TransUnion expects spike in debt delinquencies in Alberta, Saskatchewan
Alberta and Saskatchewan will soon see a 'sharp' increase in the number of people falling behind on their debts for the rest of this year, credit agency TransUnion says.
The debt monitor said in a study released Wednesday that it is expecting the number of consumer credit delinquencies to increase by double-digits in Saskatchewan, and as much as 60 per cent in parts of Alberta.
The two provinces are disproportionately dependent on oil prices to drive their economy. In Alberta's case, more than a quarter of the province's GDP is tied to oil revenues, which have halved in the past year. In Saskatchewan's case, the ratio is still high at more than one sixth of GDP tied to oil.
Cheap oil has hit those economies in many ways. "First, oil price drops cause lower oil sector investment," TransUnion says. That leads to higher unemployment, which leads to less disposable income to spend in all other aspects of the economy.
"Consumers then have lower ability to service debt, finally resulting in higher delinquency rates," TransUnion says.
"Based on an historical analysis of the last oil crash and recent payment behaviour trends, we expect materially higher delinquency rates in Alberta and Saskatchewan in the second half of 2015," the company's research director Jason Wang said.
"If lenders do not take proactive measures to address the impact of the decline in oil prices, we could potentially see double-digit delinquency rate increases in Saskatchewan, and as much as a 60 per cent rise in areas of Alberta."
The company came up with that figure after looking at what happened to delinquencies in 2008, the last time the price of oil declined by this much. That time, a spike in delinquencies started two quarters after the price of oil cratered, and rose by 60 per cent for the next four quarters. "These are particularly noteworthy observations because it shows that Albertans suffered financially for a period much greater than the actual oil slide and recovery," Wang said.
At least in some areas, that could be happening again.
The debt monitoring agency says that quite often, the first sign of bigger debt problems down the line is a change in how much people pay off their credit cards every month. A reasonably small credit card bill of $1,000 might be easy to pay off in full for some, but a certain segment of the population might only pay the minimum payment, something in the range of $25 a month. (It's worth noting that on a no annual fee credit card charging 20 per cent per month, it would take 26 years to pay down a $1,000 credit card bill while only paying the minimum balance.)
"The fraction of the balance that is paid — and changes in that fraction — are quite effective indicators of future non-repayment risk," TransUnion says.
If that's the case, Northern Alberta could be a canary in the coal mine. TransUnion says in the oil town of Fort McMurray, the percentage of people who pay off no more than twice the minimum payment every month has increased by 10 per cent since last summer.
No such increases were observed for the rest of the country.
"Many consumers in Alberta may be facing challenges meeting their monthly payment obligations," said Wang.
So far, there's little indication that there's any change to national delinquency rates. That's because when looking at Canada as a whole, Alberta has a relatively small percentage of total consumer debt. Ontario makes up 39 per cent of all lending accounts in Canada, followed by Quebec at 23 per cent. Alberta makes up just 12 per cent.
But "what's particularly important to understand is that balances are much greater today than they were in the 2008 and 2009 period," Wang said. "Thus any delinquent accounts will place a greater burden on the economy."