Household Credit Analysis March 26, 28 Economics & Strategy Jeffrey Rubin (416) 594-7357 jeff.rubin@cibc.ca Avery Shenfeld (416) 594-7356 avery.shenfeld@cibc.ca Benjamin Tal (416) 956-3698 benjamin.tal@cibc.ca Peter Buchanan (416) 594-7354 peter.buchanan@cibc.ca Meny Grauman (416) 956-6527 meny.grauman@cibc.ca Krishen Rangasamy (416) 956-3219 krishen.rangasamy@cibc.ca Highlights So far the credit crunch did not impact the Canadian household credit market in any significant way. Household credit in is rising by an annual rate of well over %, with both consumer and mortgage credit expanding at a similar rate. When adjusted for inflation, credit growth during this cycle was not as strong as in previous cycles. This means that any softening in the pace of household borrowing in 28 will not be as dramatic as in the past. Note that the recent acceleration in non-mortgage credit growth is largely due to a rebound in both direct loans and personal lines of credit. The wide gap in overall economic performance between the west and the rest of the country is increasingly being reflected in the credit market in general, and in the mortgage market in particular. Note, for example, that the value of mortgage outstanding in Ontario, Quebec and Atlantic are now rising by 5.3%, 3.1% and 4.5% respectively on a year-over-year basis all lower than the national average, while in Alberta, they are rising by more than 2%. During the fourth quarter of 27, overall household debt rose by almost 3% while personal disposable income rose by 1.6%. This led to an increase in the debt-to-income ratio during the quarter. Over the past year, the debt-to-income ratio rose from 122% to 13%. At the same time, the debt service ratio, as measured by debt interest payments as a share of disposable income is still about 3 basis points higher than it was in 26. With widening credit spreads offsetting the declines in both prime and government bond rates, debt interest payments will remain relatively stable over the next few months. With the recent correction in the stock market and a slower pace of increase in home valuations, the debt-to-asset ratio rose in the fourth quarter of 27 to 17.1%, the first increase since early 26. The cumulative number of consumer bankruptcies rose by 1% during the year ending January 28. With the economy slowing, look for the number of bankruptcies to rise by 4-5% in 28. With the US economy in recession, the Canadian economy is likely to soften in the coming six months. We project that the overall GDP growth in 28 will average 1.6% well below the 2.7% seen in 27. As well, we expect the Bank of to cut interest rates by additional 5-75 basis points in the coming months. Despite a weakening US economy, western will continue to benefit from relatively high commodity prices in general, and energy prices in particular. Overall we expect British Columbia, Alberta and Saskatchewan to grow by well over 3% in 28 well above the projected 1.6% for the economy as a whole. At the same time, the strong Canadian dollar and the weakening American economy will clearly hurt central mainly in the manufacturing sector where the recession will get even deeper in 28. Look for growth in Ontario and Quebec to rise by only 1.3% and 1.6% respectively in 28. Benjamin Tal Senior Economist Contents Residential Mortgages...2 Non-Credit Card Personal Loans...4 Credit Cards...5 Household Debt And Assets...6 Consumer Bankruptcies...8 Economic Drivers Affecting the Consumer...9 Data Sources: Bank of Statistics Industry CBA CREA CIBC World Markets Equifax http://research.cibcwm.com/res/eco/ecoresearch.html CIBC World Markets Inc. PO Box 5, 161 Bay Street, BCE Place, Toronto, M5J 2S8 Bloomberg @ WGEC1 (416) 594-7 C I B C W o r l d M a r k e t s C o r p 3 M a d i s o n A v e n u e, N e w Yo r k, N Y 1 1 7 ( 2 1 2 ) 8 5 6-4, ( 8 ) 9 9 9-6 7 2 6
RESIDENTIAL MORTGAGES So far there are no indications that the credit crunch had impacted the mortgage market in any significant way. In fact, the last few months of 27 have seen a significant acceleration in the pace of growth in overall mortgage outstanding. And data for the first two months of 28 suggest that the level of activity is still very strong. Total residential mortgage outstanding rose by a strong 13% during 27 notably stronger than the % rate seen in 26. This is very different than the situation south of the border where the pace of growth in mortgage outstanding has slowed significantly. Note that in recent months, banks have taken the lead from non-bank in overall mortgage outstanding growth. Regionally, the rate of growth in mortgage outstanding reflects the growing economic performance gap between the west and the rest of the country. Growth in mortgage outstanding in British Columbia, Alberta and Saskatchewan are well above the national average while Ontario, Quebec and Atlantic are well below. The Mortgage Market 14 12 Y/Y change in Mortgage 8 6 4 2 % 97 99 1 3 5 7 Residential Mortgages 24 2 (% chg) 26Q3-27Q3 Growth in Mortgage (Fiscal year ending Jan 8) 3.2% Banks (incl. Securitization) 2.9% Non-Banks It is difficult to see how the mortgage market will continue to grow at this pace. While the prime rate is falling and will continue to fall in the near term, the credit crunch means that the discount on variable-rate mortgages are not as wide as they were for most of 27, and the spread on the five year fixed rate over the 5 year government bond rate is at an all-time high. Along with the cyclical slowing in the economy, this suggests that overall growth in mortgage outstanding in 28 will be roughly 8-9%. This projection reflects our assessment that the housing market will decelerate in the coming 12 months, with both housing starts and MLS activity falling by roughly 5%. As well, average house price is projected to rise by roughly 5% in the coming 12 months almost half the rate seen in the past year. Arrears The arrears rate has seen some volatility lately but at.26%, it is still extremely low. Note that this trend is very different than the situation in the US where delinquency and foreclosure rates have risen notably in recent months. There is little doubt that low interest rates played a role here, but even more important was the fact that the labour market has been relatively healthy in recent years. We believe that the next 6-12 months will 16 12 8 4 BC Alta Sask Man Ont Que Atl The Housing Market (3 mo moving average) 5 y/y % chg y/y % chg 14 4 12 3 2 8 6 4-2 -2 99 1 2 3 4 5 6 7 8 MLS Resales (L) Average Price (R) 2
Residential Mortgages see some upward trend in arrears. But since we do not expect a significant deterioration in overall labour market conditions in, the upward pressure on this rate will be limited at best. Despite ultra expensive real estate prices in British Columbia, the arrears rate in that province is now the lowest in the nation. At the same time, the arrears rate in Atlantic is currently at.39% the highest in the country. Average House Price 55 5 45 4 35 3 25 2 15 5 Jan 28 vs. Jan 27 % chg BC Alta Sask Man Ont Que Atl Mortgage Arrears MLS Resales.5.45.4.35.3.25.2 as a % of total portfolio 1 2 3 4 5 6 7.4.35.3.25.2.15. By Province as of Dec 27 BC AltaMan/ Ont Que Atl Sask 35 3 25 2 15 5-5 - Feb 27-Jan 28 -v- Feb 26-Jan 27 % chg BC Alta Sask Man Ont Que Atl National Residential Housing Data by Province (MLS Market) For January 28 Dollar Average Unit Sales New Listings Volume Price seasonally adjusted ($s) ($) Ratio of New Listings to Unit Sales 13,224,65 41,215 74,943 32,87 1.8 Atlantic 354,229 2,148 3,521 164,911 1.6 Quebec 1,365,435 6,189 12,67 22,623 2. Ontario 5,39,183 17,112 29,215 3,261 1.7 Manitoba 23,71 1,162 1,36 175,32 1.2 Saskatchewan 255,665 1,23 1,33 212,523 1.1 Alberta 1,961, 5,39 12,33 369,375 2.3 British Columbia 3,765,758 8,43 14,57 468,23 1.8 Source: CREA
NON-CREDIT CARD PERSONAL LOANS Overall growth in consumer credit is still very strong rising by close to 11% in 27. The Personal Lines of Credit portfolio (PLCs) continues to dominate, and while no longer rising by 3% on a year-over-year basis as it did in 25, this portfolio has seen some acceleration in activity recently, with overall growth as of January at close to 15%. Growth in the direct loans (term-loans) is also accelerating and at 7.7% (year-over-year) it is now rising at a rate not seen since 25. Consumer Credit Personal Loans 14 y/y % chg 12 8 6 4 2-2 -4-6 2 3 4 5 6 7 8 Lines of Credit 35 y/y % chg 3 25 2 15 2 3 4 5 6 7 8 Delinquencies Delinquency Rates Despite rapid growth in the PLCs portfolio, data as of December 27 reveal no particular trend in the delinquency rates. At the same time, the delinquency rates in the Direct Loans portfolio are starting to show a modest upward trend. 2.% 1.5% 1.% Direct Loans % of All Trades.8%.6%.4% Lines of Credit % of All Trades.5%.2%.% 5Q4 6Q2 6Q4 7Q2 7Q4 Major Delinquency Minor Delinquency Source: Equifax.% 5Q4 6Q2 6Q4 7Q2 7Q4 Major Delinquency Minor Delinquency Personal Loan Plans 26Q3-27Q3 % chg 5.4 8.5 12. 9.4 12.8-4.6-3.2-7.7-8.1-11.9-12.6 BC Alta Sask Man Ont Que NB NS PEI Nfld Source: Bank of
CREDIT CARDS Credit Cards Growth in the Credit Card portfolio has been improving moderately lately, in part due to strong marketing incentives over the past year. Overall, we expect credit cards outstanding to rise by 11-12% in the coming 12 months. Note also that recent months have seen some acceleration in the rate of growth in premier cards which are currently rising by a year-over-year rate of 16.5% vs..1% growth among classic cards. 5 4 3 2 y/y % change 99 1 2 3 4 5 6 7 Standard / Classic Premier Delinquencies Delinquency Rate The last six months of 27 have seen a moderate increase in delinquency rates in the Credit Card portfolio. The overall delinquency rate is currently at 1.9% vs. 1.7% in early 27. While the slowing economy suggests that default rates will probably trend upward, it will take a major economic weakness and a significant rise in the unemployment rate to see a material jump in these rates. Such scenarios are not in the cards. 1.5% 1.%.5% National Credit Cards % of All Trades.% 5Q4 6Q1 6Q2 6Q3 6Q4 7Q1 7Q2 7Q3 7Q4 Major Delinquency Source: Equifax Minor Delinquency Credit Cards 26Q3-27Q3 % chg 12.2 13. 14.7 11.1 11.2 11.8 11.7.6 11.8 14.1 9. BC Alta Sask Man Ont Que NB NS PEI Nfld Source: Bank of
HOUSEHOLD DEBT AND ASSETS During the fourth quarter of 27, overall household debt rose by almost 3%, while personal disposable income rose by 1.6%. This led to a moderate increase in the debt-to-income ratio during the quarter. Over the past year, the debt-to-income ratio rose from 122% to 13%. At the same time, the debt service ratio, as measured by debt interest payments as a share of disposable income is still about 3 basis points higher than it was in 26. With widening credit spreads offsetting the declines in both prime and government bond rates, debt interest payment will remain relatively stable over the next few months. Also note that with the recent correction in the stock market and a slower pace of increase in home valuations, total household assets rose by less than.5% in the fourth quarter of 27. That is notably slower than the 3% growth observed in household credit outstanding. As a result, the debt-to-asset ratio rose in the fourth quarter of 27 to 17.1%, the first increase since early 26. Household Credit (% of personal disposable income) 9 86 82 78 74 7 66 62 97 98 99 1 2 3 4 5 6 7 Mortgage Credit (L) Consumer Credit (R) Interest Payments (% of personal disposable income) 5.4 5.2 5. 4.8 4.6 4.4 4.2 4. 3.8 1 2 3 4 5 6 7 44 4 36 32 28 24 3.4 3.2 3. 2.8 2.6 2.4 Mortgage Credit (L) Consumer Credit (R) Debt To Asset Ratio Net Worth To Disposable Income Ratio.18.175.17.165.16.155.15.145 94 96 98 2 4 6 7. 6.5 6. 5.5 5. 4.5 94 96 98 2 4 6 6
Household Balance Sheet Data Total Household Assets Non- Financial Assets Financial Assets Debt to Asset Ratio Net Worth ($Mill) ($Mill) ($Mill) ($Mill) Net Worth to Disposable Income Ratio 22:1 4,611,59 1,845,68 2,765,379.167 3,84,27 5.596 22:2 4,597,59 1,89,85 2,76,29.171 3,89,522 5.527 22:3 4,557,559 1,916,58 2,641,51.176 3,756,671 5.396 22:4 4,644,651 1,952,214 2,692,437.175 3,831,975 5.44 23:1 4,647,132 1,981,698 2,665,434.177 3,824,683 5.344 23:2 4,769,469 2,24,713 2,744,756.177 3,927,66 5.494 23:3 4,862,334 2,64,981 2,797,353.176 4,4,32 5.523 23:4 4,983,352 2,5,89 2,877,462.175 4,113,658 5.651 24:1 5,124,152 2,155,72 2,969,8.172 4,244,47 5.718 24:2 5,22,368 2,229,458 2,99,9.172 4,322,347 5.79 24:3 5,274,744 2,26,154 3,14,59.174 4,356,924 5.72 24:4 5,418,651 2,36,845 3,111,86.172 4,484,748 5.818 25:1 5,532,852 2,356,254 3,176,598.171 4,588,418 5.93 25:2 5,675,291 2,422,337 3,252,954.17 4,7,113 6. 25:3 5,815,516 2,465,496 3,35,2.17 4,827,847 6.54 25:4 5,931,294 2,517,263 3,414,31.169 4,927,567 6.112 26:1 6,97,837 2,578,831 3,519,6.167 5,78,982 6.86 26:2 6,185,699 2,664,747 3,52,952.169 5,141,851 6.172 26:3 6,3,72 2,728,871 3,571,849.169 5,234,182 6.194 26:4 6,519,373 2,778,257 3,741,116.166 5,434,315 6.344 27:1 6,651,995 2,841,57 3,8,425.166 5,549,954 6.335 27:2 6,822,28 2,929,446 3,892,762.166 5,687,518 6.45 27:3 6,941,219 2,99,341 3,95,878.167 5,778,954 6.476 27:4 6,972,72 3,36,222 3,935,85.171 5,782,366 6.381 Consumer Debt Figures and Ratios Consumer Credit Mortgage Credit Total Household Debt Pers. Disp. Income Interest Payments Consumer Credit Mortgage Credit Total Pers. Debt Interest Payments ($Mill) ($Mill) ($Mill) ($Mill) ($Mill) (% of PDI) (% of PDI) (% of PDI) (% of PDI) 21:1 199,456 44,56 639,512 667,516 53,74 29.88 65.92 95.8 8.5 21:2 22,129 443,822 645,951 663,872 53,64 3.45 66.85 97.3 8.7 21:3 24,295 45,784 655,78 669,772 53,9 3.5 67.3 97.81 8.5 21:4 25,513 458,413 663,926 675,624 53,196 3.42 67.85 98.27 7.87 22:1 28,931 466,841 675,772 686,216 52,54 3.45 68.3 98.48 7.65 22:2 213,4 476,82 69,213 689,24 51,6 3.96 69.18.14 7.49 22:3 218,19 486,99 74,289 696,156 52,536 31.34 69.83 1.17 7.55 22:4 223,57 494,6 718,7 74,428 53,8 31.73 7.21 1.94 7.64 23:1 227,26 54,234 731,494 715,632 53,992 31.76 7.46 2.22 7.54 23:2 232,775 514,4 746,779 714,876 54,396 32.56 71.9 4.46 7.61 23:3 239,435 525,179 764,614 724,996 55,824 33.3 72.44 5.46 7.7 23:4 244,91 537,226 781,317 727,916 55,848 33.53 73.8 7.34 7.67 24:1 249,928 549,194 799,122 742,224 56,172 33.67 73.99 7.67 7.57 24:2 257,379 563,583 82,962 757,112 56,192 33.99 74.44 8.43 7.42 24:3 264,887 577,887 842,775 764,52 56,68 34.67 75.63 1.3 7.41 24:4 272,35 592,364 864,399 77,888 57,536 35.29 76.84 112.13 7.46 25:1 279,78 64,99 884,698 777,288 57,96 35.99 77.83 113.82 7.46 25:2 287,56 618,421 95,927 785,52 58,444 36.62 78.77 115.4 7.44 25:3 295,92 634,65 929,985 797,44 59,372 37.11 79.51 116.62 7.45 25:4 34,8 65,816 954,896 86,164 6,224 37.72 8.73 118.45 7.47 26:1 311,436 667,961 979,397 834,5 61,496 37.32 8.4 117.36 7.37 26:2 317,596 686,375 1,3,971 833,116 63,228 38.12 82.39 12.51 7.59 26:3 324,578 72,85 1,27,383 844,976 65,444 38.41 83.17 121.59 7.75 26:4 331,649 719,512 1,51,16 856,616 67,16 38.72 83.99 122.71 7.82 27:1 34,416 739,296 1,79,712 876,6 67,888 38.86 84.39 123.25 7.75 27:2 349,194 76,958 1,1,152 881,84 69,616 39.6 86.3 125.9 7.89 27:3 357,836 785,485 1,143,321 892,316 71,58 4. 88.3 128.13 8.1 27:4 367,312 8,48 1,177,793 96,224 73,84 4.53 89.43 129.97 8.6
CONSUMER BANKRUPTCIES The cumulative number of consumer bankruptcies rose by 1% during the year ending January 28. The 3- month moving average figure has been slowing in recent months. Note that all provinces with the exception of Ontario and Quebec are still witnessing declining bankruptcies. The number of bankruptcies in Ontario rose by a cumulative 4.6% during the year ending January 28. We expect that the slowing US economy will lead to further job losses in the manufacturing sector, with some negative implications for the bankruptcy picture in the province in the coming 12 months. Overall, it seems that the number of personal bankruptcies in 28 will rise by 4-5% as the slowing US economy will impact overall growth in, especially in Ontario and Quebec. Personal Bankruptcies Monthly Data y/y % chg 25:1 6,194 1.4% 25:2 7,98 -.2% 25:3 7,749-9.1% 25:4 7,939 4.8% 25:5 7,431 5.8% 25:6 7,43-1.% 25:7 6,219-1.8% 25:8 6,941 4.5% 25:9 7,171 1.4% 25: 7,45 -.8% 25:11 7,58 3.% 25:12 5,95-3.9% 26:1 6,234.7% 26:2 6,71-5.6% 26:3 7,727 -.3% 26:4 6,62-16.8% 26:5 7,21-5.5% 26:6 6,799-8.2% 26:7 5,711-8.2% 26:8 6,625-4.6% 26:9 6,571-8.4% 26: 6,947-1.4% 26:11 6,946-8.4% 26:12 5,393-8.7% 27:1 6,276.7% 27:2 6,431-4.% 27:3 7,177-7.1% 27:4 6,793 2.9% 27:5 7,476 6.5% 27:6 6,62-2.9% 27:7 6,26 9.6% 27:8 6,814 2.9% 27:9 6,43-2.1% 27: 7,34 5.1% 27:11 7,93 2.1% 27:12 5,192-3.7% 28:1 6,525 4.% Personal Bankruptcies Growth in Personal Bankruptcies By Province 25 15 y/y % chg 3 mo moving average Ontario Quebec Feb 6-Jan 7 vs. Feb 7-Jan 8 4.6 3.8 5 Atlantic -2.7 1. -5 BC -5.5-15 1 2 3 4 5 6 7 8 Alberta Man/Sask -12.6-8.1 % 8
ECONOMIC DRIVERS AFFECTING THE CONSUMER The US housing market is in the midst of the worst meltdown in the post-war era, and the economy as a whole is in a recession. But whatever the final outcome for American economic growth, what s remarkable is how little difference it makes to global economic growth in general and the resource market in particular. Real GDP Growth 3.5 % (AR) 3. The US may have been the world economy s locomotive in the second half of the 199s, but that s not the case anymore. The American economy grew by a mere.6% (annual rate) in the fourth quarter of 27, and probably by a more even moderate pace in the first two months of 28. But commodity prices are still at near recordhigh, with oil prices hovering around the $ per barrel mark. 2.5 2. 1.5 1. 25A 26A 27F 28F The reason for this decoupling between global and US economic growth is the fact that in the past three years, the so-called BRICA economics (Brazil, Russia, India, China and Mideast oil producers) have accounted for about 4% of global economic growth three-to-four times the US share. China and the other emerging markets hardly noticed the 21 US recession, and back then more than a fifth of their exports went to the US. Today, their dependency on the US is even lower with only 15% of BRICA s exports being directed to US markets. Even in the US largest trading partner the chill from the south has not damaged the economy in a meaningful way. While the economic news from the US will almost certainly get worse, the reality is that the US is no longer driving the global economic bus. China, India and other emerging markets do. The booming Chinese economy, the construction boom in the Gulf States, surging car ownership rates in Russia and the switch to protein base diet in most emerging markets, all suggest that demand for base metals, grains, and energy will continue to surge despite of developments in the US economy. This means that despite a weakening US economy, western will continue to benefit from relatively high commodity prices in general, and energy prices in particular. Overall we expect British Columbia, Alberta and Saskatchewan to grow by well over 3% in 28 well above the projected 1.6% for the economy as a whole. At the same time, the strong Canadian dollar and the weakening American economy will clearly hurt central Inflation 5. % 4. 3. 2. 1.. 98 99 1 2 3 4 5 6 7 CPI Core CPI (excl. energy & food) Provincial Real GDP Forecast Y/Y % Chg 6A 7F 8F British Columbia 3.3 3.3 3.3 Alberta 6.6 3.8 3.5 Saskatchewan -.4 4.2 4. Manitoba 3.2 2.9 2.4 Ontario 2.1 2. 1.3 Québec 1.7 1.9 1.6 New Brunswick 3. 2.3 1.9 Nova Scotia.9 1.8 2.1 Prince Edward Island 2.6 1.7 1.8 Newfoundland & Labrador 3.3 8.3 1.2
Economic Drivers Affecting The Consumer mainly in the manufacturing sector where the recession will get even deeper in 28. Look for growth in Ontario and Quebec to rise by only 1.3% and 1.6% respectively in 28. With the US Fed cutting interest rates at a pace never seen before, look for the Bank of to continue to trim rates in order to buffer from a slowing US economy, as well as to prevent a dramatic appreciation in the value of the Canadian dollar. Overall we project additional 5-75 basis point rate cut by the Bank in the coming months. While at this point the Fed and the Bank of are not worrying too much about inflation, there is a risk that inflation will start rising by year-end and into 29 due to the cumulative impact of the current monetary easing, the beginning of a recovery in the US economy and rising food and energy prices. This combination can take inflation in 29 to levels not seen in years. In fact, market-based inflation expectations have increased significantly over the past several weeks. As measured by the five-year forward five-year break even rate, inflation expectations in the US are at 2.8%, which is well above their 26-27 average of 2.45%, and are at their highest since 24. As well, the yield on five-year treasury inflation protected security is close to negative territory. This implied higher expected inflation and that the Fed may be underestimating inflationary pressures. Granted, it is difficult to think about inflation in the midst of a financial market crisis. But if the story of 28 is of a recession/slowdown, subprime losses and lower interest rates, the story of 29 will be of accelerating inflation and higher interest rates. Conflicts of Interest: CIBC World Markets analysts and economists are compensated from revenues generated by various CIBC World Markets businesses, including CIBC World Markets Investment Banking Department. 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