Canada is facing a debt delinquency spike warns TransUnion

Non-mortgage delinquencies were already rising heading into the COVID-19 crisis but the outlook calls for swift recovery

Canada is facing a debt delinquency spike warns TransUnion
Steve Randall

The high levels of debt that burdens many Canadian households is forecasted to catch up with some by the end of summer.

A multi-scenario outlook from TransUnion Canada projects that non-mortgage debt delinquencies will spike to 6.9% by the end of the third quarter of 2020 from 5.75% at the end of the first quarter.

That would be the highest level since 2015 and is of course driven by the economic impact of the coronavirus pandemic including rising unemployment.

“Elevated unemployment and its effect on consumers’ income and ability to pay debt obligations is a primary driver of increased delinquency,” said Matt Fabian, director of financial services research and consulting at TransUnion. “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 data reveals that many Canadians were already concerned about their debt levels during the second half of 2019 and into the first few months of 2020.

They were taking steps to cut their exposure with average overall consumer non-mortgage debt balances relatively stable in Q1 2020, dropping 1.3% from a year earlier to $29.6K and nearing a two-year low.

“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.

However, TransUnion is expecting the delinquency rate to begin to ease as 2020 ends with the rate falling to 6% by the end of the first quarter of 2021.

Experts at Hamilton ETF have been warning investors that Canadian banks could be vulnerable to weakness in consumer lending.

Regional, demographical disparity
The delinquency rate, already higher at the end of the first quarter than at the end of 2019 (5.75% vs. 5.61%), will not rise evenly.

Those provinces that rely heavily on industries that have been hit hardest by the lockdown – such as tourism and travel – and those that are energy producers, can expect a sharper rise in non-mortgage delinquencies.

The serious (90 days or more past due) is estimated to hit 8.3% in Alberta, for example, by the end of the third quarter.

There is also an increased struggle for younger Canadians.

Compared to the previous quarter, serious delinquency rates 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 billion – a growth rate of just over 28% over the past two years.

TransUnion’s analysis suggests that 8% of credit-active consumers are vulnerable to credit shocks with a history of missing payments and generally only making minimum payments on products such as credit cards and lines of credit.