacKinnon. “This suggests that an increasing amount of industry mortgages are moving to non-OSFI regulated entities like credit unions and other financial providers.”

Canadian consumers to pay down debt over the next few years

BMO expects mortgage loan growth to remain in the 5 to 6 percent range over the next couple months, and in the 4 to 6 percent range over the next 3 to 5 years. Improving conditions in the US should spur commercial loan growth, keeping it in the 6 to 8 percent range. MacKinnon points out that while many Canadian consumers will he expects Canadian consumers to pay down debt over the next few years, the low cost of borrowing means that companies will continue to take on more loans. If the Canadian government want to change course and go with broader deleveraging, it will have to raise interest rates to get companies to play along.