International Banking - Annual Overview

CANADIAN HOUSEHOLD DEBT Household debt has been increasing since the mid-1980s 。 Low interest rates, demographics (including immigration), financial innovation and shift in consumer attitude/behaviour Debt increase has largely been driven by mortgage debt (represents ~72% of total household credit) ⚫ Household debt to disposable income is only one metric to analyze 。 While debt growth is not fast by historical standards, income growth has not kept up, leading to increasing household debt to income ratio o Household debt to income ratio mixes a balance sheet measure "debt" with an income statement measure "disposable income". Borrowers are not expected to pay off their debts with one year's income • Other considerations regarding consumer indebtedness and consumer resilience to shocks: o Housing affordability – Mortgage debt-service ratios are in line with historical averages at the national level Interest and principal mortgage debt payments steady at ~6% of disposable income since 2008 Consumers prudently taking advantage of low rates to repay more principal 。 Net worth - Net asset levels (assets less debt) are at an all-time high of more than 8 times disposable income About half of these assets are financial (not real estate) Asset growth has outpaced debt growth Interest rate shocks - Despite expectations for higher rates, there are mitigating factors ○ Canadians have substantial equity in their homes The majority of mortgage holders are locked in at fixed rates, with the 5-year term the most popular Variable rate borrowers are qualified at the 5 year posted rate to provide a buffer against interest rate shocks. These borrowers have the option to switch into fixed rates _ o Unemployment rate – A key driver of delinquencies and losses that determines borrowers' ability to pay debt ○ Levels are expected to remain fairly stable over the next 2-3 years Scotiabank® | 46

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