Canadian credit card asset-backed securities (ABS) performance remained strong in second-quarter 2019 as Canadian credit card receivables continued to demonstrate stable and strong credit metrics, including high seasoning and credit quality. Over the 10-year business cycle through June 2019, yield and payment rate increased to 23.6% and 44.0%, respectively, from 18.9% and 30.1% as of June 2009. Similarly, 30-plus day delinquencies and net loss rate (charge-offs) declined to 3.0% and 1.9%, respectively, from highs of 6.1% and 3.2%, as Canada's unemployment rate decreased to 5.5% from 8.6%. Credit card receivables increased through organic growth and new programs to C$52 billion as of June 2019 from C$43 billion a decade earlier.

The improved performance and strong credit metrics support issuance volumes, increasingly through cross-border transactions into the U.S. market. Seven Canadian credit card ABS transactions were issued during the six months ended June 2019. About 89.0% of the C$6.06 billion issued, or US$4.05 billion, were cross-border transactions in the U.S.--a 5% increase from the US$4.03 billion transacted through June 2018. The six transactions accounted for about 33% of the total U.S. bank-credit card ABS volume, providing liquidity and investment opportunity to the U.S. market at a time of declining volumes from U.S. bank-card issuers.

Issuance Declined Year-Over-Year

Overall, Canadian credit card ABS issuance volume declined about 31% to C$6.06 billion as of June 2019 from C$8.83 billion a year earlier, primarily due to reduced Canadian dollar-denominated issuance in the Canadian market.

The relatively lower Canadian volume is consistent with our expectation for 2019 credit card volume to be lower than the previous year's due to refinancing of maturing ABS (C$9 billion) and marginal growth in new issuance (C$3 billion). We expect U.S. dollar-denominated issuance to remain strong. However, total issuance will depend on issuers' funding needs and market conditions (see charts 1 and 2; note that we rounded the numbers in this report to one decimal point, but percent changes are based on unrounded figures).

The slow-down in issuance, coupled with a strong performance matrix (low charge-off, strong payment rate, high excess spread, and seasoned and diversified collateral pools) could be a credit positive for Canadian credit card ABS spreads.

Chart 1

Chart 2

Cross-Border Transactions: Funding Diversification

For the six-months ended June 2019, the top five Canadian banks (Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank) conducted six U.S. cross-border transactions totaling US$4.05 billion out of Canada-domiciled trusts backed by Canadian dollar-denominated credit card receivables (see table 1). Across the border, the number and volume of U.S.-domiciled credit card ABS transactions continued to decline (see table 2).

Table 1

Table 2

Notwithstanding the reduced issuance volumes in the U.S. market, general market uncertainties pushed ABS spreads wider and Canadian credit card ABS issuers continue to face wider issuance spreads in the U.S. market relative to their U.S. peers. Although U.S. cross-border issuances could result in cost savings when compared to existing Canadian credit card ABS trading spreads or potential new issue spread in the Canadian market, they also provide funding diversification for Canadian issuers.

Canadian Receivables: Performance Still Strong Despite Consumer Indebtedness

Canadian credit card receivables continue to demonstrate strong credit metrics such as high seasoning, diversification, and credit quality. On average, approximately 83% of the receivables are accounts aged at least five years, which leads to stable payments and performance. In addition, approximately 34% of Canadian credit card ABS receivables comprise accounts that can be classified as "super prime." The receivables are also geographically diverse, with province exposure consistent with the nation's population distribution.

Canadian credit card ABS performance remained strong in the second quarter. The receivables balance in the Canadian Credit Card Quality Index (CCQI) increased to $52.1 billion as of June 2019 from C$50.8 billion as of June 2018. Collateral performance of the credit card receivables backing Canadian credit card ABS transactions has generally remained within our expectations. In second-quarter 2019, the 30-plus-day delinquency rate of 1.9% and charge-off rate of 3.0% remained steady compared with 1.93% and 2.9%, respectively, a year earlier. The payment rate also stayed robust, with the 12-month average increasing to 45.2% as of June 2019 from 45.1% the prior year. These figures positively affect yield and excess spread, which averaged 23.9% and 17.1%, respectively, during second-quarter 2019.

The strong receivables performance reflects many factors, including favorable credit fundamentals, conservative underwriting standards, established credit relationships within issuers' framework, and prudent consumer behavior, influenced by the full recourse credit regime.

Canadian consumer debt service ratio increased to 14.9% as of first-quarter 2019, nearing the historical high of 15.0% as of December 2007. The 14.9% debt service ratio includes 6.7% mortgage debt and 8.2% other consumer debt. Household savings as a proportion of disposable income decreased to 1.1% as of first-quarter 2019 from 1.9% as of first-quarter 2018 (see chart 3). Despite this weakening consumer profile, prudent consumer behavior, influenced by the full recourse credit regime and conservative lending practices at banks, will continue to balance the risks of consumer affordability.

We expect Canadian credit card ABS transactions will continue to benefit from strong performance, and we will continue to monitor the credit quality of the receivables relative to the credit enhancement available to each class.

Chart 3

The Relative Value

Comparatively, Canadian credit card receivables have historically performed better than U.S. bankcard receivables (see table 3).

Table 3

Over the past five years, the Canadian CCQI payment rates and yields have significantly outperformed the U.S. bankcard CCQI (see charts 4a and 4b). Most Canadian bank originators tend to have robust reward and loyalty programs linked to their cards, resulting in payment rates of around 44%, compared with approximately 30% in the U.S. Furthermore, the Canadian CCQI yield of approximately 24% is also higher, compared with the U.S. bankcard CCQI yield of 20%. Canadian credit cards tend to have high annual percentage rates (APRs), which stem from less stringent usury laws. Although APR is a major driver of yield, other components of yield, such as interchange and annual fees, could also contribute to the higher Canadian yield. Most Canadian credit cards are issued from just six major banks, whereas the banking sectors in the U.S. are highly competitive, creating downward pressure on credit card APRs.

Although the Canadian CCQI payment rates and yields have historically outperformed the U.S. bankcard CCQI's by wide margins, Canadian charge-offs and 30-plus-day delinquencies are roughly in-line with their U.S. counterparts (see charts 4c and 4d). The Canadian CCQI charge-off rate is approximately 3.0%, compared with 2.4% in the U.S. We believe higher unemployment rates is one of the driving factors of credit card charge-offs. As of June 2019, the Canadian unemployment rate was 5.5%, whereas the U.S. unemployment rate was 3.7%. Still, despite Canada's higher unemployment rate, the Canadian CCQI charge-off rate has remained in-line with the U.S. bankcard CCQI charge-off rate, demonstrating high obligor credit quality.

Chart 4a

Chart 4b

Chart 4c

Chart 4d

Canadian CCQI Highlights

The Canadian CCQI tracks the performance of approximately C$52.1 billion in credit card receivables from eight major Canadian trusts that issue credit card ABS.

We observed the following performance trends in the Canadian CCQI as of second-quarter 2019:

• The three-month average principal receivables totaled C$51.7 billion, up 2.5% year-over-year and 3.3% from first-quarter 2019.
• The three-month average charge-off rate was 3.1%, up 3.6% year-over-year and up 5.0% from first-quarter 2019.
• The three-month average 30-plus-day delinquency rate was 1.9%, down 2.9% year-over-year and 7.6% from first-quarter 2019.
• The three-month average total payment rate was 46.1%, up 0.1% year-over-year and 9.6% from first-quarter 2019.
• The three-month average yield was 23.9%, up 0.9% year-over-year and 2.6% from first-quarter 2019.
• The three-month average excess spread was 17.1%, down 1.1% year-over-year and up 2.2% from first-quarter 2019.

Table 4

Chart 5

Chart 6

Issuers Versus The Index

Table 5a

Table 5b

Appendix: CCQI Performance Variables

The CCQI is a monthly performance index that aggregates performance information across credit card ABS transactions in the following key risk areas: receivables outstanding, yield, payment rate, charge-off rate, delinquencies, base rate, and excess spread rate.

We determine each master trust's weighting by dividing its outstanding eligible principal receivables by the total outstanding eligible principal receivables for all trusts included in the index. We then determine the CCQI weighted average performance variables by adding the result of each master trust's variables multiplied by each master trust's respective weighting.

Receivables outstanding

The aggregate outstanding eligible principal receivables of credit card accounts backing each master trust at the end of the collection period.

Yield

The weighted average total trust income for the collection period, as a percentage of eligible principal receivables (annualized).

Total payment rate

The weighted average total monthly collections (obligor principal and finance charge payments), as a percentage of total receivables outstanding.

Charge-off rate

The weighted average losses on principal receivables for the collection period, as a percentage of eligible principal receivables (annualized).

Delinquencies

The weighted average past-due amount for the collection period, as a percentage of the current month's eligible principal receivables.

Base rate

The weighted average cost of funding (the sum of the certificate rate on a securitization and the corresponding transaction servicing fee) for the collection period. For those issuers with ABS not rated by S&P Global Ratings, the base rate is calculated as the difference between the reported yield and charge-off rate for the issuer, less the weighted average excess spread of the issuer based on the outstanding principal balance of each series.

Excess spread rate

The weighted average surplus of cash inflow for the collection period (yield minus charge-offs minus the base rate). For those issuers with ABS not rated by S&P Global Ratings, the excess spread rate is calculated as the weighted average of each series based on the outstanding principal balance.

Related Criteria

• Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• U.S. Credit Card Securitizations: Methodology And Assumptions, Aug. 24, 2017
• Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015
• Global Derivative Agreement Criteria, June 24, 2013
• Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
• Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• General Methodology And Assumptions For Rating Canadian Credit Card ABS, March 22, 2012
• Criteria - Structured Finance - General: Methodology For Servicer Risk Assessment, May 28, 2009

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• Quarterly U.S. Credit Card Quality Index: Performance Remains Stable Despite Market Volatility in Fourth Quarter 2018, March 22, 2019
• Canadian Credit Card Quality Index: 2018 Canadian Credit Card Issuance Volumes Exceed 10-Year High, March 19, 2019
• Canadian Credit Card Quality Index: First Quarter 2019 Issuance Declines While Performance Remains Stable, May 23, 2019
• 2019 U.S. And Canadian Credit Card ABS Review, Jan. 14, 2019
• Global Structured Finance Outlook 2019: Securitization Continues To Be Energized With Potential $1 Trillion In Volume Expected Again, Jan. 7, 2019
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016