Strong credit activity in Q4 2020 and an improvement in the risk profile of Canadian credit consumers point to a healthy credit market. Most consumers have remained resilient, and we expect this to continue through 2021. However, as regional lockdown measures and economic pressures persist, there’s a risk of higher delinquencies. The long-term impact of this will depend largely on unemployment, interest and income rates.
Risk composition of credit consumers points to continued resilience
From the results of our Q3 2020 report, we noted greater consumer resilience and positive performance in some markets marked a shift to recovery in 2021. Looking at the risk composition of credit consumers in Q4 2020, there are clear signs of consumer resilience.
The proportion of consumers in riskier segments decreased from the prior year, with below prime down 10.6% and subprime down 14.5%. There’s also been a shift in the less risky tiers — the proportion of prime or better consumers was up 4.9% in the same period.
Auto and mortgage growth offsets decline in credit card balances
Last quarter, we noted credit card originations fell sharply year-on-year, while mortgages had the lowest decline. Results from Q4 2020 show total credit market balances are up 3.7% from the previous quarter, driven largely by increased activity and growth in the auto and mortgage sectors (up and 6.8% respectively).
In the housing market, both sales volumes and home values increased, resulting in a 16% rise in mortgage volumes from the previous quarter (up 5.6% year-on-year). The value of mortgage originations went up by $88 billion from Q3 2020 to Q4 2020.
An easing of lockdown restrictions and incentives offered by manufacturers and dealers helped release pent-up demand in the auto market toward the end of 2020. Roll-up financing and higher ticket prices also contributed to the 54% increase in total auto loans from Q3 2020 to Q4 2020. Lower volumes were offset by a 4.7% year-on-year increase in average balance per new loan.
Credit cards originations were down 13.6% and lines of credit down 4.% from Q3 2020. While the number of consumers with a credit balance dropped slightly (-0.41%), the total balance for credit cards increased by 3.7% ($1.99 trillion).
With relief and deferral programmes coming to an end, delinquency rates on credit cards have started to rise (yet remain low on other products). Serious delinquency rates increased by five basis points from Q3 2020. This could be an early sign of risk, as our research shows consumers facing financial difficulties are more likely to pay auto loans and mortgages first.
Monitor early indicators of long-term risks
The Canadian credit market remains healthy. Indications are Canadians will generally be able to manage the impact of continued lockdown measures. However, new lockdown measures implemented during the year will put additional strain on consumers — particularly those most vulnerable.
Delinquency rates are sensitive to interest rates, unemployment and income, all of which are likely to vary from region to region. Monitoring these economic events will help determine the extent of their impact on consumers and the credit market over the longer term.