COVID-19: Three Scenarios for the Canadian Consumer Credit Market

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.

Three market scenarios

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.

Early insights

Most scenarios suggest a reduction in the quality and volume of credit during COVID-19. Other key forecasts are as follows:

• Below-prime originations drop through 2020 and remain below pre-crisis levels
• Average non-mortgage balances spike through Q3 — with a slow decline into 2021
• Consumer non-mortgage delinquency increases through Q3 2020
• Unsecured personal loan originations for prime and above drops through to Q1 2021
• Instalment originations for below-prime grow through to Q4 2020, while balance growth and delinquency rates increase
• Credit card originations increase moderately for prime and above, and rapidly for below prime
• Bankcard delinquency rates spike through Q2 and Q3 2020 to rates similar or exceeding the financial crisis

The table below gives an overview of the credit market under each scenario:

Three-phased response

Lenders should think of their response to the pandemic in three phases across the credit lifecycle:

Phase 1 (now): Buy time and mitigate the downside

• Mobilize downturn analytical decisioning
• Given isolation policies, over-engage in digital
• Monitor often by region, sector and segment
• Educate customers and help them buy time
• Reinforce digital channels for fraud
• Focus on capacity and operational optimization

Phase 2 (H2 2020): Prioritize post-COVID-19 robustness

• Start to refactor analytical decisioning
• Get future-ready with digital channel build out
• Know your customer — again
• Flatten the impairment curve
• Expect more fraud
• Monitor long tails

Phase 3 (2021 onward): Out of the blocks first, fast recovery

• Rebuild and automate analytical decisioning
• Scale marketing efforts — don’t be last
• Improve predictive capabilities
• Pick your battles
• Challenge conventional wisdom in the new normal
• Futureproof your business

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.

Revise strategies as scenarios unfold

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.