Canada Sees Auto Loan Defaults Surge (IAG-TSX) (BNS-TSX) (TD-TSX)

Auto Loan Defaults Rise

Auto loan defaults in Canada are on the rise, according to Equifax data. The delinquency rate for personal auto loans reached 2.0% in the third quarter of 2022, higher than the average of 1.8% from 2018 to 2019. This trend is concerning for lenders and investors, as the rise in default rates could lead to decreased earnings and increased risk.

There are several factors contributing to the increase in auto loan defaults in Canada. Firstly, the size of auto loans has been increasing, putting more pressure on consumers to keep up with payments. Secondly, declining used car prices have reduced the value of the collateral for these loans, making it more difficult for lenders to recoup their losses in the event of a default.

In addition to the declining value of used cars, higher borrowing rates and inflation are also putting pressure on the loss rates for auto loans. Consumers are allocating a greater portion of their disposable income to interest payments, making it more difficult to afford car payments. This, combined with the rising cost of living, is making it increasingly challenging for Canadians to keep up with their car payments.

When it comes to Canadian banks, Bank of Nova Scotia (BNS) and TD have modest earnings per share (EPS) risk, while Industrial Alliance Insurance and Financial Services (IAG), with its non-prime auto loans, has higher earnings risk. Under a downside scenario, IAG’s earnings risk could reach around 4% for a reasonable downside scenario.

BNS and TD are estimated to have a 2.5% downside risk to their EPS estimates under a downside scenario, while Royal Bank of Canada (RY) and National Bank of Canada (NA) have less earnings sensitivity. Bank of Montreal (BMO) is believed to have immaterial exposure to auto loan risks.

It is clear that the rise in auto loan defaults in Canada is a cause for concern for lenders and investors. The increasing size of auto loans, declining used car prices, higher borrowing rates, and inflation are all contributing to the rise in defaults. As a result, lenders and investors need to be cautious when it comes to auto loans, especially given the higher earnings risk for some banks.

Consumers need to be mindful of their financial situation and be aware of the rising cost of borrowing, as it could put pressure on their ability to afford car payments. With the right financial planning and education, consumers can make informed decisions about borrowing and make sure they are prepared for the rising cost of living.

In conclusion, auto loan defaults in Canada are on the rise and are likely to continue to increase. This trend is concerning for lenders and investors, as well as for consumers, who need to be mindful of their financial situation and be aware of the rising cost of borrowing. To mitigate the risk of auto loan defaults, lenders and investors need to be cautious, while consumers need to be proactive and make informed decisions about borrowing.

Banks At Risk

Auto loan defaults in Canada have risen, with the delinquency rate for personal auto loans reaching 2.0% in Q3 2022. The increasing size of auto loans, declining used car prices, higher borrowing rates, and inflation are putting pressure on loss rates. Banks with the highest exposures to auto loan risks are IAG, BNS, and TD, with BNS and TD estimated to have a 2.5% downside risk to their earnings per share estimates under a downside scenario. IAG, with its non-prime auto loans, has higher earnings risk which may reach around 4% for a reasonable downside scenario. Banks may need to increase provisions for personal lending going forward.

 

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