Industry Insights: Understanding Delinquency Dynamics to Manage Through the Crisis

Before COVID-19, economic growth in Canada had slowed. Increasing insolvency and delinquency rates were a sign that consumers were under financial pressure. Although healthy inflation and employment were expected to bolster the market to some degree, continued headwinds were likely to affect repayment behaviour. The Q1 2020 Industry Insights Report reflects how the crisis has affected consumer confidence and the credit landscape thus far. Delinquency dynamics warrant further scrutiny as lenders seek to manage portfolios successfully through the crisis and well into recovery.

A view of the lending landscape before COVID-19

Before the COVID-19 crisis, underlying credit drivers were beginning to decline. The number of consumers with active credit was increasing — and so were balances and delinquency rates.

In our previous Industry Insights Report (Q4 2019), we saw outstanding credit balances were approaching $2 trillion, fuelled by increased consumer participation and higher balances. The overall, consumer-level serious delinquency rate (90+ days past due, including 12-month rolling charge-offs) had increased 37 basis points (bps) year-on-year, while insolvency rates were up 11.5% year-on-year.

Consumer confidence hits a record low in March 2020

In March 2020, the Conference Board of Canada logged a record 32-point decline in consumer confidence — a key behavioural driver in this pandemic, and perhaps a leading indicator of how recovery may unfold.

Results from TransUnion’s fourth Financial Hardship Study indicate over 65% of Canadians feel they’ll be impacted by the crisis due to job loss, reduced work hours or small business shutdown. On a more positive note, fewer say they don’t know how they’ll afford to pay bills, perhaps an indication they’re making the necessary adjustments.

Early signs of economic impact

Data from the Q1 2020 Industry Insights Report shows despite increased participation and higher balances, consumer risk distribution in Canada remains relatively stable. A higher proportion of consumers are migrating to lower risk tiers, offsetting new entrants in the below prime segment.

Consumer credit balances continue to increase across most products due to continued growth in personal loans and a resurgence in mortgages The average revolving balance per consumer grew 0.9% year-on-year, while non-revolving balances were up 5.8%. Minimum payment amounts grew by an average of 3% over the past year.

Despite recent upticks in auto and instalment lending, serious delinquency remains low. However, findings from the report reveal delinquency dynamics that merit scrutiny for lenders seeking to manage through the crisis.

COVID-19 will accelerate delinquency

TransUnion has identified three scenarios under COVID-19 with varying levels of impact: mild, medium and severe. The severity of each scenario affects both the magnitude and duration of delinquency rates and origination patterns, which in turn influence liquidity and capital structure.

A high-level view of each scenario suggests a reduction in the quality and volume of credit during the crisis, and a clear impact on delinquency rates:

• Consumer non-mortgage delinquency is expected to increase through to Q3 2020
• Instalment delinquency rates are projected to increase rapidly under the more severe scenarios
• Bankcard delinquency rates are expected to spike through Q2 and Q3 2020 to rates similar or exceeding the financial crisis
• The scenarios identify provincial sensitivities, as the severe scenario for Ontario is still less damaging than the mild scenario in Alberta

Managing risk in a state of flux

The bottom line is we remain in a state of flux. Uncertainty about the length and ultimate impact of the crisis affects consumers, which in turn affects demand and the broader economy.

Understanding consumer dynamics and likely behaviours under each scenario will assist lenders in developing a playbook that details risk, underwriting and consumer engagement strategies for different economic circumstances.

TransUnion’s Vulnerability Index has been developed to complement CreditVision® Risk Scores and help lenders rank-order credit portfolios based on the predicted loss they may realize on a segment of customers within the next 24 months. Knowing which customers are more vulnerable during the crisis enables lenders to refine pricing, monitoring and collections activities accordingly — and strengthen their own resilience.

Additional resources

For the full Q1 2020 report and a forecast of consumer credit trends in 2020, visit transunion.ca/lp/IIR.