Canadian Credit Market Surges as Economy Recovers

TransUnion today released the findings of its Q1 2022 TransUnion Credit Industry Insights Report (CIIR), which showed a surge in credit activity as the economy strengthened. As part of the CIIR, TransUnion maps the consumer credit market health with its Credit Industry Indicator (CII), which rose 22 points year-on-year (YoY) to 105.3 in March 2022, returning to pre-pandemic levels. This rise was driven by improvements across all consumer credit health categories measured by the CII – demand, supply, consumer behaviour and performance – and marks the first time since the pre-pandemic period that all four factors grew in tandem. The CII, which TransUnion launched in July 2021, is a country-specific measure of consumer credit health trends.

Chart 1: Canadian Credit Industry Indicator

Source: TransUnion Canada consumer credit database.

(i)              A lower CII number compared to the prior period represents a decline in credit health, while a higher number reflects an improvement. The CII number needs to be looked at in relation to the previous period(s) and not in isolation. In March 2022, the CII of 105.3 represented an improvement in credit health compared to the same month prior year (March 2021) and a slight decline in credit health compared to the prior month (February 2021).

“As the pandemic impacts continue to fade and Canada’s economic recovery endures, the Canadian credit market has experienced significant growth in credit activity. Credit participation is increasing as lenders employ more aggressive growth strategies, and as credit demand increases, balances are growing as well,” said Matt Fabian, director of financial services research and consulting at TransUnion. “However, while the economy continues to recover, rising inflation and interest rates pose some uncertainty and volatility in the market.”

Credit participation increased as lenders accelerated acquisitions 

The Canadian economy continued to rebound, with the unemployment rate falling to 5.3% in March 2022 – the lowest rate on record since comparable data became available in 1976[1]– marking a robust recovery for the labor market from the impacts of the pandemic. Against this backdrop, credit activity grew in Q1, with lenders increasing acquisition efforts and consumers returning to pre-pandemic credit use. Credit participation – the number of consumers utilizing credit – increased 2.1% YoY in Q1 2022 bringing the credit active population to 29.7M consumers, with the increase partly driven by increased originations by lenders. Origination volumes increased 12% in Q1 2022, with lines of credit and credit card new openings driving volume, up 47.5% and 24.6% YoY, respectively. 

After a year of reduced activity, consumer demand for credit cards is returning, and card issuers are moving into growth mode. TransUnion’s analysis showed that growth in originations came from consumers entering the credit market for the first time, with younger consumers making up a significant portion of overall new credit card openings. TransUnion’s recent study focused on new-to-credit (NTC) consumers’ journey showed that 80% of NTC consumers open a credit card as their first credit product. In Q4 2021, new-to-credit consumers made up 9% of overall card originations, compared to 7% in the same period in 2020. In addition, 54% of NTC consumers are under 25 years of age. Younger consumers gaining access to credit cards and beginning their credit journey is an important measure of success for financial inclusion.

As consumer demand for credit grew, total credit balances increased 9.2% YoY when compared to Q1 2021, and were up 13.8% when compared to Q1 2020. This growth was driven partly by the resurgence in average credit card balances per consumer, up 4.6% YoY in Q1 2022. This was the first time that YoY growth in average card balances was observed since the onset of the pandemic and represents a sign of recovery in consumer spend behaviours. Average personal loan balances per consumer also increased significantly, up 19.1% YoY. In addition, limited inventory is driving up prices for homes and vehicles, which is in turn pushing average consumer balances higher for both auto and mortgage products, up 3.3% and 8.4% respectively.

Table 1: Balance Growth by Product

Source: TransUnion Canada consumer credit database.

“Consumers had been focused on paying down balances throughout the pandemic, but in Q1 we saw more consumers use credit cards – and these consumers are spending more as compared to the peak pandemic phase,” added Fabian. “As credit card issuers aggressively seek share of recovering spend and balances, we expect a period of competitive growth strategies deployed by issuers through aggressive acquisition and balance management offers. Card issuers need to leverage insights into consumers’ holistic wallet behaviours and performance to be relevant and profitable in their account management campaigns.”

With rising inflation and interest rates, Canadians are concerned about future household finances

Inflation and interest rate hikes are moderating an otherwise recovering economy. Canada’s consumer price index rate rose to 6.7%[2] in March, marking a 30-year high, and the Bank of Canada raised its interest rate by 0.5% to 1%. Increased interest rates, combined with already slowing demand for mortgage refinancing, tempered mortgage origination growth from the record highs observed over the previous two years.

A combination of rising interest rates and a higher cost of living can create a sudden change in payment obligations that a consumer cannot control, also known as a payment shock. As the cost of living increases, consumers have less disposable income available; for many consumers, the higher cost of living is compounded by a higher cost of debt as interest on variable rate products increases. TransUnion has conducted multiple studies around payment shock and its effects on specific consumers’ payment obligations when they rise beyond their capacity to pay. These studies have revealed that when these sudden shocks occur, there is a proportion of vulnerable consumers that do not have the capacity to meet these increased payments along with all of the minimum payment due amounts on their credit products. For these vulnerable consumers, this can lead to a rise in defaults on debt obligations.

Consumers have a rising level of concern about these dynamics, with inflation remaining a top worry of Canadians in TransUnion’s Q1 2022 Consumer Pulse Study. More than half (56%) of Canadian consumers reported being very concerned about the inflation rate and associated impacts, and 56% indicated that these concerns have impacted their purchasing behaviour. In addition, while most consumers felt positive about their current financial situation, 54% of Canadians indicated they do not feel as optimistic about their household finances over the next 12 months. Nearly half (46%) indicated they are cutting back on discretionary spending, and one in four (25%) reported that they do not expect to be able to pay at least one of their current bills and/or loans in full. 

Consumer delinquencies remain low in year-over-year comparisons and are still below pre-pandemic levels. While overall consumer delinquencies are not a major concern, some credit products experienced higher deterioration in the recent quarter. Personal loan consumer delinquency (the proportion of consumers 60 or more days past due on at least one installment loan in wallet) increased 19 bps YoY, rising for the third consecutive quarter.

“Canadian consumers have shown great resiliency in the past two years, with increased savings aided by government and lender assistance programs. The credit market didn’t experience significant destabilization during the pandemic, and now it is normalizing to pre-pandemic levels of activity, especially in the credit card space,” concluded Fabian. “While we’re seeing increased credit activity alongside many positive macroeconomic trends, skyrocketing inflation is a concern, and higher interest rates make the cost of servicing debt more expensive, highlighting the need for more frequent monitoring and prudent lending.”

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 an actionable picture of each person so they can be reliably 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:

Contact           Fiona Bang

E-mail             Fiona.Bang@ketchum.com

Telephone      647-680-2885

[1] Statistics Canada. Table 14-10-0287-03  Labour force characteristics by province

[2] Statistics Canada. Table 18-10-0004-01  Consumer Price Index