In Equifax Canada’s Q2 Canadian Consumer Credit Trends report, Canadian credit cards show an increase in balances for the first time in 2 years, totaling $77.1 billion in outstanding credit card debt. Contrary to other lines of credit, we are seeing growth in the number of new credit card accounts as well, with Canada having a total of close to 43 million credit card accounts open. So what can we make of the data?
First of all, aggregate credit lines have remained relatively stable for credit cards,indicating that while consumers are taking on additional credit cards, banks are not exposing themselves to a linear increase in unsecured debt. For aggregate credit lines to remain the same, while the total number of credit cards increase, average credit line sizes per card have to be decreasing. The conclusion has to be Banks are either issuing new accounts with lower lines of credit or cutting existing lines of credit, to manage for each cardholders total debt to equity ratio.
This will be an interesting phenomenon to watch play out in issuers strategies to remain, or become, top of wallet. Since we know that the size of a credit card’s credit line is one of the most important factors in its usage, there might be an opportunity for an issuer with an aggressive line strategy to take on some additional risk and become top of wallet.
We would also guess that since Canada now has close to 43 million credit card accounts, which is about an average of 3 credit cards per wallet, and the number of active credit cards (those that are actually being used) has been constant for the past 3 years, activation rates must be declining. Canadian banks are now in a saturated mature market with no net new active account growth. However, every Canadian bank is trying to either increase or maintain the size of their credit card portfolio, since they have some of the highest returns within their product portfolios. As a result, Canadians are more than willing to apply for new accounts to take advantage of better rewards or interest rate offers. All that’s really happening is banks are offering Canadians better offers (likely on credit cards with better interchange for the banks as well), and Canadians are shifting their spend to those new accounts, while keeping their previous accounts open.
The Equifax report also shows that total credit card balances have increased for the first time in 2 years. This is a big deal for the credit card issuers, who have seen credit card revolve rates and average balances decline since 2009. Increased credit card balances are either a function of people spending more, and maintaining their spend to balance ratio, or spending the same and decreasing their spend to balance ratio, or a combination of the two. Regardless, the banks will be earning more money because of it, so long as losses stay constant. But as the Equifax report shows, while delinquencies are at a long-time low, one troubling trend we can read from the Equifax report is that for the first time since 2009, we’ve seen an increase in bankruptcies in March, which will be something to closely monitor.