Canada's Credit Stress Is Rising, Not Breaking, Says National Bank

Total debt insolvency in Canada reached its highest level since the 2009 financial crisis in Q1, according to data from Equifax released on Wednesday, said National Bank of Canada.

This increase may seem alarming and raises concerns about the financial health of Canadian households. The bank asks if the situation is really as concerning as it seems.

To gain a clearer picture, National Bank analyzed data from the Office of the Superintendent of Bankruptcy, which tracks the total number of insolvency filings; bankruptcies and consumer proposals, across the country. This data also shows that the number of insolvencies reached its highest level since the financial crisis in Q1.

However, two adjustments are necessary to correctly interpret the trend in insolvencies, stated the bank. The first concerns seasonality, since the first half of the year is historically associated with a higher volume of insolvencies.

The second involves accounting for the strong population growth observed since 2009, as the Canadian population has increased by about 25% over the period.

Once the data is seasonally adjusted and expressed on a per capita basis, the insolvency rate remains well below the peak reached in the wake of the financial crisis and is even below its pre-pandemic level of 2019, the bank pointed out.

The upward trend observed since 2022, as such, reflects a normalization from an exceptionally low pandemic trough rather than a widespread breakdown in household credit. However this does not mean the situation should be downplayed.

The rise in the insolvency rate over the past year reflects a more fragile labor market, high interest rates, and a still-high cost of living, particularly for housing, food, and energy, which continue to put pressure on many households.

However, the data doesn't support the narrative of systemic credit risk suggested by some media headlines, added the bank. The most accurate interpretation remains more nuanced: financial strains are increasing, but their magnitude remains moderate by historical standards for now.