Growth Challenges in the Canadian Credit Card Industry

Navigator Edition: May 2012
By: David Woynerowski

A recurring theme in our recent discussions with Canadian credit card issuers, large and small, has been, “Where’s the growth?”  Although total consumer debt has managed to sustain growth rates in the low-to-mid single digits in the last year, according to the Canadian Banker’s Association, credit card balances in Canada contracted by about 1% in 2011, following less than 1% growth in 2010.  Of the top-five Canadian credit card issuers (accounting for approximately 75% of the market), only one issuer generated organic growth exceeding 3% in 2011 (TD achieved 5% growth before consideration of the acquisition of MBNA Canada).

In spite of the challenges in growing credit card balances, purchase volume grew steadily in both 2011 and 2010, registering growth of 8% and 6% respectively, and according to Dominion Bond Rating Service, excess spreads are several hundred basis points higher today than they were prior to the recession.  These dynamics are strikingly familiar to the U.S. credit card market where profitability is strong, but receivables and therefore revenue growth prospects are unclear.  The one difference between the markets is that the credit crisis and the recession were more severe in the U.S., partially explaining the growth challenges given the after-effects of the sharp economic downturn.

One theory on Canada’s growth dynamics posited by CIBC’s Gerry McCaughey in the bank’s quarterly earnings call was that Canadians are shifting would-be credit card balances to lower-cost forms of consumer debt.  While credit availability in the U.S. is still relatively tight in the aftermath of the housing crisis, Canadians have several alternatives to credit cards available to finance large purchases, home renovations, or pay down more expensive forms of debt.  These products are generally marketed as lines of credit and personal loan plans, and carry APRs in the 6-11% range (compared to credit cards, which carry APRs of 12-20%). Currently, Canadian financial institutions hold more than three times the dollar value of these personal loans than credit card loans.  Recent statistics suggest that alternative loan types grew at rates of 6% and 11%, respectively, in 2011 and in the low double-digits in 2010.  In addition to these unsecured loans, Canadians also have the option of borrowing against the equity in their still-appreciating homes, albeit without the tax advantages available in the US.  The home equity loan market in Canada has grown at an average of 10% in the past few years in stark contrast to the U.S. and is now more than double the size of the credit card market.  The Bank of Canada has warned against lax underwriting in the HELOC market in particular, and the government stopped insuring these loans in January 2011.  With debt-to-income ratios at all-time highs, real-estate prices at record levels, and employment and wage growth still sluggish, some market observers wonder whether Canada can maintain its relatively stable economic environment versus suffering a recessionary fate similar to that of other nations.

With this as a backdrop, rather than ask “Where’s the growth,” we would recommend asking:

“Where is my exposure?”  Our advice to Canadian credit card issuers would be that prior to focusing on growth, they should assess any pockets of their unsecured loan portfolios, including credit cards, that would be most exposed to a housing price correction.  In the U.S., credit card loss exposure was in states and localities that experienced the greatest real estate price appreciation coupled with the highest LTV ratios in the previous five years (California, Nevada, Florida and Texas).  In Canada, it would seem that, in addition to geographic exposure, unsecured products heavily used to finance real-estate investments such as remodels would be especially vulnerable, calling into question growth strategies predicated heavily on lines of credit and personal loans.  The exposure to a severe correction in the housing market has a ripple effect given the near-immediate increase in unemployment that occurs in the construction and housing-related industries and the potential government response in the form of heightened regulation.

“Where’s the quality?”  Since the recession in the U.S., the stakes have never been higher among credit card issuers competing for affluent cardholders with new products (e.g., Capital One’s Venture Miles), new partnerships (e.g., Chase’s Hyatt, Ritz-Carlton and Fairmont cards), and product extensions (e.g., CitiExectutiveSM / AAdvantage card).  In Canada, in spite of increased profitability, we haven’t yet seen evidence of similarly fierce competition for affluent cardholders in terms of widespread product innovation or the recovery of direct mail volumes to pre-recession levels.

“Where’s the loyalty?”  While no portfolio is immune to performance erosion in a recession, it’s no secret that portfolios with the highest mix of “first-in-wallet” status tend to suffer the least.  We’ve witnessed unprecedented activity and promotion – particularly in the U.S. – to reinvent value propositions to drive every-day usage and cardholder loyalty (e.g., Target’s 5% Rewards, Capital One’s Cash Rewards, Discover’s 5% Cashback Bonus, etc.).  In Canada, we’ve observed increased activity on this front as well, with Scotiabank’s Momentum cards offering up to 4% cash back on gas and groceries, and with PC Bank and Canadian Tire re-evaluating their rewards programs and BMO and RBC leveraging partnerships to access loyalty to leading grocery / drug store brands in Sobey’s and Shoppers Drug Mart, respectively.

Regardless of whether the downstream effects of a cooling of Canada’s real-estate market are major or muted, balancing growth ambitions with answers to threshold questions such as those listed above would be prudent.

For more information, please contact David Woynerowski, Partner specializing in Card Issuing,

To read the rest of this article, please subscribe to

The Navigator Newsletter