Since the pandemic began, Canadian households have never been better. They’re saving more, they’re defaulting less, and some have even begun to poop rainbows. At least that’s what the narrative has been.
Non-mortgage loan (A2) filings with the Office of the Superintendent of Financial Institutions (OSFI) shows that may not be the case. Expected credit losses (ECL), potentially unrecoverable debt, barely moved in Q1 2021. Despite many lenders saying the worst is over, they might not believe it. Expected losses are only slightly lower than they were at the beginning of the pandemic. It appears they might just be related.
Expected Credit Losses (ECL)
Expected credit losses (ECL) are potentially unrecoverable debt a lender forecasts. This debt may be written off at any point, and can be a total loss. After 2008, lenders were forced to make realistic assumptions about losses. This involves putting aside more cash, and assessing risk properly. Even if execs say we’re past a default issue, their ECLs will show the truth. It’s an unbiased and quantitative view of risk.
Lenders Still See Bigger Losses Than They Did During The Great Recession
Lenders have seen few delinquencies, but that barely moved the needle on loss expectations. Non-mortgage credit ECLs came in at 1.99% in Q1 2021, down a single basis point (bp) from the previous quarter. The ratio was 59.2% higher than the same quarter a year ago. Prior to 2020, the record peak was in the third quarter of 2009, during the Financial Crisis. Currently, they’re still above that level.
Canadian Non-Mortgage Expected Credit Losses (ECLs)
The percent of non-mortgage debt reserved for credit losses at Canadian regulated lenders.
Source: OSFI A2 Filings; Statistics Canada; Better Dwelling.
The Expectation of Losses Haven’t Changed Much Since The Start of The Pandemic
One of the most important takeaways in the data is how little these numbers changed. When the pandemic kicked off in Q1 2020, lenders were expecting the worst. Everyone was going to default, and lenders would be bagholders. They saw increased risk, typical of a recessionary environment.
Very few credit defaults have materialized since the beginning of the pandemic. Generous income supports and lender deferrals dropped delinquencies to almost nil. They’re actually better than the best economic environment. Even with few delinquencies, non-mortgage ECLs have only fallen 4 bps. The best delinquency environment compared to expectations of the worst, produced what could have been a rounding error. This is a huge narrative-reality mismatch.
Consumer data in aggregate shows stronger households, and credit delinquencies are nearly non-existent. That might just be a fleeting moment though. The end of government support and payment deferrals may have only delayed the issues, not eliminate them. It won’t be clear until the government takes the training wheels off of the economy whether it can ride on its own.
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