Yahoo Finance Canadians may feel the pinch, but bankruptcies are actually on the decline: CIBC
Consumer insolvencies are rising at the sharpest rate since mid-2016, according to a report by CIBC Capital Markets breaking down delinquencies across various types of credit.
Benjamin Tal, the bank’s deputy chief economist, found the portion of Canadians who find themselves unable to meet their financial obligations is climbing 4.5 per cent on a year-over-year basis.
“It is reasonable to expect that the recent interest rate hikes by the Bank of Canada will lead to further moderate increases in the insolvency rate, as the negative impact of increased debt financing costs offset any positives on the unemployment front,” Tal wrote in the report on Wednesday.
The CIBC report comes on the heels of an Ipsos poll released on Monday by MNP Ltd. that found 46 per cent of respondents come within $200 of insolvency every month. Thirty-nine per cent said rising interest rates could move them towards bankruptcy, a five point increase since September.
The math seems simple. Many Canadians have a lot of debt. The Bank of Canada makes it tougher to service that debt. Indebted Canadians feel the pinch. But the CIBC report reveals interesting trends baked into the rise in insolvency figure.
“At just 0.9 per cent, the delinquency rate in the credit cards portfolio is at a record-low, after trending downward since the recession. The same is true for term loans and mortgages,” Tal wrote.
“Despite a clear downward trend since 2012, the delinquency rate in the lines of credit portfolio is still higher than its pre-recession level — most likely reflecting transfer of risk from credit cards to lines of credit.”
Tal’s report also found the number of personal bankruptcies actually fell by a cumulative five per cent over the past year. While the number of proposals, a situation where an individual negotiates to repay only a portion of their debt, climbed 8.4 per cent over the same period.
The number of proposals now surpasses the amount of bankruptcies, according to the report. Both are considered types of insolvency.
“The opposing trajectories of proposals and bankruptcies have led to a situation in which proposals now account for a record-high of 55 per cent of total insolvencies.” Tal wrote.
“The trend was largely due to changes in the Bankruptcy Insolvency Act in 2008. With the most significant being the increase in the limit of non-mortgage debt for qualifying for a proposal from $75,000 to $250,000, making proposals more attractive relative to the bankruptcy route.”
The impact of weak Canadian energy prices surfaced in the report’s data. The cumulative number of insolvencies in Alberta rose by 12 per cent in the six months ending November 2018. Manitoba and Saskatchewan saw roughly the same increase. Meanwhile, the number of insolvencies in Ontario rose by close to 3 per cent. The same was true for B.C.
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