The Canadian economy has rebounded from the COVID-19 crisis more rapidly than expected. Relief programs have provided much-needed support for consumers, although it’s still too early to understand the full impact of these programs. Opportunities for cautious growth exist; however, the consumer credit environment may be challenging over the medium term as lenders look to mitigate risk.
Consumer confidence has rebounded slightly
The re-opening of the economy and relaxed social distancing measures have led to a resurgence in consumer confidence, although it’s still below pre-crisis levels. While resilient, consumers remain concerned about adapting to a changed lending environment.
However, credit performance is deteriorating
Average balance and delinquency rates declined during the crisis, driven partially by deferral volumes. However, a steady rise in delinquency rates over the last two quarters and the uncertainty of increased losses are a concern. Consumer balances have declined and credit performance is deteriorating, which warrants concern in a slowing economic environment.
During the pandemic, consumer credit balances dropped as the lockdown impacted purchase and spend volumes.
Reduced credit card balances and slowing originations create a difficult environment for lenders. Credit limit increase activity slowed dramatically as the crisis evolved. Growth in installment loans slowed across all tiers except subprime, partly due to growth in the alternative lending segment (including FinTechs) — which is the fastest-growing. Overall, non-mortgage delinquency fell due to a combination of federal relief and forbearance activity. However, delinquency rates have been creeping up in all regions. A moderating economy, declining oil price and global trade issues have affected certain sectors, and increased interest rates have tightened disposable income allocation.
Low interest rates kept the mortgage market relatively active which was a primary driver of overall growth. Mortgage originations jumped 29% year-on-year and origination volumes increased in all risk tiers.
As forbearance programs wind down, uncertainty remains
Data from Q2 2020 shows 9.2% of Canadians have a deferral on file; however, the vast majority are deferred on only one account. Super prime consumers hold the highest deferrals by account balance but have the lowest proportion of deferrals.
Government and industry relief programs have provided much-needed support for consumers. Although it’s still too early to understand the full impact of these programs, these measures were welcome during one of the largest shocks in Canadian history. While deferrals may simply delay the inevitable among some segments, previous TransUnion studies have shown over time, many consumers show a positive bounce-back, and lenders are rewarded for helping households manage during a tough time.
Do you have a recovery plan in place?
While some characteristics of the economy turn toward positive, it’s likely to be a long, slow recovery that may impact the Canadian lending space. As lenders cautiously examine their portfolios, and perhaps even begin to look at opportunities for growth, uncertainty over long-term impacts when deferrals and government subsidies wind down, and whether Canada could expect another wave, are still looming.
The key now is to quickly identify which consumers will roll forward in delinquency, put strategies in place to mitigate the impact of delinquencies, and find opportunities to begin accelerating growth.