- Canadian credit consumers show persistence, aided by government subsidies and deferrals
- Credit activity in Q4 2020 was strong, driven by growth in auto and mortgage loans
- The general default level remains very low; credit card delinquencies have increased slightly, but are not a cause for concern
TORONTO, March 8, 2021 (GLOBE NEWSWIRE) — TransUnion today released its findings Fourth Quarter 2020 Industry Insights Report, which noted an increase in consumer credit activity. This increase appears to be driven in part by recent improvements in economic and labor market activity, as well as by government measures and payment deferral programs supported by lenders. Consumer credit activity picked up in the last quarter of 2020 and while overall still below last year’s balance sheet and production levels, particularly for unsecured credit products, it rose from the lows observed during the early stages of the COVID-19 pandemic. -19 pandemic. The Canadian credit market remained stable as consumers deleveraged and many improved their risk scores. However, new lockdown restrictions to prevent future waves of COVID-19 and the phasing out of deferral programs are expected to add additional stress to debt management.
“As the fourth quarter came to a close, the Canadian credit market remained strong despite the imposition of further lockdown restrictions,” said Matt Fabian, director of financial services research and advisory at TransUnion. “While the credit market has remained solid, as the default rate has remained stable for most products so far, and risk scores show a positive trend, the number of delinquents increased very slightly in the fourth quarter of 2020 after four consecutive quarters, which should be addressed. checked to see if this trend continues.”
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Consumers are resilient to the current crisis
The overall risk composition of Canadian credit consumers improved in the fourth quarter of 2020 compared to the previous year, despite the economic impact of COVID-19. The share of consumers in credit levels below prime* (riskier) decreased by 10.6% year-on-year, with the largest decline observed within the subprime risk level, which fell by 14.5%. The share of prime or better (less risky) credit consumers increased by 4.9%, mainly due to a growth in the prime plus segment of 11.4% year-on-year. As of the fourth quarter of 2020, nearly 22% of credit consumers migrated upward to better-score bands from the previous year, while only 13% migrated to lower credit-score bands.
Consumers at the highest or lower risk levels reduced their average outstanding debt by 4.5% and the serious default rate in this group declined by 125 basis points from the previous year, although some delinquency may still be masked by consumers taking loan deferrals. Overall, these trends reflect continued strength among Canadian consumers.
In line with these observations, TransUnion Canada’s Latest Financial Trouble Survey It further confirmed consumer resilience during the downturn, as 61% of consumers surveyed said their household finances are at least equal to or better than last year. In addition, the survey found that 63% of respondents would be able to continue making payments on credit or other obligations for at least one to three months.
New credit growth shows signs of recovery
Total outstanding balances for all credit products increased 3.7% year-over-year, representing $68.9 billion in additional outstanding credit at the end of 2020. The increase was largely due to the mortgage sector, which grew 6.8%. ($88 billion) grew. Production, measured quarterly behind, in the mortgage sector improved by 5.6% in the third quarter of 2020 compared to the same quarter last year. Low interest rates and increased demand for housing, as well as pent-up demand from earlier in the pandemic, have fueled the growth of this credit product.
In addition, auto loans in the total outstanding market grew by 2.3% year-over-year, mainly due to a higher average balance per new loan (an increase of 4.7% year-over-year). This increase may be due to a combination of roll-up financing (taking the remainder of an existing loan into a new loan), as well as higher ticket prices as Canadian car buyers continue to switch from passenger cars to light trucks. As pandemic restrictions eased in the third quarter, there may have been pent-up consumer demand leading to increased purchasing activity, alongside dealers and manufacturers providing incentives to boost auto sales. The combination of strong new lending in the auto and mortgage sectors in the third quarter of 2020 ensured that healthy Canadian credit market activity ended 2020 on a positive note.
This positive new credit growth was offset by declines in outstanding revolving credit products, with card balances declining 13.6% ($13.6 billion) and credit lines declining 4.0% ($10.3 billion). The slowdown in balance growth for these products was due to a combination of a lower year-over-year decline in demand for card spend and increased payment activity against card balances. Demand for additional credit has also declined as manufacturing activity for all products declined by approximately 24% compared to Q3 2019. Revolving credit products, such as credit cards and lines of credit, had the largest decline in new account opening (-35% and – 37% year-on-year, respectively).
|Originations activity shows signs of recovery|
|credit cards||Personal loans||Car financing||lines of credit||Mortgages|
|3rd quarter 2019||1,627.135||1,086,974||1,133,436||784,402||579,860|
|4th quarter 2019||1,647,627||1,062,610||953,988||692,778||520,562|
|1st quarter 2020||1,313,470||951,584||767.584||631,986||410.772|
|2nd quarter 2020||642.845||695.222||738,430||438.006||527,916|
|3rd quarter 2020||1.051.728||891.062||1,100,590||495.334||612.556|
|Q3 2020 YoY Change||-35.4%||-18.0%||-2.9%||-36.9%||5.6%|
Source: TransUnion Canada Consumer Credit Database
Delinquency numbers at record low, but as payment deferral ends, credit card delinquencies show early trend reversal
When the government support and deferral programs ended, the default rate continued to fall for most products. Credit cards bucked this trend and rose slightly from an earlier decline in four quarters. As of Q4 2020, only 2.3% of credit consumers had deferrals for at least one product, compared to 8% of consumers when the deferral peaked in June 2020. Despite the end of the deferral for the majority of consumers, the default rate remained lower compared to the previous year across all products. While the number of serious credit card defaults declined year-over-year, there was an increase in the number of serious defaults from the previous quarter (+5 basis points versus Q3 2020), marking the first time in four quarters that card delinquency failed to turn up. TransUnion’s 2019 Payment hierarchy research into the choices consumers make with regard to payment obligations when they encounter financial difficulties, has shown that credit card payments seem to be the last priority.
“The consumer credit market is performing well, given the long-term impact of the pandemic. Serious delinquency levels remain low, while balance sheet and origination activity show signs of an upturn,” concluded Fabian. “Additional stimulus measures and declining unemployment rates appear to support the trends in the credit economy that we observe. Consumer performance after payment delays and any shifts in Payment priorities as we recover from the crisis will shape the credit outlook for 2021. With these programs coming to an end, lenders need to evaluate pre-delinquency treatment strategies for their consumers at risk.”
* TransUnion CreditVision® score risk level segment definitions: subprime = 300-639; near prime = 640-719; prime = 720-759; prime plus = 760-799; super prime = 800+
About TransUnion (NYSE: TRU)
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