Toronto,
09
December
2019
|
12:00
Europe/Amsterdam

Canadian Consumer Credit Market Expected to Show Marginal Growth in 2020

  • TransUnion’s 2020 consumer credit forecast anticipates marginal credit balance growth and broadly stable delinquencies with pockets of stress on certain consumer segments
  • As 2019 draws to a close, overall credit card balances reached a record high of over $100 billion for the first time

Toronto, December 9, 2019 – The Canadian consumer credit market is expected to show marginal balance growth with broadly stable delinquencies over the next year. These predictions were shared as part of the newly released Q3 2019 TransUnion (NYSE: TRU) Industry Insights Report.

The report suggests a measured outlook, as Canadians showed signs of some vulnerability in the latest quarter as the consumer credit market continued to adjust to economic uncertainty. TransUnion’s findings revealed the early warning signs of a potentially weakening market, with overall non-mortgage delinquency rates increasing by 26 basis points (bps) YoY to 5.54% in Q3 2019. While overall delinquency rates were still below levels of even three years ago (5.62% in Q3 2016), this recent upward trend indicated that certain segments of consumers have started to feel the pressure of current debt levels in the face of a slowing economy and rising interest rates.

In Q3 2019, overall levels of non-mortgage consumer debt remained broadly stable – up just 0.24% to $30,038 YoY. The total number of consumers with access to credit continued to grow, up 2.9% to over 29.5 million over the same period.

During the third quarter, outstanding credit card balances passed the $100 billion mark, a significant milestone for what is the most widely held consumer credit product. In addition to being used to facilitate retail purchases, credit cards are often used by consumers to finance essential living expenses.

“While the Canadian economy has slowed, key measures like inflation and unemployment remain healthy and continue to bolster the market. However, a potential slowdown in the Canadian economy, combined with soft wage growth, heightened global economic uncertainty and potential further interest rate increases, may cause some challenges,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada.

The Year Ahead: 2020 Forecast

TransUnion’s forecasting models provide forward-looking insights for consumer credit balances and delinquency rates, and incorporate dozens of credit, behavioural and macroeconomic variables. The 2020 forecast indicates that, despite some potential economic challenges, the outlook remains relatively positive for the Canadian consumer credit market, with continued opportunities for growth.

At the end of 2020, TransUnion is forecasting that the average non-mortgage consumer debt balance will reach $31,531, a relatively minor increase of 1.02% annually. Serious delinquency rates are forecasted to increase in the early part of 2020 and then begin to correct for most credit products. Overall consumer non-mortgage delinquency rates are expected to drop in Q4 2019 from Q3 levels, and then increase a modest 3 bps by end of 2020. Each individual credit product is expected to see small increases in delinquency rates, well within manageable levels at 1–8 bps.

TransUnion Canada 2020 Consumer Credit Forecast

Consumer Level Metrics

Q3 Actual

Q4 2019 Forecast

Q4 2020 Forecast

Non-Mortgage Consumer Balance

$30,038

$31,215

$31, 531

Non-Mortgage Serious Delinquency (90+ DPD)

5.54%

5.41%

5.44%

Credit card average balance

$4,240

$4,362

$4,465

Credit card serious delinquency (90+ DPD)

2.80%

2.90%

2.98%

Installment loan average balance

$34,633

$35,268

$36,621

Installment loan serious delinquency (60+ DPD)

4.45%

4.13%

4.20%

Mortgage average balance

$273,276

$275,692

$285,738

Mortgage serious delinquency (60+ DPD)

0.45%

0.49%

0.51%

Auto loan average balance

$21,216

$21,411

$21,582

Auto loan serious delinquency (60+ DPD)

1.77%

1.73%

1.74%

* Serious delinquency rates are consumer level and are measured as 60 or more days past due for mortgage and 90 or more days past due for all other products

Three Trends to Watch in 2020

1) Credit card delinquency rates at higher risk of an increase

Credit cards are forecast to have increased delinquency rates in 2020. TransUnion research studies have shown that, when faced with economic pressure, consumers often have a payment hierarchy around which debt payments they make and in what order. These analyses have shown that, for financially distressed Canadian consumers with credit cards, auto loans and mortgages in their wallets, the credit card payments are generally the first that will be missed, as consumers prefer to keep payments on auto loans and mortgages in good standing if they are forced to choose.

The current forecast is for consumer-level delinquency (the proportion of consumers with card credit who would go seriously delinquent on at least one of those cards) to rise 8 bps from 2.90% in Q4 2019 to 2.98% at the end of 2020.

2) Potential for regional shocks across Canada

TransUnion forecasts the possibility for regional economic shocks across Canada contributing to a slight rise in overall delinquency. These include the impact of continued struggles in the energy sector as well as the impact of trade restrictions on agricultural producers, both of which are likely to contribute to weakened economies in the prairie provinces.

“Depending on the severity and length of factors like trade restrictions, the outcome of trade agreements and pipeline bottlenecks, some regions could experience delinquency rate increases of up to 50 basis points depending on various scenarios, similar to what occurred in Alberta and Saskatchewan following the last oil price drop. Typically, as these economic shock events occur, we tend to see some unemployment increases followed by a rise in delinquency as incomes and capacity to service debt become constrained,” said Fabian.

3) Mortgage market is gaining renewed strength

Stricter mortgage qualifying rules and stress tests have been successful in tightening entry into the mortgage market for many consumers over the past 18 months. The TransUnion Industry Insights Reports have tracked market adjustment to the new mortgage rules over the past few quarters. As lenders have gotten acclimated to these new rules, other positive market factors, including lower long-term interest rates and positive housing sales and demand conditions, have contributed to a bounce back in Canada’s mortgage market.

In Q3 2019, origination volumes were up 4.5% YoY, and average mortgage balances, despite the qualifying rules, also increased modestly, up 1.3%. TransUnion forecasts this growth to continue as demand increases and the market further acclimatizes to the new rules. Average balances are also anticipated to grow 3.6% by end of 2020, to $285K, and delinquencies to remain low and stable with a modest 2 bps increase to 0.51%.

Q3 2019 at a glance

In Q3 2019 new account originations in the credit card market continued to slow. Recent TransUnion research showed that many of the new cards issued in the market have been to existing cardholders taking on new cards versus new card consumers. Average balances continued to grow as the total credit card debt in Canada reached a milestone of $100B in Q3 2019. TransUnion analysis indicates consumers with credit cards have been actively using them and growing balances at an accelerating rate.

Q3 2019 Metrics for Major Credit Products

Credit Product

Q2 2019 Originations(1) – All Borrowers

Annual Change

 

Average Account Balance

Annual Change

Consumer-Level Serious Delinquency Rates(2)

Annual Change

Consumer Credit Cards

1,738K

-4.3%

$4,240

1.45%

2.80%

- 20 bps

Captive Auto Loans

264K

-7.9%

$21,216

1.07%

1.77%

+ 7 bps

Lines of Credit

387K

12.2%

$35,451

-1.03%

1.07%

+ 2 bps

Installment Loans

840K

0.6%

$34,633

5.09%

4.45%

+ 36 bps

Mortgages

270K

4.5%

$273,276

3.65%

0.45%

- 1 bps

(1) Originations are viewed one quarter in arrears to account for reporting lag.

(2) Serious delinquency rates are 90 or more days past due for credit cards and 60 or more days past due for all other credit products.

The auto market continued to slow from the elevated pace of the last 18 months as vehicle sales trend to more historical levels. Average auto loan amounts have remained relatively stable but still higher than previous years as Canadians continued to move away from passenger vehicles in favour of light trucks and SUVs. Much of the growth in new loans was concentrated in below prime* risk tiers, as lenders expanded their risk appetite to grow business. Lenders have also been increasing the average term length of loans, making monthly payments more affordable for this segment. Delinquency rates have risen, driven mostly by the prairie provinces which have experienced significant economic pressures in recent quarters.

In contrast to several other consumer lending categories, mortgage originations appeared to stabilize after 10 consecutive quarters of YoY declines that followed the early 2019 introduction of legislation relating to qualifying rules and stress testing. Mortgage originations increased 4.5% YoY in the most recent quarter, and overall balances were up 1.3% YoY in Q3 2019.

Overall non-mortgage delinquency rates increased 26 basis points (bps) YoY to 5.54% in Q3 2019, but still remain below the levels of even three years ago (5.62% in Q3 2016). Another indicator of some increased pressure on consumer finances was the number of accounts entering collections increasing 3.8% to 731,000 YoY in Q3 2019. Additionally, data reported by the Office of the Superintendent on bankruptcy shows insolvency rates have also increased by 12% over the same period. Generally, there is a lag of between 18-24 months from when interest rates rise and insolvency rates increase as consumers struggle to cover the rising cost of servicing debt.

“Consumers’ ability to manage their debt is directly impacted by their disposable income. While Canada is not expected to slip deep into a recession through 2020, any significant economic headwinds or downturn would likely put credit cards at a higher risk for increased delinquency rates relative to other major credit products. At the same time, we would expect balances to rise as consumers look to cards to help make ends meet,” concluded Fabian. “While current expectations are for low but still positive economic growth through 2020, lenders are likely to monitor their portfolios closely in the event of any negative news, and many have already developed downturn strategies that would be implemented in the event of a prolonged economic adjustment."

More information about the TransUnion Canada Industry Insights Report, including its 2020 consumer credit market predictions, as well as details about a variety of credit products, can be found here. Among the details are more information about balance and delinquency trends, including for auto loans, installment loans, lines of credit and mortgage loans. Please visit the following website to register for TransUnion's Q3 2019 Industry Insights Report webinar scheduled Wednesday, December 11th at 2pm ET.

* TransUnion CreditVision score risk tier segment definitions: subprime = 300-639; near prime = 640-719; prime = 720-759; prime plus = 760-799; super prime = 800+

About the TransUnion Canada Industry Insights Report

TransUnion’s Canada Industry Insights Report is an in-depth, full credit-active population-based solution that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across virtually every active credit file on record. Each file contains hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyze market dynamics over an entire business cycle, helping to understand consumer behavior over time and across different geographic locations throughout Canada. Businesses can access more details about and subscribe to the Industry Insights Report.

About TransUnion (NYSE: TRU)

Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion reaches consumers and businesses in more than 30 countries around the world on five continents. Based in Burlington, Ontario, TransUnion Canada provides local service and support throughout Canada. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide. We call this Information for Good. Visit www.transunion.ca to learn more.

For more information or to request an interview, contact:

Katie Duffy, Ketchum
katie.duffy@ketchum.com
416-355-7421