Consumers Show Signs of Resilience and Deleveraging in a Slow Credit Market
Canadian credit consumers seem to be deleveraging due to higher liquidity and lower demand. Despite an improving credit performance picture, new credit growth is slow and has not yet recovered to pre-pandemic levels.
Today, TransUnion released the findings of its Q1 2021 TransUnion Industry Insights Report, which showed a sharp decline in balances across most products as higher consumer liquidity, reduced spending and lender accommodations enabled Canadian credit consumers to navigate the ongoing public health and economic crises. While the Canadian economy is improving, the credit market has been slow to recover as consumers are seeking fewer credit products and maintaining conservative borrowing behaviours. Nevertheless, the Canadian credit market shows signs of good health and consumer confidence is at its highest level in more than a year, according to TransUnion’s most recent Consumer Pulse survey, which suggests an improved outlook for new credit activity in the latter half of 2021 and beyond.
“As the economy slowly recovers, we are witnessing consumers deleveraging in the Canadian credit market, with the exception of mortgages,” said Matt Fabian, director of financial services research and consulting at TransUnion. “Despite increased consumer confidence and liquidity, the decline in consumer balances and originations could pose problems for lenders that are not prepared for the changing consumer behaviours, which could result in a higher proportion of risky balances. Lenders should consider actively seeking to replenish their portfolios with new balances and originations to maintain a manageable delinquency rate.”
Consumers show signs of deleveraging unsecured credit
In Q1 2021, use of credit remained slow across all products except for mortgages. Existing borrowers focused on paying down balances, while balance growth on newly originated products remained stagnant compared to prior periods. While the overall number of credit-active consumers remained essentially flat – down by 0.47% year-over-year (YoY) – consumers seem to be taking advantage of higher income and savings from enhanced government benefits and reduced spending to deleverage1.
The average non-mortgage consumer balance declined by 2.9% YoY to $28,900 in the first quarter of 2021. Unlike unsecured lending products, the average consumer mortgage balance increased by 5.7% to $112,000. This strong mortgage activity appears to have been buoyed by attractive interest rates and high real estate demand. Continued strong mortgage originations generated over $170 billion in mortgage balances in Q4 2020 – a 43% increase from prior year. While delinquencies remain low, this recent growth bears watching in future quarters.
Consumer liquidity has increased as Canadian consumers have elevated their savings rate to an all-time high – 28% of disposable income2. The decrease in non-mortgage balances could be attributed to this higher consumer liquidity, as well as appeared reduced spending and accommodation programs that have enabled consumers to pay down revolving balances on credit cards and lines of credit. In Q1 2021, the average revolving balance per consumer decreased by 7.3% YoY, with credit cards down by 16.5% YoY. The total number of accounts with one or more credit cards also decreased in Q1 2021 by 5.2%.
Originations slowed down across all credit products and risk tiers, except for mortgages
In Q4 2020, the Canadian credit market saw significant declines in origination volume YoY, suggesting that consumers have adequate liquidity and do not feel the need to engage in the credit market. New originations dropped across all products, except for mortgages, on an annual basis.
Bankcards experienced the sharpest decline in originations with a 31.4% reduction YoY. Other products suffered double-digit drops in originations, including personal loans (-27.1%), lines of credit (-18.3%), and auto finance (-8.8%).
Meanwhile, mortgage originations continued to grow in Q4 2020 – increasing 25.8% YoY, likely fueled by record-low interest rates and increased demand for refinancing. Because of intense real estate activity, home prices surged by 31.6% in March on an annual basis, with home sales up 76.2%. This growth is expected to continue through the second quarter of 2021, before tapering off due to lower demand.
Line of Credit
The decrease in originations occurred across the risk spectrum, though it was most pronounced in below-prime consumers3. Origination volumes for below-prime consumers fell 27% from the prior year, while prime and better originations were down by 12%.
According to TransUnion’s most recent Consumer Pulse survey, more than 30% of consumers who classified their credit as good to poor – out of a potential range of excellent to poor – considered applying for credit but ultimately did not. When asked about the reason for not applying, 29% reported they did not think they would meet income or employment conditions and 23% thought their credit history would be inadequate.
Higher-risk consumer originations were down across all product categories, signalling that lenders may not be expanding their risk appetite to pre-COVID levels or engaging these consumers. Subprime consumers saw a decline in originations across credit cards (-26.7%), auto loans (-33.6%), LOCs (16.9%), installment loans (-42.3%) and mortgages (-24.1%).
Lower-risk consumers also showed a decline in originations, with the percentage drop for new credit cards greater for super prime consumers than for subprime, likely due to lower demand. However, other unsecured products saw much smaller YoY declines for low-risk versus high-risk borrowers, whereas auto originations for prime and better borrowers effectively recovered to pre-pandemic levels.
YoY Growth/Decline in Origination Volume
“We’ve observed depressed spending and decreased overall balances as people stay home, cut entertainment and travel costs and increase their savings rate,” explained Fabian. “Fewer consumers have been seeking credit, regardless of whether they are below or above prime. As pandemic-related lockdowns ease and businesses reopen, consumers are expected to increase their spending, which may drive a resumed need to borrow. Lenders could work with existing consumers to inform them of the many credit products and services available as consumers return to more robust spending and borrowing patterns.”
Improving delinquency rates indicate resilience of the Canadian credit market
Despite the end of a majority of deferral programs, delinquency rates decreased for all products. At the end of Q1 2021, consumer-level serious delinquency (90 DPD) dropped 63 bps YoY to 1.4%, and consumer non-mortgage delinquency decreased YoY 62 bps to 1.39%, potentially driven by the combination of increased consumer liquidity and deleveraging observed driving down non-mortgage credit balances and reducing payments.
Consumer-level delinquency (% of consumers delinquent on at least one product) by product
90 + DPD
YoY change (bps)
Consumers are managing financial obligations effectively, likely thanks to improved savings and debt relief, and many appear to have leveraged that increased liquidity to pay down credit balances. The number of consumers making payments beyond the minimum payment due on revolving balances grew 4% from the prior year.
“There are several healthy market trends that lenders should consider in extending new credit to consumers,” said Fabian. “As pandemic-related concerns begin to ease, consumers are performing better than expected even after deferral programs ended, and delinquencies are lower than expected. Lenders can take note of these positive trends and be prepared to meet the needs of consumers as their credit demand rebounds in 2021.”
1 Unless otherwise stated, the source of the information in this release is from the TransUnion Canada consumer database.
2 Statistics Canada. Table 36-10-0112-01 Current and capital accounts - Households, Canada, quarterly
3TransUnion CreditVision® score risk tier segment definitions: subprime = 300-639; near prime = 640-719; prime = 720-759; prime plus = 760-799; super prime = 800+
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