TransUnion Launches New Indicator Charting Health of Canada’s Credit Market
Credit Industry Indicator reveals the significant impact of COVID-19 when compared to other recent economic and market events.
Analysis shows continued effects on credit market health since the onset of the pandemic, with a partial recovery recorded in most recent months, while still below pre-pandemic levels.
TransUnion has recently developed a new Credit Industry Indicator (CII) to summarize the relative health of Canada’s consumer credit market*. The CII shows the pronounced impact of the COVID-19 pandemic as well as other economic and market events over the last decade on consumer credit health conditions.
The CII is a country-specific measure of depersonalized and aggregated consumer credit health trends. It evaluates the impact of hundreds of reported credit variables and identifies those that are most significant to changes in consumer credit trends. Data elements are summarized on a monthly basis to analyze changes in credit health and are categorized under four pillars: demand, supply, consumer behaviour and performance**. These are then combined into a single, comprehensive indicator measure.
The CII shows a significant impact on credit market health beginning at the onset of the pandemic and continuing through April 2021. Between February and August 2020, the headline measure fell from 101 to 84, a drop of 17 points. This was driven largely by a decrease in both the demand and supply of credit as the impact of pandemic lockdowns took effect. Demand for credit dropped 44 points, driven primarily by a decline in consumer credit inquiries by 38% over that period. Credit supply also dropped over that same period by 35 points as origination volumes fell 48%, due to tightening lender risk appetite during the downturn. In April 2021, there was a slight 2-point recovery from the low point in August 2020. While there has been some improvement in credit performance due to higher liquidity, this has been offset by the reduced supply and demand.
Analysis shows that following the double-dip seen in 2020, the CII dropped slightly in February 2021 as the next wave of the pandemic spread across the country and has started to increase in April 2021. This increase is driven primarily by a sharp increase in inquiries and originations in April 2021 compared to April 2020. Volumes for inquiries, a demand measure, increased year-over-year (YoY) by 80%. Similarly, originations, a supply measure, increased 33% from the prior year Q1 as the economy started to accelerate reopening.
Matt Fabian, TransUnion’s director of financial services research and consulting, explains: “The TransUnion Credit Industry Indicator’s methodology draws on our comprehensive consumer dataset to derive an accurate reflection of the health and direction of Canada’s credit market. Its trajectory is a representation of the increasing or decreasing health of the market compared to previous periods. The CII has been designed to help inform lenders, consumers, regulators, government departments and other market stakeholders with one single measure of the overall health of the consumer credit market.”
Chart 1: Monthly CII of Canadian Credit Market 2012 – 2021 (i)
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 February 2019, the CII of 102 represented an improvement in credit health compared to same month prior year (February 2018) and compared to prior month (January 2019).
Pandemic impact on credit health significant
The CII charts the relative health of Canada’s consumer credit market through a number of significant economic and market changes. The oil price crash and slow economic growth between December 2014 and May 2016 saw a decline in the CII through the first half of 2017 as credit growth moderated, delinquencies increased in energy provinces, and supply deteriorated as lender risk policies were more restrictive.
Through the end of 2017 and into 2019, stronger economic growth created greater demand and supply in the market and credit health improved. During this period, non-bank lenders and FinTechs entered the credit market. These lenders, along with some mainstream lenders, focused on geographic expansion and extending credit to higher-risk segments to varying degrees, leading to greater credit growth. Economic growth started to moderate again into 2019 and beyond, as historically low-interest rates ticked upward and credit demand decreased, while performance deteriorated slightly as the cost of credit increased and delinquency rates rose. As a result of these changing dynamics, the pre-pandemic period ended with the CII at 101 in Feb 2020.
The initial economic shock caused by COVID-19 and its associated lockdown had a far more pronounced impact on the credit economy than previous economic or market events. In March 2020, credit demand and supply decreased significantly, as lenders activated downturn risk strategies, and access to bank and credit union branches was constrained due to social distancing rules, slowing new account openings. While credit performance has remained strong, driven by higher liquidity, this has been offset by continued reduced supply and demand, keeping the CII low.
Though supply and demand did fall in April 2021, the decline was not as significant compared to the lows seen in April 2020. During the back half of 2020, lenders adapted to the shift in new credit originations from online channels, which has become the new normal in the pandemic environment. Despite certain restrictions, lenders have continued to extend credit with confidence, and consumers have demonstrated resiliency as they pursued this back-to-normal cycle. During the third quarter of 2020, as lockdown restrictions eased throughout many regions across Canada, both supply and demand for credit increased, causing a slight uptick in the CII. Also during the third quarter of 2020, credit performance improved significantly, driven by a combination of lender deferral programs and payment holidays that allowed certain segments of consumers to remain current on payments, as well as a surge in government stimulus.
The CII stabilized through late 2020 and the first quarter of 2021 as lender deferrals expired and some government subsidies ended, causing a slight uptick in delinquency rates. This deterioration offset improvement in other key measures like demand and supply that drive the CII. The savings rates of Canadian consumers are at historical highs, household debt is down, and the improvement in delinquency and increased liquidity is expected to continue to impact credit demand and performance.
Fabian continues: “By looking at just one dimension of the credit market, such as new account openings or balances, it is easy to get an incomplete picture of credit health. Just because one metric has improved, it doesn’t mean overall credit health of the market has also improved. Our indicator shows the importance of considering a comprehensive range of measures that drive credit market health. The latest CII clearly indicates that there are still uncertainties ahead on the road to recovery.”
Unemployment and economic growth impact credit health during the pandemic
The TransUnion Canada CII also charts the relative health of the credit market against key macroeconomic indicators including economic output, employment rates, oil prices, housing prices and inflation. When comparing the CII to these indicators, the trends demonstrate how closely credit health is tied to the overall health of the economy.
Fabian adds: “The key macro drivers for the Canadian market align extremely well with the CII, affirming its effectiveness as a measure of credit health. As we look at the CII alongside macro drivers, we can see the drastic impact across the entire Canadian economy.”
There is a strong correlation between unemployment rates and the CII movement. The CII hit a low point of 84 in August 2020, while unemployment levels spiked to 10% that same month, compared to 6% in August 2019. This alignment was also seen when comparing the year-over-year (YoY) change in GDP with the YoY change in CII. As economic growth deteriorates, the CII follows a few months later, as that drop translates to deteriorating credit health. In April 2020, GDP dropped 17%, and by August 2020, the CII had dropped to its low point of 84.
Chart 2: Monthly CII Compared to Macroeconomic Indicators
Source: TransUnion Canada consumer credit database, Oxford Economics
Fabian concludes: “The global pandemic is far from over, but having a single measure of credit health provides a valuable tool to help understand current conditions. Lenders can use the CII as a key performance indicator to benchmark their portfolio trends against other peers in the market – especially with the recent volatility spurred by COVID-19. With better and timely insights, lenders can build more robust strategies that can support consumers and ultimately fuel lending that will act as a catalyst for economic growth.”
To learn more about the Credit Industry Indicator, visit: https://content.transunion.com/v/credit-industry-indicator
* Consumer credit products include: bankcards, auto loan, lines of credit, personal loan, residential mortgages, and education loans
** The TransUnion Credit Industry Indicator (CII) is an evolving model which is regularly reviewed to ensure the most relevant variables and their relative weighting are selected to best chart the credit health of Canada’s consumer credit market. When selecting certain variables year-on-year movements are analyzed to remove the effects of seasonality.
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 visit: www.transunion.ca
About TransUnion Credit Industry Indicator (CII)
The CII is a country-specific monthly measure of depersonalized and aggregated consumer credit health trends. It evaluates the impact of hundreds of reported credit variables and identifies those that are most significant and summarizes movements amongst credit demand, credit supply, consumer credit behaviours, and credit performance metrics over time. These are combined into a single, comprehensive indicator measure.