Continued labor market strength, including wage growth, should mitigate higher chargeoffs and sustain Canadian credit card collateral performance improvements in the short term, according to Fitch Ratings.
In a recent analysis, "Canadian Credit Card Index - Second-Quarter 2022," Fitch noted that quarter-over-quarter collateral performance improved in three out of four metrics, suggesting that some performance in its indices had normalized and remain stronger than pre-pandemic levels as of February 2020.
What charge-off normalizing means
The Chargeoff Index average, known as net chargeoffs increased for the third consecutive quarter to 1.86%, up from 1.68% in Q1 2022. That still represented an improvement, compared to 1.94% in Q2 2021.
As of the June 2022 collection period, net chargeoffs were at 2%, the highest level since reaching 2.06% in April 2021. It was below the 2.97% mark in Q2 2020 and 3.05% in Q4 2019, however.
Fitch expects net chargeoffs to normalize moderately in 2022 as households continue to face high inflation and aggressive interest rate policy pressures. That might include the 100-basis point increase in July that these figures do not reflect.
To measure Canadian indices Fitch used three-month rolling collateral balances as of June 30, 2022.
"The Canadian Chargeoff Index comprises net chargeoffs that are 15%–20% lower than the corresponding gross chargeoff numbers as net chargeoffs include recoveries," wrote Michael Girard, a director at Fitch's Canada branch, and senior director Herman C. Poon, who authored the report. This is unlike U.S. and U.K. credit card indices.
Delinquencies improve
Following two consecutive quarterly average increases the 60+ Days Delinquency Index decreased to 0.87% in Q2 2022, from 0.96% in Q1 2022, and 0.89% in Q2 2021,and remains close to the low-end quarterly average range of 0.78% to 1.35% seen at the start of the pandemic.
Late-stage delinquencies decreased each month during the quarter, ending at 0.83% in June 2022, slightly up from 0.81% in June 2021, yet lower than 1.06% in June 2020.
Quarterly delinquency spikes suggest some households are struggling to manage debt. Also, for insolvent Canadians, the pressures of rising living costs likely will push bankruptcies and proposals higher in the coming months, analysts wrote.
A debt-to-income balance
As Canadians struggle to manage these pressures, more of them have filed for insolvency since April 2022, the report found.
Total household debt, which includes consumer credit, non-mortgage and mortgage debt, increased to $2.7 trillion in Q1 2022, up from $51.9 billion. That represented a 2% increase on a quarter-over-quarter basis. Household debt was $333 billion higher than in Q4 2019.
Consumer credit tripled since Q4 2021 driven by the reopening of the economy and resumption of global travel.
Not all indicators of consumer health are foreboding. The labor market's continued strength, including wage growth, mitigates these daunting factors, analysts wrote. The Q2 2022 unemployment rate fell to a new low as of June at 4.9%, down 0.4% compared to Q1 2022. The average hourly wage was $31.24 in June, up 5.2% on a year-over-year basis.
Disposable income grew and outpaced household debt at 3.3% during the quarter, so the household debt-to-income ratio fell by 2.5% to 182.4%, the first decrease since 1Q 2021.
'Very strong' monthly payment rates
The Q2 2022 average for Monthly Payment Rate (MPR) Index was at 61.26%, up from 54.32% in Q1 2022 and 55.21% in Q2 2021, and "remains very strong" compared to its 40.98% pre-pandemic level, according to the report, despite volatility.
In June 2022, the monthly payment rate index fell to 62.07%, down from a new high set in May 2022 at 64.91% that surpassed the 61.12% high set in December 2021.
Fitch expects monthly payment rate performance to remain strong compared to historical levels albeit with some moderate normalization toward 2019 levels. Growing credit card balances, up 10% since January 2022, the expiration of government income assistance programs, inflation and interest rate hikes likely will reduce savings and households' cash available for payments in 2023.
