DBRS Morningstar Releases October 2020 Canadian ABS and Enhanced ABS Report

DBRS Limited (DBRS Morningstar) released the enhanced version of the Monthly Canadian ABS Report (the Enhanced ABS Report) and the asset-backed securities (ABS) market data in Excel form in conjunction with the Monthly Canadian ABS Report.

The Enhanced ABS Report offers additional metrics, longer data series, definitions, and charts that provide the user with both numeric and graphic presentations to allow for a quick review of the overall performance and trends for each transaction as well as the benchmarking of transactions within an asset class.

The reports provide an overview of the Canadian term ABS market for the month ended October 31, 2020.

As of October, the total outstanding amount in the Canadian ABS market further declined to $40.6 billion compared with $41.8 billion in September. Regular runoff amounted to $490.6 million.

Credit cards remain the largest asset class within the ABS market, comprising 62.3% of the market, followed by auto loans and leases at 17.1%. Home equity lines of credit comprised 12.2% of the market. The ABS market composition continues to favour consumer lending, with credit card, auto loan/lease programs, and lines of credit accounting for approximately 91.6% of the market.

Impact of the Coronavirus Disease (COVID-19) Pandemic on Canadian ABS
The Bank of Canada (BoC), the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar), and the Office of the Superintendent of Financial Institutions implemented several economic measures to help stabilize the economy and to help Canadians affected by the pandemic. Some measures support liquidity in the financial markets and continued access to financing, while other measures provide financial support to cash-strapped businesses and households affected by the coronavirus pandemic. Financial support was also provided by lenders to consumer and business obligors in the form of payment deferrals. In aggregate, these measures have proven effective as delinquencies and loss ratios for most Term ABS transactions remain lower in October than at the beginning of the lockdown in March 2020. With market conditions improving in Canada, programs offered by the BoC to support the functioning of key financial markets have been used less frequently by participants. As a result, the BoC reduced the frequency of its Term Repo operations to biweekly from weekly, starting October 21, 2020. In addition, own-name covered bonds, own-name Term ABS, and own-name asset-backed commercial paper are no longer eligible for Term Repo operations. Canadian dollar-denominated marketable securities that are directly issued or explicitly guaranteed by the Government of Canada or by Canadian provincial government and that are eligible for the Standing Liquidity Facility continue to be eligible for regular Term Repo operations.

Although the gradual economic recovery in Q3 2020 allowed many business and obligors get back on their feet, the risks to transactions into Q4 2020 are the second wave of the pandemic and the potential economic impact that new temporary containment measures may have on already-affected consumers and businesses. Many deferral programs that lenders offered have also ended and extensions are only granted on a case-by-case basis. The end of this support may pressure transaction performance as some accounts may become delinquent and lead to losses.

The Government of Canada’s introduction of three additional programs (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit, and the Canada Recovery Caregiving Benefit) will continue to provide financial assistance to households directly affected by coronavirus, which is expected to continue to provide some level of support to credit performance in structured finance transactions.

DBRS Morningstar expects delinquencies and losses to rise, but the extent of the increase will depend on the pace of the economic recovery and the effectiveness and extension of support from the governments and lenders.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The report is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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