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TransUnion Canada Revises 2020 Credit Forecast Amid COVID-19 Pandemic

Forecasts highest non-mortgage delinquency rates since 2015

  • Non-mortgage delinquency in Canada forecast to increase to 6.9% by end of Q3 2020.

  • Canadian consumers were already feeling debt pressure coming into the crisis, with non-mortgage delinquency rates up 39 bps at end of March from previous quarter to 5.75% - marking highest observed level since 2015.

TORONTO, May 21, 2020 (GLOBE NEWSWIRE) -- As the COVID-19 pandemic continues to bring unprecedented pressures on consumers’ ability to repay their debt obligations, TransUnion (TRU) today released a new multi-scenario credit forecast.

TransUnion’s current scenario projects that overall non-mortgage delinquency in Canada will peak at 6.9% at the end of Q3 2020 before gradually dropping back down to 6% at the end of Q1 2021. For context, the non-mortgage delinquency rate in Q1, which straddled pre- and post-COVID worlds, was 5.75%, and concluded Q4 2019 at 5.61%.

“As unemployment reaches levels not seen in several years, it’s important to take a step back and reassess how COVID-19 will impact the consumer credit market in the coming quarters,” said Matt Fabian, director of financial services research and consulting at TransUnion. “Elevated unemployment and its effect on consumers’ income and ability to pay debt obligations is a primary driver of increased delinquency. The various government relief benefits, combined with deferral programs provided by lenders, can act to offset some of the COVID-related delinquency. However, each of these measures may contribute to long-term risk at a future time, as consumers will generally still be responsible for paying these deferred obligations at some point in the future.”

The updated forecast indicates that the economic effects will likely not be evenly distributed by region. Certain provinces, such as those more dependent on industries heavily impacted by the lockdown, like tourism and travel, are likely to be more adversely affected. Additionally, the energy provinces including Alberta and Newfoundland could potentially be even harder hit with the combination of COVID restrictions and the economic impact of plummeting oil prices.

The revised forecast, for example, estimates the non-mortgage serious delinquency rate in Alberta to reach 8.3% at the end of Q3 2020. Lenders are already preparing for these and other scenarios, building and executing against their downturn crisis playbooks with a goal of mitigating risk while still supporting consumers who may be suffering through the crisis – especially those that are only struggling due to the crisis and would otherwise be reliable customers.

Serious Delinquency Rates Expected to Rise for All Major Credit Products

Serious delinquency measured as 90 or more days past due

Product

Forecast serious delinquency rate at end of 2020

Q1 2020* serious delinquency rate

Q4 2019 serious delinquency rate

Overall non-mortgage

6.3%

5.8%

5.6%

Credit Card

3.8%

2.9%

2.8%

Auto finance

2.8%

1.6%

1.5%

Personal loan

5.1%

4.3%

4.1%

Mortgage

0.9%

0.3%

0.3%

*assumes second half likely impacted by COVID-19

The lockdown has caused businesses of all sizes to shut down, causing massive spikes in unemployment. TransUnion estimates that approximately 8% of Canadian credit-active consumers (3% of the total population) impacted by COVID-19 are vulnerable to credit shocks. This segment of consumers already has a history of missed payments and generally can only make the minimum payment due on revolving products like lines of credit and credit cards.

“The average consumer delinquency rate for this group is approximately 17% - almost three times the overall market rate. This group will be most exposed to the economic impacts of social distancing and other economic stresses like low oil prices. The breadth and scope of impact to this group will be largely determined by the duration of the crisis and when consumers are able to safely resume their previous activities,” added Fabian.

Canadian consumers felt the pressure of debt coming into this crisis

Canadian credit-active consumers were already feeling the pressure of debt coming into the COVID-19 crisis. Overall non-mortgage delinquency rates in Q1 2020 were up 39 bps from the previous quarter to 5.75%, marking the highest observed since 2015. This increase was likely fueled by the impact of a higher cost of debt combined with plummeting oil prices and a cooling economy.

While we observed a decline in 2018 and the first-half of 2019 of 20 bps per quarter, the latter half of 2019 saw an increase in delinquencies. Since Q2 2019, the rate of increase in delinquencies had been accelerating leading into the first quarter of 2020 with an average increase of 2.4%.

Average overall consumer non-mortgage debt balances remained relatively stable in Q1 2020, dropping 1.3% YoY to $29.6K and nearing a two-year low, as consumers may have been trying to deleverage in the face of higher interest rates on their credit balances.

“Consumers may have been feeling the pressure of higher credit balances and increased interest rates and so were beginning to deleverage and pay down debts. However, some were unable to do this, which can explain in part the higher delinquency rates we saw for Q1. We do not anticipate non-mortgage balances remaining stable in the coming months due to the COVID-19 pandemic,” said Fabian.

Canadian consumers have historically shown resilience and responsibility when it comes to managing credit debt. But the impact of a slowing economy and oil price slump has affected some consumers, and the massive impact of COVID-19 lockdowns will put even more pressure on consumers as it relates to the ability to pay down debt.

The resiliency of Canadian consumers remains to be seen, as current circumstances make drawing historical parallels challenging. This is further highlighted in a recent financial hardship survey conducted by TransUnion, in which 60% of Canadians indicated their incomes had been negatively impacted by the COVID-19 pandemic, with 67% of those impacted showing concerns about their ability to pay bills and loans.

Younger credit consumers are feeling more of the impact

The younger cohorts seem to be struggling the most. Compared to the previous quarter, serious delinquency rates (90+ days past due) for Millennials increased 52 bps to 7.9% in Q1 2020, and Gen Z consumers increased 130 bps to 7.5%. Millennials and Gen Z have seen their overall total debt grow to $595 B – a growth rate of just over 28% over the past two years.

Generally, younger consumers have fewer relief outlets during economic downturns, and with fewer options there tends to be higher delinquency levels. As these cohorts are already at a stress point, the effects of COVID-19 and accompanying lockdowns are likely to increase the financial shock on younger generations. This is consistent with recent survey findings that showed both Millennial and Gen Z cohorts indicated that they are even more likely to be impacted by COVID-19, at 71% and 73% respectively.

While the Q1 scenario heading into the COVID crisis was already challenging, Fabian said that he expects a drastic change over the next quarter. “It’s important to note that the constant change, and unprecedented scope and scale of this crisis can still unfold into many scenarios. Possibilities to consider include how the various relief programs will support consumers and small business, how resilient consumers will be, and how lenders will manage through the worst of this situation.”

For more information about the updated TransUnion consumer credit forecast, please visit https://www.transunion.ca/lp/IIR.

About the TransUnion Canada Industry Insights Report
TransUnion’s Canada Industry Insights Report is an in-depth, credit-active population-based solution that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across active credit files on TransUnion record. These files contain hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyze market dynamics over an entire business cycle, helping to understand consumer behavior over time and across different geographic locations throughout Canada. Businesses can access more details about and subscribe to the Industry Insights Report.

About TransUnion (TRU)
TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing a comprehensive picture of each person so they can be reliably and safely represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good.® TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people in more than 30 countries. Our customers in Canada comprise some of the nation’s largest banks and card issuers, and TransUnion is a major credit reporting, fraud, and analytics solutions provider across the finance, retail, telecommunications, utilities, government and insurance sectors.

For more information or to request an interview, contact:
Contact Fiona Bang
E-mail Fiona.Bang@ketchum.com
Telephone 647-680-2885