The Canadian credit market was already experiencing several stresses before the outbreak of COVID-19 — which continue to play out amid the pandemic’s repercussions. While it’s difficult to forecast the full impact of the crisis on the credit market, we’re able to gain some early insights by modelling various scenarios. The financial services community can use these insights to develop lending strategies that support the market now and better position it to weather ongoing uncertainty.
The socioeconomic nature of the lockdown and global scale of COVID-19 combined to create a low-probability, high-impact event that was difficult to predict. The severity and velocity of the crisis caused a shock to consumer confidence never before seen in a single month — the Canadian Index of Consumer Confidence recorded a record 32-point decline in March 2020.1
In an already-fragile macroeconomic landscape, all indications are COVID-19 will have a significant impact on global growth and job security, and repercussions will be felt across Canada. However, the unprecedented scope and scale of the crisis, constantly changing circumstances and limited empirical data make it difficult to pinpoint how considerable that impact will be.
To provide early insights, we modelled the impact of three macroeconomic scenarios — mild, medium and severe — leveraging learnings from previous crises and our full credit reporting database to see how each could affect consumer credit dynamics and the banking industry.
Most scenarios suggest a reduction in the quality and volume of credit during COVID-19. Other key forecasts are as follows:
The table below gives an overview of the credit market under each scenario:
Lenders should think of their response to the pandemic in three phases across the credit lifecycle:
The scenarios also identify provincial sensitivities, as the severe scenario for Ontario is still less damaging than the mild scenario in Alberta. Understanding the relative weight of outstanding assets in your portfolio across regions, and mapping out the various key industries most vulnerable to shocks, can help guide local risk management policy.
The COVID-19 pandemic remains unpredictable. Uncertainty lingers regarding the duration of the current outbreak and possibility of further waves.
The ability of businesses to recover and get back to pre-crisis productivity will drive the shape of the recovery, while additional government policy measures and actions by creditors, landlords and consumers will determine the severity of impact in the short run.
Potential long-tail risks may force future revisions to scenarios and forecasts. Lenders should prepare for strong downside risk, but be ready to engage consumers when recovery spikes.
TransUnion is committed to supporting our customers with insights and a range of useful tools, including dashboards, webinars and playbooks to help you manage through uncertainty.
1Source: The Conference Board of Canada