TransUnion Canada sees credit market functioning ‘correctly’

TransUnion Canada director of research and industry analysis Matt Fabian used the words credit, consumer and correctly within the same thought to describe the overall picture painted by TransUnion’s latest Canada Industry Insights Report

Fueled by younger Canadians and overall confidence in the nation’s economy, Fabian and the TransUnion team spotted an array of positive signs in the fourth-quarter data, including how auto finance performed as dealerships nationwide enjoyed record sales.

“We’re still seeing a consistency in terms from an overall debt perspective. Consumer balances continue to rise. To us, seems in line with the economic expansion and the fundamentals we saw at the end of 2017. There was a build in consumer confidence toward taking on that additional debt,” said Fabian, who is among the experts scheduled to share presentations during the Auto Remarketing Canada Conference that begins on March 27.

“Additionally, overall we’ve seen delinquency rates remain at low levels. In fact, year-over-year they’ve dropped,” he continued during a phone conversation ahead of Thursday’s report release.

“The overall consumer picture for us is that the market is still working fundamentally correctly as it should. And consumers in Canada, despite having an increases in their balances, are still being pretty cautious and being good at managing that overall debt,” Fabian went on to say.

As Canadian consumer debt continues to rise, TransUnion found that millennial and Gen Z borrowers are playing leading roles in this growth.

Average consumer non-mortgage debt balances rose 4.3 percent between Q4 2016 and Q4 2017 to close the year at $29,312. However, both millennials (born 1980 to 1994) and Gen Z (born 1995 or later) consumers experienced significantly higher yearly percentage increases of 12.6 percent and 22.9 percent, respectively.

“As consumer debt continues to increase, it’s clear that the youngest generations are playing a critical role in the consumer credit market,” Fabian said. “Millennials are taking on additional balances as they reach significant life events that put pressure on their overall wallet — many of them are now supporting children, purchasing homes and acquiring additional vehicles.

“These costs may be financed through additional borrowing, so this growth in debt is not surprising,” he added.

TransUnion also found that the high rate of balance growth among Gen Z, albeit from a much lower base level, is also expected. These younger consumers are entering the workforce for the first time and starting households, milestones which also increase demand for credit.

“It’s interesting that Gen Z is growing at a fast pace, but they also are the only generation that has shown increased delinquency rates on debt over the past year,” Fabian said. “It could be they’re inexperienced in managing their credit obligations and demonstrating less discipline in making regular payments, which we tend to see reflected in their risk distribution, which is typically non-prime compared to older generations.

“It will be important for these emerging consumers to learn the importance of maintaining their credit health,” he continued. “We have seen that credit education tools provided by financial institutions such as credit monitoring and score simulators can be very effective in building positive credit behaviors, reducing delinquency rates and increasing credit scores.”

TransUnion’s report determined that overall consumer delinquency rates for commitments 90 days or more past due declined 23 basis points during 2017 to finish at 5.30 percent. While Gen Z experienced a 39-basis point increase in serious delinquency rates, millennials saw a 69-basis point drop in delinquencies during 2017.

Comparing Consumer Credit Performance by Generation

TransUnion insisted the credit performance of the youngest generations is especially significant because they are increasingly taking a larger role in the overall Canadian credit marketplace.

In fact, analysts discovered the share of all credit-active consumers in the millennial and Gen Z age ranges combined has increased from 28.0 percent in Q4 2015 to 30.0 percent in Q4 2016, and again to 31.6 percent in Q4 2017 — an increase of 12.2 percent in just the last two years.

Conversely, between Q4 2015 and Q4 2017, the number of Baby Boomers (born 1946 to 1964) with credit declined 3.4 percent, while Gen X (born 1965 to 1979) dropped 1.6 percent.

“Millennials are already a significant part of the consumer credit dynamic in Canada. In fact, Millennials surpassed Gen X in market share for consumer credit at the end of 2016 and continued to outpace them in 2017,” Fabian said.

“Of even greater anticipated consequence is Gen Z, even though they comprise only 7 percent of all credit consumers in Canada currently,” he continued. “The share of Gen Z consumers will increase materially in the next few years as they are expected to grow from about 25 percent of the population today to 30 percent in a few years, with many obtaining a credit product for the first time.

“It will be important for lenders to understand the credit needs and preferences of this rapidly growing segment in order to effectively serve them in the coming years,” Fabian went on to say.

Keeping tabs on interest rates

The latest Industry Insights Report from TransUnion also showed that the consumer credit market is performing well.

The overall risk tier mix of Canadian consumers has improved, with 68 percent of consumers having prime or better risk scores — a 2.3 percent increase over last year. The number of consumers with access to credit also has increased about 0.4% in the last year to 28.5 million.

Serious delinquency levels for all major credit products remain at relatively low levels, though recent Bank of Canada rate increases may be starting to impact some consumers.

Q4 2017 Canadian Consumer Credit Debt/Delinquency Picture

*Serious delinquency rates are 60 days or more past due for all credit products except for credit cards (90+ DPD).

“Most consumers will not be materially affected by the Bank of Canada rate increases. However, using our next-generation CreditVision credit data that identifies payment amount trends and behaviors, we have started to see an uptick in delinquency among pockets of consumers vulnerable to an interest rate shock,” Fabian said.

In 2017, TransUnion observed an increase in 90-day delinquency in consumers who have typically made just their minimum monthly payments or slightly more. The percentage of such consumers rose 2.9 percent over the past year to approximately 120,000 consumers.

“These consumers are among the most vulnerable to interest rate increases — the fact that they are making monthly debt payments near the minimum due indicates that they may have less financial cushion to absorb monthly payment amount increases,” Fabian said.

“While it’s a relatively small percentage of the overall consumer credit population, it is important for lenders to identify those consumers who are most at risk from interest rate increases, and to incorporate these insights into their customer and portfolio management strategies,” Fabian added.

Fabian also touched on observations solely about the auto finance sector; a trend likely quite familiar to underwriting departments.

“There has been a move toward longer terms. In Canada, that’s certainly been the case. It’s allowed consumers to afford more expensive vehicles than maybe they would have as their payments are no longer an obstacle. So we’ve seen balances grow as a result,” Fabian said.

“It will be something that we’ll keep an eye on if it promotes more risk into the system,” he went on to say.

Regional analysis

While most parts of Canada have seen relatively low delinquency levels over the course of the last three years, TransUnion pointed out that two provinces proved to be outliers — Alberta and Saskatchewan.

Analysts explained the massive drop in oil prices between 2014 and 2016 negatively impacted consumer credit performance in Alberta and Saskatchewan, but these risks, too, may finally be subsiding.

“Economic conditions have been improving for a few quarters in these two oil provinces, but we had not seen similar improvements in consumer credit behavior,” Fabian said. “We’re beginning to see that now, as delinquency rates are finally beginning to drop on a yearly basis while debt level increases have slowed in these provinces.”

The report mentioned the average non-mortgage debt balance per consumer in Alberta and Saskatchewan grew below the national average, increasing 1.7 percent and 2.6 percent, respectively. Although the actual dollar balances are still above the national average, TransUnion observed that this growth trend has slowed.

Also reassuring, according to analysts, is that the 90-day delinquency rate dropped in both provinces (down 4 basis points in Alberta and down 24 basis in Saskatchewan).

Ontario saw the largest yearly increase in average consumer non-mortgage debt at 6.2 percent to $30,191.

“This growth appears to be driven by a couple of factors, including auto finance where Ontario consumers recorded the highest percentage increases in both volume and average size of auto loans. We also saw material increases in lines of credit and mortgages, likely due to increased home equity values, especially in the greater Toronto Area,” Fabian said.

Although Quebec consumers remain the least indebted, with average non-mortgage consumer debt at $22.543, TransUnion noted the province did see an increase of 3.1 percent year-over-year, marking the third consecutive quarter where balances grew.

TransUnion added serious delinquency rates in Quebec remain very low, and well below the national average at 4.3 percent (an annual drop 7 basis points).

What else analysts are watching

Fabian noted that this year’s increase in the Canadian minimum wage should enhance consumer confidence further. However, he and the TransUnion team are expected some slowdown in overall economic growth because 2017 was so robust.

“We’ve seen disposable income go up quite a bit year-over-year. The latest data suggests the median household income continues to increase from previous year. That’s partially fueling things,” Fabian said. “Plus, it’s just an overall economic expansion. If you look at the fundamentals, we have one of the lowest unemployment rates in many years. We see GDP in Canada continue to grow and expands.

“Of course, there are risks with possible changes to (the North American Free Trade Agreement) and other agreements and how those might affect overall consumer trends going forward. Those also might be regional depending on the negotiations with NAFTA go,” Fabian continued.

“I think in Q1 you will see growth but not at the rate it was 2017. It will be interesting to see how consumers adjust and if we start to see some deleveraging happen,” he went on to say.

More information about the Q4 2017 TransUnion Canada Industry Insights Report, including details about a variety of credit products, can be found here. You can visit this website to register for TransUnion's Q4 2017 Industry Insights Webinar scheduled for March 7 at 2 p.m. ET.