Canadian Consumers and Lenders Brace for Uncertainty

• Credit participation growth slowed as originations of credit products dropped
• Credit usage slowed as balances on revolving products dropped due to crisis containment measures that impacted spend rates and consumers paying down existing balances
• Delinquency and insolvency rates improved reflecting systemic resiliency as lenders and consumers work together
• Consumer mindset shifted as Canadians prepare for the end of financial accommodation programs and government emergency benefits

TransUnion Canada’s Q2 2020 Industry Insights Report shows that the impact of the COVID-19 pandemic continued to affect the consumer credit market as consumers and lenders braced for uncertainty. Access to credit slowed as overall origination of credit products fell. Existing credit consumers slowed usage, as revolving balances (cards and lines of credit) dropped, partly due to reduced consumer spending and deleveraging by certain segments of consumers. While use of credit slowed and balances dropped, delinquency and insolvency rates improved, driven in part by the widespread use of financial accommodation tools, such as deferrals.

“COVID-19, of course, continues to be the dominant driver of changing conditions in credit markets, but it is very encouraging to see lenders and borrowers working together to adapt to the new environment,” said Matt Fabian, director of financial services research and consulting at TransUnion. “As lockdown restrictions due to the pandemic eased slightly in July, a combination of a more resolved consumer base augmented by government relief and financial forbearance programs seemed to be restoring some business and consumer confidence.”

In addition to the Industry Insights Report, TransUnion’s most recent Financial Hardship Survey revealed that consumers continue to take payment deferrals. In the latest wave of the survey the week of August 2nd, 18% of consumers surveyed indicated they are receiving some form of financial accommodation such as a deferral or payment holiday, up 306 bps from the last wave the week of July 4^th. Further, of those receiving deferrals, the most common products are credit cards (29%), mortgages (28%), personal loans (17%) and utilities (16%).

As originations slowed, consumers tapped into investments and savings to manage cashflows

As the crisis progressed, the number of consumers seeking credit—observed by the volume of applications—plunged at the start of Q2 2020, then slowly grew to pre-crisis levels by the end of the quarter. The slowdown may have been driven by a combination of reduced access to branches during the lockdown, and uncertainty around employment and the implications of the lockdown causing consumers to defer taking on new debt. While the number of consumers with access to credit grew from the prior year by 1.5% to 29.2 million, this number is below the average year-over-year growth rate of 2% to 3% observed in previous reports.

Origination volumes of loans declined across most products heading into the crisis, led by credit cards, which experienced a 13.5% year-over-year (YoY) decline in Q1 2020 (originations are reported one quarter in arrears). Credit card origination volumes had already been declining for a few quarters before the pandemic as the market for additional cards had become saturated. Auto loan originations declined as auto sales had continued to drop heading into the crisis. Access to dealers during the early stages of the lockdown also impacted auto sales and financing volumes. Mortgages were the only product with positive YoY origination growth, at 29.2% as many consumers took advantage of renewals and refinancing opportunities, given the continued drop in interest rates.

While access to credit may have tightened as lenders were more cautious during the peak of the crisis, lenders provided support and relief programs to existing customers through a hard economic period. However, consumers did not solely rely on credit. The results of TransUnion’s most recent Financial Hardship Survey indicate that Canadian consumers are withdrawing from savings and investments to augment their incomes. Over 1 in 3 affected consumers (approximately 13% of Canadians) reported they are using money from TFSA or RRSP accounts to help pay bills – up by 345 bps from the previous month’s survey.

“We are finding that Canadian consumers may be using their existing savings and investments to supplement income during this pandemic,” said Fabian. “Many Canadians are opting to dig into their personal savings and investments rather than taking on additional debt, which could partly explain the general decline in new originations. There are obvious longer-term implications to this approach, but this is an unprecedented situation, and we will have to see how sustainable it is if the economic recovery is slower to materialize.”

Borrowing and credit utilization slowed due to consumer caution and spending preferences

Total outstanding debt in Canada grew 4.3% to $1.9 trillion, with the growth in balances being driven by mortgages, which grew 5.3% from the prior year. Credit card balances fell drastically, by 12.3% YoY, with TransUnion’s Financial Hardship Survey indicating that Canadians are postponing expenditures during the crisis. Two of the top expenditures being postponed are vacations and holidays (56%) and home improvement (23%)—this has likely impacted card balances, especially as card is often the mode of paying for such expenditures.

The Q2 Industry Insights Report shows that that the number of consumers with delinquent balances dropped, reflecting the impact of both government support and the provision of financial accommodations by lenders. Overall, consumer non-mortgage delinquency rates have declined by 10 bps YoY, to 1.7%. The reduction in delinquency was driven, by credit cards and auto loans with drop in consumer delinquency rates of -14 bps and -3 bps respectively. Lines of credit and mortgages saw slight increases in delinquency rates and personal loans saw a much larger increase in delinquency. Personal loan growth has been partly fueled by alternative lenders who have been slightly more aggressive in issuing personal loans to Below Prime consumers (consumers with CreditVision scores below 720).Delinquency rates reflect systemic resiliency as lenders and consumers are working togetherWhile overall non-mortgage credit balances declined, balances for Millennials and Gen Z consumers grew 0.8% and 5.9% respectively. It is harder for younger consumers to absorb economic shocks like this as they have fewer options to maintain cashflows, like savings, investments or retirement funds. As a result, it is likely that more of these younger consumers have been forced to rely on credit. In the TransUnion Financial Hardship Survey, younger generations felt overwhelmingly impacted, as 65% of Gen Z and 63% Millennials surveyed indicated they remain negatively impacted financially by the pandemic.

* Serious consumer delinquency defined as the percentage of consumers delinquent on at least one product 90+ days past due for Credit Card and 60+ days past due on other products

Delinquency rates have been mitigated by lenders through the provision of financial accommodation tools like deferrals. Approximately 2.6 million Canadians (or 9.2% of credit consumers) have at least one active deferral, with higher-risk consumers more likely to be taking advantage of financial accommodation tools. 15.2% of Subprime consumers (consumers with CreditVision scores between 300 – 639) and 12.8% of Near Prime consumers (consumers with CreditVision scores between 640 – 719) have taken a deferral on at least one credit product or loan, while only 6.1% of Super Prime consumers (consumers with CreditVision scores above 800) have opted to take a deferral.

TransUnion’s Financial Hardship Survey indicates that consumers are planning for the inevitable termination of financial accommodation programs like deferrals. 32% surveyed indicated that they plan to create a repayment plan, while 28% plan to extend programs for an additional period if possible. Additionally, with the government emergency relief benefit coming to an end, consumer delinquency may be impacted in the coming months as some segments may have reduced cash flow as a result and will be forced to make trade-offs on what they will pay.

As the pandemic lingers, consumers should continue to manage expenditures and debt levels to sustain themselves through the crisis. Lenders should continue to monitor portfolios frequently to predict and assess risk and strategize for sustainable and prudent growth amidst uncertainty. Managing consumer loyalty and trust, planning for future growth strategies, and leveraging enhanced data and analytics to inform those strategies are critical ingredients to build resiliency during these unprecedented times.

About the TransUnion Canada Industry Insights Report

TransUnion’s Canada Industry Insights Report is an in-depth, credit-active population-based solution that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across active credit files on TransUnion record. These files contain 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 behaviour 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)

TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing a comprehensive picture of each person so they can be reliably and safely represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good.® TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people in more than 30 countries. Our customers in Canada comprise some of the nation’s largest banks and card issuers, and TransUnion is a major credit reporting, fraud, and analytics solutions provider across the finance, retail, telecommunications, utilities, government and insurance sectors.

For more information or to request an interview, contact:
Fiona Bang
Fiona.Bang@ketchum.com
647-680-2885