Canadian Credit Market Poised for Growth
March 08 2021 - 6:00AM
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 |
|
Credit Cards |
Personal Loans |
Auto Finance |
Lines of Credit |
Mortgages |
Q3 2019 |
1,627,135 |
1,086,974 |
1,133,436 |
784,402 |
579,860 |
Q4 2019 |
1,647,627 |
1,062,610 |
953,988 |
692,778 |
520,562 |
Q1 2020 |
1,313,470 |
951,584 |
767,584 |
631,986 |
410,772 |
Q2 2020 |
642,845 |
695,222 |
738,430 |
438,006 |
527,916 |
Q3 2020 |
1,051,728 |
891,062 |
1,100,590 |
495,334 |
612,556 |
Q3 2020 YoY Change |
-35.4% |
-18.0% |
-2.9% |
-36.9% |
5.6% |
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+
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 or to request an
interview, contact: |
Contact |
Fiona Bang |
E-mail |
Fiona.Bang@ketchum.com |
Telephone |
647-680-2885 |
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