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The Bankruptcy Report
May 19, 2015
ECONOMICS
Avery Shenfeld
(416) 594-7356
[email protected]
Benjamin Tal
(416) 956-3698
[email protected]
Andrew Grantham
(416) 956-3219
[email protected]
Royce Mendes
(416) 594-7354
[email protected]
Nick Exarhos
(416) 956-6527
[email protected]
Insolvencies—Rising Again
by Benjamin Tal
The insolvency rate in Canada is back to
its pre-recession level of 4 in 1,000 adults
(Chart 1). But recent activity reveals a
reversal of that trend. During the six months
ending February, the cumulative number of
insolvencies rose by 1.2%—the first increase
since the recession.
This trend, however, masks two different
trajectories of the components that comprise
the insolvency rate. The number of personal
bankruptcies, the first component, fell by
a cumulative 4.7% during the six months
ending February 2015. However, the second
component, the number of proposals (a
situation in which a consumer negotiates to
repay only a portion of his/her debt) has, in
fact, risen by no less than 9% during the
same period (Chart 2).
Note that while proposals rose alongside
bankruptcies during the recession, they
stayed high during the recovery (Chart 3).
That was largely due to changes to the
Consumer Insolvency Rate
3.0
2.0
1.0
CIBC World Markets Inc.
CIBC
World
Markets
•
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
Bankruptcies
Proposals
Insolvencies
Source: Office of the Superintendent of Bankruptcy
Canada, CIBC
Bankruptcy Insolvency Act (BIA) in 2008
with the most significant modification being
the increase in the limit of the size of nonmortgage debt for qualifying for a proposal
from $75,000 to $250,000—making
proposals more attractive relative to the
bankruptcy route.
Bankruptcies and Proposals—
Diverging Trends
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.0
http://research.cibcwm.
com/res/Eco/EcoResearch.
html
Cumulative % Change:
Sep 13-Feb 14 vs Sep 14-Feb 15
No. of Bankruptcies and Proposals
Per 1,000 Population Aged 18 Years+
Per 1,000 Population Aged 18 Years+
5.0
0.0
Rising Proposals Offset Falling Bankruptcies
Chart 3
Chart 1
6.0
Chart 2
88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Industry Office, Office of the Superintendent of
Bankruptcy Canada, CIBC
88
92
96
00
Bankruptcy Rate (L)
04
08
12
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Proposal Rate (R)
Source: Office of the Superintendent of Bankruptcy
Canada, CIBC
PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada
M5J 2S8
Corp
300
Madison
Avenue,
New
York,
NY
10017
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•
•
Bloomberg @ CIBC
(212)
856-4000,
•
(416) 594-7000
(800)
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The Bankruptcy Report—May 19, 2015
Chart 4
Chart 6
Rising Share of Proposals in Insolvencies
Proposals in Alberta are On the Rise
50
y/y % change,
3-month moving average
100
3-month moving avg
45
80
40
35
60
30
40
25
20
20
15
0
10
5
-20
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Office of the Superintendent of Bankruptcy Canada, CIBC
07
08
09
10
11
12
13
14
15
Source: Office of the Superintendent of Bankruptcy Canada, CIBC
In the past, the growth in the number of proposals
was of little importance given their relatively small size.
That, however, is changing. The opposing trajectories
of proposals and bankruptcies have led to a situation in
which proposals now account for a record-high 50% of
total insolvencies (Chart 4).
Zooming in on the situation in Alberta, there are reasons
to believe that the coming quarters will see continued
deterioration. Note that the number of proposals in the
province rose by a cumulative 24% during the six months
ending February and by 30% on a smoothed year-overyear basis (Chart 6). And given that the share of proposals
in bankruptcies is the highest in Alberta (Chart 7)—that
trend is likely to lead to a higher insolvency rate in the
coming quarters.
And the damage from lower oil prices is starting to show.
The cumulative number of insolvencies in Manitoba
and Saskatchewan rose by almost 11% during the six
months ending February 2015, while in Alberta it rose
by 6.5%—the worst showing since the recession. At the
same time, the number of insolvencies in Ontario fell by
almost 7%, while in British Columbia they were little
changed (Chart 5).
Looking deeper into what’s in the pipeline by focusing on
trends in major delinquencies of various credit products,
reveals differing trajectories. Delinquency rates continue
to trend downward in all major credit vehicles with
the exception of lines of credit where the delinquency
Chart 5
Chart 7
Increase in Consumer Insolvencies by Province
Share of Proposals in Insolvencies by Province
12.0
%
Cumulative % Change:
Sep 13-Feb 14 vs Sep 14-Feb 15
70
10.0
3-month moving avg
60
8.0
6.0
50
4.0
40
2.0
0.0
30
-2.0
20
-4.0
Canada
10
-6.0
-8.0
As of February 2015
Man/Sask Atlc
Alta
Que
CAN
BC
0
Ont
Source: Office of the Superintendent of Bankruptcy Canada, CIBC
ALTA
ONT
SASK
QUE
BC
MAN
ATL
Source: Office of the Superintendent of Bankruptcy Canada, CIBC
2
CIBC World Markets Inc.
The Bankruptcy Report—May 19, 2015
Chart 9
Unemployment Not the Chief Factor Behind
Insolvencies
Chart 8
Major Delinquencies by Product
Mortgage Arrears
0.7
1.25%
% of total portfolio
0.6
Term Loans
Total Balance
Delinquencies
7
1.00%
0.5
%
6
0.4
12
10
0.75%
0.3
5
0.2
13Q4
12Q4
11Q4
10Q4
09Q4
08Q4
07Q4
06Q4
05Q4
04Q4
0.15%
13Q4
12Q4
11Q4
10Q4
4
8
3
6
2
1
0
13Q4
0.20%
Credit Cards
Total Balance
Delinquencies
12Q4
0.25%
1.8%
1.7%
1.6%
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%
0.9%
0.8%
0.7%
11Q4
Lines of Credit
Total Balance
Delinquencies
09Q4
14
10Q4
12
08Q4
10
09Q4
08
07Q4
06
08Q4
04
06Q4
02
07Q4
00
06Q4
98
05Q4
96
05Q4
0.30%
94
04Q4
0.50%
92
04Q4
0.1
per 1,000 population,
aged 18 years+
Source: Equifax Canada, CBA, CIBC
Insolvency Rate (L)
4
Unemployment Rate (R)
88 90 92 94 96 98 00 02 04 06 08 10 12 14
2
Source: Office of the Superintendent of Bankruptcy Canada, CIBC
rate has been on the rise over the past few years. This
trajectory largely reflects transfer of risk from credit cards
to lines of credit (Chart 8).
the unskilled or semi-skilled occupational classifications.
Increased self-employment activity is also important with
no less than 20% of insolvents stating that they operated
a business within a five-year period prior to becoming
insolvent. More than half of insolvencies occur due to
the combination of overextension of credit, financial
mismanagement and unexpected expenses.
So what’s next for the insolvency rate in Canada? A quick
look at Chart 9 suggests that the answer does not lie
only with the highly quoted unemployment rate. Clearly,
a sharp rise in the unemployment rate can lead to a surge
in the insolvency rate (see the 2009 recession), but from
a long-term perspective we find the unemployment rate
to provide only partial explanations to changes in the
insolvency rate. In fact, based on information obtained
from the Office of the Superintendent of Bankruptcy, only
one third of insolvent debtors are unemployed. Other
factors such as employment quality play an important
role here, with more than 60% of insolvents being in
Given the increased sensitivity of Canadian households
to higher interest rates, it is reasonable to expect that,
as opposed to previous cycles, the upcoming interest
rate tightening cycle will lead to a moderate increase in
the insolvency rate, as the negative impact of increased
debt financing costs will offset any positives on the
unemployment front.
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