The Bank of Canada (BoC) recently announced its decision to maintain the overnight rate target at 1 ¾%– while the Bank Rate and deposit rate are 2% and 1 ½% respectively – resulting in no shortage of backlash. In its press release, the BoC cites the escalation of international trade conflict as a factor in the constricting of business investment, and thus, is a heavy blow to the global economic momentum that it had projected to be an influential growth factor in its Monetary Policy Report (MPR) back in July. Uniquely, the BoC remains the only hawkish major central bank in the world, as all of its global counterparts continue to exercise dovish policies aimed at lowering various interest rates. Of course, the Canadian dollar – and the Canadian Credit Market (CCM) as a whole – will continue to move based on expectations of BoC's next announcement.
With a focus on these mixed feelings towards what the future of the CCM may look like, it is worthwhile to take a closer look at the CCM's overall performance as of late. Ernst & Young's Credit Market Barometer provides an overview of the CCM's 2019 year-to-date statistics and gives annual/quarterly comparative performance metrics based on analysis of various credit market conditions and indicators. It also gives some insight into the CCM's outlook going forward, with its trends and statistics sourced from different credit market and governmental entities.
A review of the increasing trends in the CCM reveal that over the past year, the growth in total credit outstanding in Canada has somewhat slowed, but the quality of new borrowers has improved, which is linked (in part) to the marked decline in gross impaired loans (GILs). Impaired loans statistics are representations of delinquency probabilities (for example, GIL represents the gross value of loans that are deemed improbable for full collection of both principal and interest). The GIL ratio (which is simply GIL as a percentage of gross loans and acceptances) has improved to its lowest level in over six years, last recorded at approximately 0.53%, which is partially due to progression of the wholesale loan delinquency rate. In terms of the growth slowdown, one of the reasons for this might simply be Canada's sluggish Gross Domestic Product (GDP), a direct result of falling commodity prices. Another attribution of this is certainly the slowing advancement of personal loans and credit cards, which is down from about 4% to roughly 2% over the past year. In terms of other standout numbers, these trends have translated to a 5.8% year-over-year rise in total credit outstanding (which is down from 6.3% a year earlier), and a 3.8% rise in the credit-to-GDP ratio. Despite consumer growth ringing in lower than the BoC had projected, the past year has still seen an increase in mortgages and stable credit quality overall (which continues to surpass historical levels),helping the positive light continue to shine on the CCM.
Categorically, this past year has also revealed growth on higher deposit margins, loan and deposit volume growth, fee income growth, and a lower corporate tax rate, which has all led to growth in overall revenue. On the whole, there have also been indications that Canadians are cutting back their debt levels due to higher interest rates, and that the growth of deposits has surpassed the growth of loans.
The next scheduled overnight rate target announcement is October 30, 2019, which will include a full update of the BoC's outlook for the economy and inflation. It will be interesting to track these and other constant changes in the CCM (and its ongoing performance) moving forward.
The author would like to thank Daniel Lupinacci, articling student, for his assistance in preparing this blog post.
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