Equifax Canada’s Q3 2013 National Consumer Credit Trends Report reveals that Canadian consumer debt is increasing, credit card debt less so, and delinquency rates are falling. While rising balances and lower delinquencies are attributed to a growing economy, Canadians remain exposed to a stalled economy or rising rates. Both could have a quick and dramatic impact on the ability of Canadians to repay their debts, either by reducing their income to pay back their debts, or increasing the cost of their debt, a combination of the two would be worst case.
While overall consumer balances rose 3.7 percent year-over-year in Q3 2013, credit card balances posted the slowest growth at 2.6 percent year over year to a total of $78 billion in credit card outstandings. Despite slow credit card balance growth, any balance growth combined with lower losses, in a low rate environment, is a recipe for rising profits for card issuers. Canadian credit card issuers will welcome the news.
That said, we think slow credit card balance growth reveals a continued trend of Canadian credit cards having reached their saturation point in the Canadian marketplace. While Equifac reveals new account growth, according to Nilson, there has been little YoY growth in active credit card accounts in Canada (accounts that are being used). This is indicative of a market where banks are stealing market share from one another, and Canadian are adding cards to their wallets. Where we will see growth in the Canadian credit card market will be in incremental cardholder spend, which will be a function of annual inflation, and credit card capturing wallet share from cash and debit. Incremental spend will and should translate into credit card balance growth, which we’re seeing, but will likely be minimal, as much of the incremental spend will be coming from transactors, versus revolvers.
One way we could see credit card balances increase is if one, or some, of the Canadian banks decides to extend credit in the near-prime space more aggressively. That would certainly expand the balances in the credit card market, but the banks would have to start changing their approach to risk based pricing (different APR’s for different risk), which we think could be coming as Canadian banks find growth harder to come by. TD has already come out with a risk based pricing approach with its TD Emerald Visa Card, which charges prime + 1.5% to 12.75% depending on an applicants risk profile.