RBC Warns Cracks "Starting To Show" In Canadian Credit

One often wonders if the government will ever realize that, due to its policies, its "solutions" often wind up turning into bigger problems than the ones they set out to address initially? Not only that, but this has been the case for decades, and it will continue to be the case until we "engineer" ourselves into a crisis that is too big to fix or too overwhelming to print our way out of.

Every day we discuss various aspects of a system that ends up far worse off due to a government apparatus that is convinced it knows best and that intervention and interfering are the solution to the problem. In essence, much of the financial crisis of 2008 was a result of the government interfering in the housing market in years prior, combined with the Fed not being able to forecast the crisis, despite widely ostracized skeptics such as Peter Schiff stating repeatedly that the housing market was heading into the abyss.

Today, we face a new set of challenges as a result of the way governments and central banks dealt (or rather, didn't) with the 2008 financial crisis. In the United States there are bubbles forming in student loans and subprime auto lending,  while mortgage debt and consumer credit both look to soon be out of control yet again.

Meanwhile, the problem is spreading geographically and today we are presented with yet another "solution turned into problem", and as Bloomberg reports, RBC now sees "cracks" in consumer credit becoming a problem yet again, this time in Canada. The combination of low interest rates and the cheap and easy access to capital has yet again gone from being a solution to a problem, as Canadian lenders are seeing delinquency rates "roll" out in time and duration.

RBC analyst Vivek Selot wrote in a Monday note to clients that "cracks are starting to show in more and more places."

The quality of Canadian consumer credit is beginning to deteriorate, according to Royal Bank of Canada credit analyst Vivek Selot.

The roll rate -- the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies -- reached the highest since 2008 for one credit card program, while delinquencies for another program were above the 10-year average, Selot said in a monthly analysis of credit securitization programs.

As we have discussed previously, strong labor markets and historically low borrowing costs have allowed Canada’s households to amass one of the highest debt-to-income ratios in the developed world.

However, amid rising interest rates and a cooling real estate market, there is growing speculation the debt burden poses a threat to the financial system even as Canadian housing prices remain one of the world's true bubbles.

As RBC adds, roll rates in National Bank of Canada’s Canadian Credit Card Trust program are at the highest since 2008, while for CIBC’s CARDS II program, early stage delinquencies, 60-89 day delinquencies and roll rates are all above the 10-year average, Selot said.

Of course, this would not be a problem if supply and demand as it relates to credit and borrowing were simply allowed to operate freely, thus establishing a free market interest-rate versus a central bank mandated cost of money. Meanwhile, Bloomberg is quick to attempt to mitigate the adverse consequences of what the above implies and quotes none other than the RBC analyst, who - perhaps worried about keeping his job - notes that these trends are really quite benign and that the rolling out of delinquencies isn’t necessarily a problem yet because they haven’t "rolled' all the way to becoming actual charge-offs:

To be sure, Selot pointed out “consumer credit quality seems benign,” with charge-offs -- or recognized losses -- remaining near cyclical lows. The average payment rate in February fell about 600 basis points from January to 41.1 percent but was up 162 basis points from the same month a year earlier.

Which reminds us of an analysis we put together in February 2018 ,detailing discrete trends within U.S. consumer credit, and identifying where the next major problem could be hiding. 

Net Charge-Off Rate on Credit Card Loans, All Commercial Banks


Why the very gradual increase in aggregated NCO, and thus why the lack of economist concerns about the state of the US consumer? Simple: the larger banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP.  The problem here is that the vast majority of bank assets is held by a small minority of individuals as in most 80/20 distributions. Meanwhile, smaller banks - those where the bulk of the population holds its meager assets - starting to panic, as charge-off rates are back to financial crisis levels.

Net Charge Off Rate on Credit Card Loans, (Banks Not in Top 100 by Assets)

Canada is about to experience something very similar, and as Selot concedes "considering that fragile household balance sheets could be a precipitating factor for the credit cycle to turn, any signs of consumer credit quality deterioration seem worthy of attention."

A few more rate hikes by the BOC should do it.