2016 Canadian Issuer Update: Growth Continues, Profitability Normalizes

Navigator Edition: January / February 2017
By: Ryan Douglas & Peter Lischick

Despite a sluggish macroeconomic environment and the newly implemented voluntary interchange reduction, Canadian credit card issuers generated receivables growth and posted elevated profitability in 2016. However, there were signs of normalization in credit card profitability due to a leveling-out of net loss rates and the impacts of the aforementioned interchange rate reductions by Visa and Mastercard.

While growth rates vary among Canadian issuers, the average receivables growth rate was a healthy 5.7% year-over-year, which is particularly impressive given that GDP growth was only 1%1 year-to-date through October of 2016. Scotiabank reported 33% year-over-year growth which is largely due to its purchase of J.P. Morgan Chase’s Sears Canada portfolio. After adjusting for this purchase, Scotiabank still managed to achieve an impressive organic growth rate of nearly 12%, the largest of any of the issuers in Canada. Considering the size of its portfolio, RBC also had particularly strong performance for the year with 7% year-over-year growth. Please see Figure 1 for a snapshot of Canadian issuer performance as of Q4 2016.

Figure 1: Canadian Issuer Performance as of Q4 2016

1 Credit card loss rates net of recoveries.
Notes: The data in this graphic are from the most recent quarterly or annual report
as of 12/31/2016. BMO loss rates are from credit card securitization trust data.
Source: Issuer investor relations filings, securitization trust monthly reports,
and First Annapolis analysis.

Issuer’s credit card profits also continued to increase during 2016 as a result of the near record low loss rates and funding rates in Canada. Bank of Canada Governor, Stephen Poloz indicated in September of 2016 that Canadian interest rates will remain low in the near future as the Canadian economy faces some serious challenges and business investment has been weak2.  Although profitability (in terms of risk-adjusted margin) remains elevated, as shown in Figure 2, there is a normalization compared to the significant increases that took place from 2012 to 2014. Two factors that contribute to this normalization are a slight increase in loss rates and the impact of reduced interchange revenue. In 2016, the weighted average net loss rate increased by 18 bps year-over-year for the eight issuers that publicly report this statistic. This increase in loss rates would suggest that banks have begun underwriting deeper into the credit spectrum versus targeting only prime and super-prime customers as was the case in the years following the recession.

Figure 2: Avg. Canadian Issuer Risk Adjusted Margin and Net Loss Rates

Note: Gross Yield = finance charges, interchange fees, annual fees, insurance premiums and other fees.
Source: DBRS monthly reports of credit card securitization performance, First Annapolis Consulting analysis.

A major topic of discussion in the Canadian payments industry is the impact of the voluntary interchange cap that was implemented in April 2015. While the impact of this interchange reduction was not as severe as some were forecasting, we did see the impact in 2016. Figure 3 analyzes the Gross Yield reported from DBRS, which shows a leveling-off in profitability (purple line) in 2016. We also calculated the year-over-year growth in Gross Yield (green line) which emphasizes the fact that after April 2015, there was a noticeable plateau in the growth of Gross Yield for Canadian issuers, which includes interchange revenue.

Figure 3: Avg. Canadian Issuer Gross Yield and Growth in Gross Yield

Note: Gross Yield = finance charges, interchange fees, annual fees, insurance premiums and other fees.
Source: DBRS monthly reports of credit card securitization performance, First Annapolis Consulting analysis.

In the Bank of Canada’s 2016 report on the economy, it repeated its admonition from six months ago that Canadian households are continuing to hold a high level of debt. In lockstep, Canadian issuers are continuing to launch new credit card products (with an emphasis on cash back) in an attempt to satisfy customer demand. It will be interesting to see how growth and profitability evolve for Canadian credit card issuers in 2017 as consumer balance sheets remain highly levered, pressure on interchange continues, and competition from alternative lenders intensifies.

1 Statistics Canada.
2 Business Insider article titled “BANK OF CANADA: ‘We’re dealing with lower for longer, not lower forever.’”

For more information, please contact Ryan Douglas, Manager, ryan.douglas@firstannapolis.com; or Peter Lischick, Consultant, peter.lischick@firstannapolis.com. Both specialize in Credit Card Issuing.

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