Interest charge

Canadian credit cards will remain strong despite the normalization of charges

According to Fitch Ratings, continued strength in the labor market, including wage growth, should mitigate higher write-offs and support improvements in Canadian credit card collateral performance in the near term.

In a recent analysis,Canadian Credit Card Index – Second Quarter 2022Fitch noted that quarter-over-quarter collateral performance improved in three out of four measures, suggesting that some of its index performances had normalized and remained stronger than pre-levels. the pandemic in February 2020.

What does charge-off normalization mean?

The average of the Chargeoff Index, known as net charges, increased for the third consecutive quarter to 1.86%, compared to 1.68% in the first quarter of 2022. This still represented an improvement, compared to 1, 94% in the second quarter of 2021.

As of the June 2022 collection period, net imputations were 2%, the highest level since reaching 2.06% in April 2021. They were, however, below 2.97% in Q2 2020 and 3.05% in Q4 2019.

Fitch expects net charges to normalize moderately in 2022 as households continue to face high inflation and aggressive interest rate pressures. This could include the 100 basis point increase in July that these numbers do not reflect.

To measure the Canadian indices, Fitch used three-month rolling collateral balances as of June 30, 2022.

“The Canadian Imputation Index includes net imputations that are 15% to 20% lower than the corresponding gross imputations figures because net imputations include recoveries,” wrote Fitch branch manager Michael Girard at Canada, and Senior Director Herman C. Poon, author of the report. This is different from US and UK credit card indexes.

Delinquencies are improving

After two consecutive quarterly average increases, the 60+ day delinquency index decreased to 0.87% in Q2 2022, from 0.96% in Q1 2022 and 0.89% in Q2 2021, and remains close from the lower quarterly average range of 0.78% to 1.35. % seen at the start of the pandemic.

Late payments decreased each month during the quarter, ending at 0.83% in June 2022, up slightly from 0.81% in June 2021, but below 1.06% in June 2020.

Quarterly spikes in delinquency suggest some households are struggling to manage their debt. Additionally, for insolvent Canadians, rising cost-of-living pressures will likely drive up bankruptcies and proposals in the coming months, the analysts wrote.

A debt/income balance

As Canadians struggle to manage these pressures, more have filed for insolvency since April 2022, the report said.

Total household debt, which includes consumer credit, non-mortgage debt and mortgage debt, increased to $2.7 trillion in the first quarter of 2022 from $51.9 billion. This represents a 2% increase quarter over quarter. Household debt was $333 billion higher than in the fourth quarter of 2019.

Consumer credit has tripled since the fourth quarter of 2021, driven by the reopening of the economy and the resumption of global travel.

Not all consumer health indicators are worrying. The continued strength of the labor market, including wage growth, is mitigating these discouraging factors, the analysts wrote. The Q2 2022 unemployment rate fell to a new low in June at 4.9%, down 0.4% from Q1 2022. The average hourly wage was $31.24 in June, up from 5.2% on an annual basis.

Disposable income rose and outpaced household debt at 3.3% in the quarter, so the household debt ratio fell 2.5% to 182.4%, the first decline since Q1 2021.

“Very high” monthly payment rates

The Q2 2022 average for the Monthly Payment Rate (MPR) index was 61.26%, compared to 54.32% in Q1 2022 and 55.21% in Q2 2021, and “remains very strong” compared to its pre-pandemic level of 40.98%, according to the report, despite the 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% which surpassed the high of 61.12% set in December 2021.

Fitch expects monthly payment rate performance to remain strong compared to historical levels, but with some moderate normalization towards 2019 levels. Growth credit card balances, up 10% since January 2022, the expiration of government income assistance programs, inflation and interest rate hikes will likely reduce household savings and available cash for payments in 2023.