Q4 2020 Industry Insights Report
Canadian credit consumers show continued perservance, aided by government subsidies and payment deferrals.
Q4 2020 credit activity was strong, driven by growth in auto and mortgage lending.
Overall delinquency levels remain very low; credit card delinquencies edged up slightly but do not show cause for concern.
TransUnion today released the findings of its Q4 2020 TransUnion Industry Insights Report, which observed an increase in consumer credit activity. This increase appears driven in part by recent improvements in economic and labor market activity, as well as government relief measures and payment deferral programs supported by lenders. Consumer credit activity picked up in the final quarter of 2020, and while generally still below the prior year balance and origination levels, particularly for unsecured credit products, rose from the lows observed during the early stages of the COVID-19 pandemic. The Canadian credit market remained stable as consumers have been deleveraging and many have improved their risk scores. However, new lockdown restrictions to prevent future waves of COVID-19 and the winding down of deferral programs are expected to create additional stress in managing debt obligations.
“As the fourth quarter came to an end, Canada’s credit market remained strong despite the imposition of further lockdown restrictions,” said Matt Fabian, director of financial services research and consulting at TransUnion. “While the credit market remained solid as delinquency rates have held steady across most products so far, and risk scores are trending positively, after four straight quarters of decline, credit card delinquency rose very slightly in Q4 2020 which bears monitoring to see if this trend continues.”
Consumers withstand the current crisis
The overall risk composition of Canadian credit consumers improved in Q4 2020 compared to the prior year, despite the economic impact of COVID-19. The proportion of consumers in below-prime* (riskier) credit tiers was down by 10.6% from the prior year, with the largest drop observed within the subprime risk tier, which dropped by 14.5%. The proportion of prime or better (less risky) credit consumers was up by 4.9%, primarily led by growth in the prime plus segment of 11.4% year-over-year. As of Q4 2020, almost 22% of credit consumers migrated upward to better score bands from the prior year, while only 13% migrated down to lower credit score bands.
Consumers within the prime or below risk tiers reduced their average outstanding debt by 4.5% and serious delinquency rates in this group fell by 125 bps from the prior year, although some delinquency may continue to be masked by consumers taking payment deferrals on loans. Overall, these trends reflect a continued strength amongst Canadian consumers.
In line with these observations, TransUnion Canada’s most recent Financial Hardship Survey further confirmed consumer resiliency during the downturn, as 61% of consumers surveyed indicated their household finances are at least the same or better than last year. Additionally, the survey indicated that 63% of respondents would be able to continue making payments on credit or other obligations for at least one to three months.
New credit growth shows signs of a rebound
Total outstanding balances for all credit products grew by 3.7% year-over-year, representing $68.9B in additional outstanding credit at the end of 2020. The increase was largely driven by the mortgage sector, which grew by 6.8% ($88B). Originations, measured one quarter in arrears, improved in the mortgage industry by 5.6% in Q3 2020 compared to the same quarter the prior year. Low interest rates and greater housing demand, as well as pent-up demand from earlier in the pandemic, have propelled growth for this credit product.
Additionally, auto loans grew in overall market outstandings by 2.3% year-over-year, primarily driven by higher average balance per new loan (up by 4.7% year-over-year). This increase may be due to a combination of roll-up financing (incorporating the remainder of an existing loan into a new loan), as well as higher ticket prices, as Canadian auto buyers continue to switch from passenger vehicles to light trucks. As pandemic restrictions eased through the third quarter, there may have been some pent-up demand amongst consumers that drove higher purchase activities in addition to dealers and manufacturers providing incentives to drive vehicle sales. The combination of strong new loan originations in the auto and mortgage sectors in Q3 2020 drove healthy Canadian credit market activity to end 2020 on a positive note.
This positive new credit growth was offset by declines in outstanding balances for revolving credit products, with card balances declining by 13.6% ($13.6B) and line of credit declining by 4.0% ($10.3B). The slowdown in balance growth for these products was due to a combination of lower year-over-year drop in demand for card spending as well as increased payment activity against card balances. Demand for additional credit is also down as originations activity across all products has dropped by approximately 24% compared to Q3 2019. Revolving credit products, like credit cards and lines of credit, had the greatest declines in new account openings (-35% and -37% year-over-year, respectively).
Originations Activity Shows Signs of Rebounding
Lines of Credit
Q3 2020 YoY Change
Source: TransUnion Canada consumer credit database
Delinquency rates at record lows, but as deferrals expire credit card delinquencies show an early reversal in the trend
As government relief and payment deferral programs ended, delinquency rates continued to decline across most products. Credit cards bucked this trend and turned up slightly from a prior four quarter decline. As of Q4 2020, only 2.3% of credit consumers had a deferral remaining on at least one product, versus 8% of consumers when deferrals peaked in June 2020. Despite deferrals ending for majority of consumers, delinquency rates remained lower compared to the prior year across all products. While the year-over-year serious delinquency rate for credit cards was down, there was an increase in serious delinquency rates from the prior quarter (+5 bps vs Q3 2020), marking the first time in four quarters that card delinquency didn’t decline. TransUnion’s 2019 Payment Hierarchy research on the choices consumers make relative to payment obligations when faced with financial distress has shown that credit card payments appear to be the last in priority.
“The consumer credit market is performing well, given the prolonged impact of the pandemic. Serious delinquency levels remain low, while balance and origination activity shows signs of a rebound,” concluded Fabian. “Additional stimulus and flattening unemployment rates appear to be supporting the credit economy trends we observe. However, the post-deferral performance of consumers and any shifts in payment priorities as we recover from the crisis will shape the credit outlook for 2021. As these programs come to an end, lenders should evaluate pre-delinquency treatment strategies for their consumers who may be at risk.”
* TransUnion 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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