Fitch Analysts Don’t See Grounds for Panic Over Canadian Debt

(Bloomberg) -- Those looking for evidence of an imminent debt crisis in Canada won’t find it in the latest credit card data.

An Aug. 2 report on asset-backed securities from Fitch Ratings, which analyzes credit card payments, indicates consumers are coping with record debt levels and concluded the “stable performance” should continue. Though charge-offs, or receivables that have been written off as noncollectable, hit a two-year high in May, the year-to-date average is little changed from 2018. Meanwhile, delinquencies of more than 60 days actually declined in the second quarter, and the monthly payment rate increased.

Ian Rasmussen, senior director at Fitch Ratings, said he and his colleagues had been concerned about the rise in housing and consumer debt. “But we saw that debt related to housing started to level off a little bit,” he said by phone from New York. “It remains an area to watch but not to the same level it was a couple of years ago, when we saw a straight increase in debt balances.”

The charge-off rate reached 3.18% in April, the highest in two years, according to Fitch data, which looks at pools of credit card debt that have been securitized by, for example, Toronto-Dominion Bank’s Evergreen Credit Card Trust and Royal Bank of Canada’s Golden Credit Card Trust. However, the charge-off rate has averaged 2.93% this year, versus 2.94% in the same period last year.

The other key measure to watch is monthly payment rates, says Rasmussen. The rate in the second quarter rose to 45.9%, up from 42.4% in the prior quarter, and little changed from 46.1% a year earlier.

“Typically in Canada, consumers are using cards much more for rewards-based usage, than to carry balances,” he said. But a drop in those levels “would signal that consumers are more interested in paying a balance on the cards, and the reason that would change is that they’re having more difficulty paying off their balances each month.”

Absent Shock

But that’s not likely to happen without some kind of a shock that knocks employment off its current path. “Stable performance is expected to continue in the long term, barring any major negative macroeconomic events,” Fitch analysts said in the report.

The report backs up the most recent view of the Bank of Canada, which said in its July Monetary Policy Report that “household imbalances, as measured by the ratio of household debt to income, have stabilized.” Stress testing has improved the quality of mortgage borrowing, while lower mortgage rates are supporting housing demand, the central bank said.

Rasmussen said his firm has shifted its focus to watching jobless trends, which have been stable, “but if we started to see a pickup in unemployment, or the economy shifting in a way that unemployment was going to increase, that would certainly be something we’d be watching much more closely.”

Fitch is charting the unemployment rate against charge-off levels. “If we were to see a pick up in unemployment as reported by the government, in conjunction with an increase in charge-offs, that would be a signal that consumers are having a more difficult time than they are currently,” Rasmussen said.

Statistics Canada releases July job numbers on Aug. 9. The country’s unemployment rate climbed to 5.5% in June, after reaching a four-decade low of 5.4% in May.

To contact the reporter on this story: Chris Fournier in Ottawa at cfournier3@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Divya Balji, David Scanlan

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