Strong Borrowing Activity and Participation Continues in the Canadian Credit Market
- Continued strong balance growth in Canada’s credit market during the first quarter of 2023, despite concerns of a looming recession
- Canadian consumers demonstrate healthy credit performance and indebtedness levels
- Consumers likely to remain resilient in the next 12 months, as they seek ways to manage macroeconomic pressures
TransUnion today released the findings of its Q1 2023 Credit Industry Insights Report (CIIR), which shows that the Canadian credit market remains resilient despite the current high cost of living and elevated interest rates.
As part of the CIIR, TransUnion maps consumer credit market health with its Credit Industry Indicator (CII). The CII is a country-specific measure of consumer credit health trends, focusing on four pillars: demand, supply, consumer behaviour and performance. The CII for Q1 of 2023 in Canada reached 106 in March 2023, hitting close to the pre-pandemic level observed in March 2019, and slightly above the prior year level in March 2022.
Canadian Credit Industry Indicator Q1 of 2023i
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 2023, the CII of 106 represented an improvement in credit health compared to the same month prior year (March 2022) and a slight increase in credit health compared to the prior quarter (December 2022).
The slight year-over-year (YoY) increase in the CII was driven by a 3.1% increase in the number of consumers carrying a balance from the previous quarter (Q4 2022), as well as continued growth in consumer credit balances. The positive impact from overall balance growth was slightly offset by slowing overall demand for new credit.
Origination growth and increased credit participation drove increased balances
As the cost of living rose, many Canadians turned to credit to alleviate financial pressures. Canadians continued to build debt, as total outstanding balances across all products increased by 5.6%, reaching a new record of $2.32 trillion. While overall debt continued to rise in Canada, it is important to understand the composition of the increased balances.
Credit participation (the number of Canadians with access to credit) grew by 2.9% YoY, as the number of Canadians with access to credit rose to 30.6 million in Q1 2023. At the same time, the number of consumers carrying a credit balance rose 3.1% YoY in Q1 2023. While the number of credit-active consumers increased across most risk tiers, the number of subprime consumers accounted for the largest increase, growing at 8.3% YoY. While this riskier segment had the highest rate of growth, prime and better consumers still represent nearly three-quarters of total consumers with a balance, indicating a relatively healthy risk distribution of the consumer credit population.
Consumer with a Balance by Risk Tier, as of Q1 2023
Number of Consumers with a Balance
Percentage of Total Credit Population
Another key contributor to the increase in overall debt is the growth in origination volumes – i.e. consumers acquiring additional credit products. Origination volumes increased 6.2% YoY, primarily driven by a surge in credit card originations to new-to-credit consumers (a combination of Gen Z consumers entering the credit market and new Canadians) which grew by 85% YoY in 2022. Overall, card originations were 20% higher YoY in Q4 2022, driven by a 24% increase in originations by prime and above consumers, with originations to below prime consumers having increased by 9% YoY. Prime and above consumers accounted for two-thirds of all new card originations during 2022.
Mortgage origination, which experienced record growth rates through 2021 and early 2022, continued to decline, dropping 32% YoY as increasing interest rates significantly slowed demand for new mortgages, especially in the refinance market.
As credit activity increased, performance moved closer to pre-pandemic levels
Higher overall credit balances as well as higher interest rates also drove higher minimum monthly payment obligations, requiring many consumers to direct additional disposable income to cover the minimum required payments – particularly on mortgages and lines of credit. Both mortgages and lines of credit are particularly sensitive to interest rate changes, and rising rates continue to exert pressure on these borrowers. The average line of credit monthly payment due increased to $436 (+43% YoY) and the average monthly mortgage payment rose to $2,032 (+16% YoY). The impact of rate increases will continue to put pressure on mortgage borrowers over the next year as homeowners open or renew their mortgage terms at higher rates.
While higher balances and rising interest rates have increased payment obligations, aggregate excess payment (the amount consumers pay on their revolving accounts over the minimum required) recorded 7% higher YoY levels for below prime consumers and 11% YoY higher levels for prime and better consumers in Q1 2023. These increases indicate that consumers are continuing to pay more than the minimum required – the average payment for credit cards is 2.6x over the minimum required. This is a positive sign indicating healthy consumer behaviors towards their payment obligations.
As the Canadian market has expanded and more consumers have entered the credit market and built balances, a corresponding uptick in delinquency would be expected. Overall consumer-level serious delinquency (the percentage of consumers 90 or more days past due on any account) increased by 9 bps to 1.57%; however, it is important to note that despite this increase, overall delinquency levels remain below pre-pandemic levels.
Bankcard serious consumer-level delinquency rates (90+ DPD) continued to increase, up 8 bps from prior year to 0.76%. It is important to take into account the significant origination growth seen over the past several quarters as a driving factor of this increase.
Unsecured personal loan delinquencies also continued to trend higher: serious consumer-level delinquency rates (60+ DPD) have exceeded pre-pandemic levels, up 71 bps YoY to 2.09% in Q1 2023 (consumer 60+ DPD delinquency was 1.35% in Q1 2019). Recent origination history for this product has been heavily weighted to below prime consumers, which is likely driving worsening performance.
Serious account-level delinquency (60+ DPD) for auto reached 0.78% in Q1 2023, up 10 bps YoY, which is a relatively low rate despite the increase, and still below pre-pandemic levels.
“Overall, the financial position of Canadian credit consumers improved coming out of the pandemic, bolstered by higher savings accumulated through the pandemic and supported by a strong labour market,” said Matt Fabian, Director of financial services research and consulting at TransUnion in Canada.
“However, the longer the current conditions of elevated inflation and higher interest rates persist, the more likely it is that a segment of more vulnerable consumers may increasingly feel the pinch. Especially impacted may be variable-rate mortgage-holders as they reach their trigger rate, and fixed-rate mortgage-holders near the end of their terms. As available disposable incomes become more stretched, we expect a segment of consumers will be more likely to miss payments, and as a result, that delinquency rates will rise,” he added. “However, we expect any rise in delinquency rates to be moderate and in line with increased credit activity.”
What lies ahead for Canadian consumers in 2023 and into 2024?
Given the economic uncertainty and to provide insights into what to expect for credit market health, TransUnion recently forecasted origination, balance and delinquency trends for the remainder of 2023 to Q1 2024, drawing on its extensive data and research resources.
“We anticipate the next 12 months to be characterized by a ‘continued resiliency meets financial fragility’ mindset. Trends for 2023 are likely to be mixed, based on consumers’ risk profiles and the uneven impact of higher inflation and interest rates, offset by softer than anticipated activity, recession, and slight recovery in early 2024, as well as a strong labour market,” Fabian said.
TransUnion forecasts growth in new account originations across all products through 2024, driven by a combination of increased demand and a stabilizing interest rate environment. The forecast anticipates lenders to continue to pursue profitable growth, i.e. that there will be continued expansion in lending with strategically managed growth and risk.
The credit card segment will remain very competitive as issuers compete for share with new offers in the market. TransUnion forecasts continued growth for credit cards with strong origination volumes through to Q1 2024 for both prime and below (up +3.5% YoY) as well as above prime segments (+11.8% YoY), and expects to see growth in balances. The forecast shows a slight uptick in delinquency, back to pre-pandemic levels, to 2.19% in Q1 2024 (+16 bps YoY).
Auto loan growth is expected to be skewed toward riskier borrowers – prime and below risk tiers – with originations in that segment growing 4.3% as vehicle inventories continue to return to normal. This demand and the continued shift toward higher average purchase price will drive loan sizes up by 2.8% for prime and below in Q1 2024, while above prime balance growth is likely to remain relatively flat YoY. Delinquency rates are expected to improve slightly in the prime and below segment – likely down 14 bps YoY to 2.27% – as more recent acquisitions have skewed away from below prime borrowers.
The prospect of interest rates holding steady and potentially lowering into 2024 is expected to help revitalize the personal loan market, as a more favourable interest rate environment will allow lenders to expand and grow their portfolios following their caution coming out of the pandemic. Acquisition is forecast to grow by 16% YoY in Q1 2024, driven by a return to below prime lending. In addition, balance growth is likely to be up 7% for below prime consumers and up 29% for prime and better. This increased activity is likely to drive higher delinquencies, with serious delinquency rates forecast to rise 13 bps to 2.27%.
As the Bank of Canada pauses interest rate hikes, a resurgence in housing demand combined with continued low inventory will drive increased activity in Canada’s housing market, which will in turn drive mortgage origination volume and balance growth. TransUnion expects a 38% increase in origination volumes from the first quarter of 2023 to the first quarter of 2024, with the concentration of new originations skewed to prime and better consumers. In line with home values, outstanding mortgage average balance growth of up to 5% is also forecast in the first quarter of 2024.
For more information about the Q1 2023 Credit Industry Insights Report, please click here.
*According to TransUnion CreditVision® risk score: Subprime = 300-639; Near prime = 640-719; Prime = 720-759; Prime plus = 760-799; Super prime = 800+
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.
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