Canadian auto-loan delinquencies rising at ‘alarming’ rate

Rapidly falling oil prices — and the consequent weakening of the Canadian dollar — contributed to a near 10-percent increase in auto loan delinquencies over the course of 2015.

That’s according to TransUnion’s latest MarketTrends report, which showed auto-loan delinquencies increased to 1.32 percent in the fourth quarter of last year, which is also the highest level observed in four years.

Not surprisingly, this dramatic spike in auto loan accounts 60 or more days past due, including write-offs, was pushed mostly by increases in delinquencies in Alberta and Saskatchewan — the Western provinces that have been most impacted by the drop-off in oil prices.  

"This was the largest spike in the national auto loan delinquency rate that we've observed in quite some time, but we do think it's a regional issue," said Jason Wang, TransUnion's director of research and analysis in Canada. "Falling oil prices have led to rising unemployment rates in oil-rich regions. We are now seeing the increase in unemployment in these areas manifest as rising delinquencies across the board, though the greatest impact has been on auto loans."

As of Q4, Saskatchewan had the highest auto loan delinquency rate of all provinces at 2.7 percent, which represents a staggering 19 percent year-over-year jump. Alberta was up next with the second highest rate of 2.4 percent, but this number represented an even bigger year-over-year jump: 35 percent, to be exact.

Interestingly, a TransUnion oil trend impact study released last summer predicted double-digit increases in delinquencies for “oil-rich regions” through at least 2016.

"We're pleased our forecasting models were so effective, although it's unfortunate our news is not positive," said Wang.

In provinces like Quebec and Ontario, regions not impacted as dramatically by the oil slump, the story was a bit different. Quebec touted the lowest auto loan delinquency rate of 0.92 percent in Q4, which represents a 1.3-percent year-over-year increase, while Ontario’s rate was 1.01 percent last quarter, which was a 1.5-percent jump from Q4 2014.

So, why the better performance for Quebec and Ontario? It comes down to the markets in those provinces, Wang explained.

“When it comes to Ontario and Quebec, we know these are not oil producing provinces, and they are net energy consumers,” Wang said.

In Toronto, he explained, there is a large concentration of financial services businesses, which are energy neutral, and if one goes a little further outside of Toronto into GTA, the area has a lot of manufacturing businesses and farming, which are energy consuming industries.

“So the lower energy price is actually good news for these manufacturers and farmers because now that means lower costs for them,” Wang said.

Also, when you take a look at the weaker Canadian dollar, one has to understand that this trend helps some of the Canadian manufactures export their products, “because if everything is cleared in U.S. dollars, then their products are cheaper and more competitive in the international market,” according to Wang.

And Quebec, also not an oil producing province, has traditionally been a “cash society,” Wang said.

“So it’s just the culture of their province where people like to use cash, and they’re a little conservative. Now, this is when I think being conservative is actually working in their favor,” he explained

Dropping oil prices and economic struggles in Western Canada are definitely contributing to overall auto loan delinquency increases, but are there any other factors at play here?

Wang told Auto Remarketing Canada that it really comes down to one word: oil.

“Actually, this will be I think the single biggest factor causing the higher delinquencies in auto loans, particularly in the oil regions, such as Alberta and Saskatchewan. As oil prices began to go down, typically a new-car loan opened these days has a much bigger amount that is being financed,” Wang said. “So people are buying bigger cars, or putting more on the loan, so all of a sudden now, when the low oil prices are causing higher unemployment in the oil region, than that reduces the income for a lot of consumers, and they won’t have enough cash to maintain their debt.”

And this auto loan delinquency trend is already a very serious issue, especially in Alberta and Saskatchewan, Wang said, considering the two provinces' rates in regard to delinquencies are double the national average.

“We forecasted this increase, and it’s happening a little too fast already, but how much higher it’s going to go from here in terms of auto loan delinquencies, there’s no good quantitative measure, but directionally, we can say that it will become worse," said Wang.

60+ DPD Delinquency Rates for Auto Loans and Leases

Surprisingly, the TransUnion report showed that when all non-mortgage loan products are considered together, delinquency rates remained nearly the same at the end of last year as in Q4 2014. According to the report, delinquencies rose one-basis point from 2.66 percent in Q4 2014 to 2.67 by the end of 2015.

In other words, auto loans are certainly being impacted the most by the current economic conditions.

“Our data does show that out of the credit products, auto loans is the one that is impacted the most. Our report is focused on non-mortgage debt, so typically we call this consumer credit, and in year-over-year increase in delinquencies, obviously auto loans is the worst, but when you look at the absolute numbers, as always, credit cards will have the highest delinquency number. But it’s just the trend in auto loans is a little alarming,” Wang explained.

So what needs to change to turn this alarming auto-loan trend around? Wang said there are things that lenders can do, which is why the company released and oil study in 2015 — to warn lenders of the coming delinquency problems that are showing up today.

“Fortunately, a lot of lenders did listen to us, and they subsequently tightened their strategies,” Wang said.

When it comes to risk management, he explained there’s two issues to look at. First, what do lenders do with their new accounts in light of recent trends, as well as what actions they take with their existing portfolio.

“It’s relatively easier at this point for anyone who has lending business in Alberta and Saskatchewan to tighten their new account acquisition criteria, because that’s a customer you haven’t let it the door yet, and you can simply say from now on we are raising the bar and increasing the threshold, and we want you to have excellent credit before we give you the car loan, so it’s easier for new accounts,” Wang said.

But for existing portfolios, it’s a little bit harder. In other words, there are limited actions lenders can take when a loan vintage — 2015, in this case — goes bad.

Wang used the analogy of making wine: “If a particular year was not very good, and then you have that 2011 batch that’s not good, there’s nothing you can do because the batch isn’t right,” he said.

But one thing lenders can do when it comes to these existing portfolios is to keep a close eye on these customers on their existing books.

“There is the dynamic monitoring so that when something happens to the consumer, you get a trigger or an alert, so you can start an early conversation with the customers,” said Wang. “Or there is payment behavior monitoring when you know the consumer doesn’t have enough cash to pay their debt, and then even though they are not defaulting, chances are they are going to default in a couple of months, so you start the conversation. So, these are the things that the lenders can do.”