Canadian Consumer Credit Quality Deteriorating: RBC

“Cracks are starting to show in more and more places,” says Royal Bank of Canada analyst.

There are growing concerns about the declining quality of Canadian consumer credit.

According to RBC credit analyst Vivek Selot, “Cracks are starting to show in more and more places.”

A Bloomberg News report says “rising interest rates and a cooling real estate market are prompting speculation the debt burden poses a threat to the financial system.”

The key concern is the ‘roll rate,’ defined as “the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies.”

The National Bank of Canada’s Canadian Credit Card Trust program is seeing the highest roll rates since 2008, while the roll rate from CIBC’s CARDS II program is above the 10-year average.

While the analyst said “consumer credit quality seems benign,” the concern is the trend, which is getting more and more concerning.

Said Selot, “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.”

At both the individual and governmental level, a large amount of debt has been accumulated at low interest rates, which has helped mask much of our underlying economic weakness. The burden of consumer debt has also been made worse by increasing taxes and rising costs, as people are pushed to take on more debt just to maintain their standard of living.

Yet, regardless of the mitigating circumstances, we know that the cost of debt must be paid one way or another. And as we saw in 2008, things can go from the status-quo to a crisis in almost no time at all.

Spencer Fernando