paynet canadian delinquency indices · 2016-02-22 · 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2005.08...

PayNet Canadian Delinquency Indices:Examining the Canadian Business Delinquency Indices (CBDI)

as Indicators of Economic Trends and Financial Distress

Prepared For:PayNet, Inc.

Prepared By:Robert Wescott, Ph.D.

Jeff JensenCameron EganKeybridge LLC

Date:December 2, 2015

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.08 2007.08 2009.08 2011.08 2013.08 2015.08

Percent of Delinquencies

National Canadian Small Business Delinquency Index (CSBDI)

The PayNet Small Business Delinquency Indices (CSBDI) gauge small

business financial stress and default risk.1

Source: PayNet, Inc.

2

Declining CSBDI indicates

fewer delinquencies and

lower financial stress

1 The CSBDI are measures of the percentage of small Canadian businesses 30–180 days and 90–180 days past due on loans and leases, published on a monthly basis.

30+ Days

90+ Days

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.08 2007.08 2009.08 2011.08 2013.08 2015.08


National CFLA/PayNet Canadian Equipment Delinquency Index (CEDI)

The CFLA/PayNet Equipment Delinquency Indices (CEDI) gauge financial

stress and default risk for both small- and medium-sized businesses.1

Source: PayNet, Inc.

31 Published on a monthly basis, the CEDI measure the percentage of small and medium-sized businesses 30–180 days and 90–180 days past due on loans and leases. The Canadian Finance & Leasing Association (CFLA) partners with PayNet to release the CEDI.

30+ Days

90+ Days

4

The CEDI are published at the national level only, while the CSBDI are also

available at the regional and industry level.

NATIONAL LEVEL REGIONAL LEVEL INDUSTRY LEVEL

Accommodations & Food

Wholesale

Agriculture

Manufacturing

Other

Professional Services

Retail

Transportation

Construction

AlbertaCSBDI (30+ and 90+ Days)

Atlantic Canada*CEDI (30+ and 90+ Days)

British Columbia

Manitoba

Ontario

Quebec

Saskatchewan

*Atlantic Canada combines data from New Brunswick, Newfoundland & Labrador, Nova Scotia, and Prince Edward Island.

CBDI

5

1

2

3

At the national level, the PayNet CBDI are strong indicators of both financial stress and

economic conditions. All of the CSBDI and CEDI were significant at the 95% confidence

level.

Several of the industry-level CSBDI measures are valid indicators of economic activity, but

results were mixed. Roughly half of the industry CSBDI are correlated with GDP and Business

Capital Formation; statistical relationships with Employment are weaker.

The CSBDI are mixed indicators of economic activity at the regional level. Some regional

CSBDI (e.g., Alberta and Ontario) showed close relationships with Employment growth, but

others were not statistically significant.

4The CBDI are concurrently tied to financial and economic trends, particularly at the

national level. However, the CBDI have a timing advantage, particularly compared to

financial indicators, allowing an advanced look at financial stress and economic trends.

Key Findings

6

1Evaluate the PayNet CBDI as indicators of economic activity and financial stress in

Canada.

2Test the CSBDI as statistically reliable indicators of financial and economic trends at

the national, regional, and industry levels; test the CEDI at the national level.

3Use regression results to determine if the CBDI are concurrent or leading indicators of

economic activity and financial conditions.

Project Overview & Goals

Small business delinquencies are a key form of financial distress and can signal an economic

downturn. It is therefore expected that the CBDI should mirror (and potentially anticipate)

financial trends and inversely reflect shifts in economic activity.

To test this hypothesis, this analysis relies on a three-step process:

Regression analysis was used to identify the statistical relationships between

CBDI data series and various economic or financial indicators.

• Charge for Impairment, Provision for Credit Losses, and Net Income were

selected as target series indicators of financial stress (sources: Office of the

Superintendent of Financial Institutions; Canadian Bankers Association).1

• GDP, Employment, and Business Fixed Capital Formation were selected as target

series indicators of economic activity (source: Statistics Canada).

Economic & Financial

Target Series1

• If one or more lagged CBDI were found to be statistically significant, the CBDI

was determined to be a reliable leading indicator.

• If the CBDI was found to be statistically significant but its lags were not, the index

was considered to be a reliable concurrent indicator.

Interpreting Results4

Project Methodology

7

• Regression analysis was used to directly test the CBDI as concurrent or leading

indicators. Specifically, the concurrent CBDI and their first and second lags were

tested as explanatory variables in regression analysis.

• Regression coefficients were examined at the 90%, 95%, and 99% levels of

confidence to test the statistical relationship between the CBDI and target series.

Regression Analysis3

• To match quarterly target series, monthly CBDI data were converted to quarterly

frequency using the last monthly value in each quarter (e.g., March = Q1).

• Some target series data were transformed from level form to year-on-year

growth rates to support the regression analysis.

Data Conversion &

Transformation2

1The OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight. The CBA is a trade association that works on behalf of 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada.

8

The analysis tested the corresponding CSBDI and CEDI against target series

at the national, industry, and regional levels, including:

NATIONAL LEVEL

(CSBDI & CEDI)

INDUSTRY LEVEL

(CSBDI only)

REGIONAL LEVEL

(CSBDI only)

Employment

Real GDPReal GDP

EmploymentEmployment

Business Capital Formation*

*Business Gross Fixed Capital Formation data are only available for the Construction, Manufacturing, and Transportation industries.

Business Capital Formation

Charge for Impairment

Net Income (Domestic Banks)

Provision for Credit Losses

Financial data are available

at the national level only.

Neither GDP nor Business

Capital Formation is available

at the regional level on a

monthly or quarterly basis.

9

Testing the CSBDI and CEDI as indicators of economic activity at the

national, industry, and regional levels involved 80 regressions.

9 Industry CBLI

2 State-Industry FDIC

X

80 Total Regressions

X6 Target Series

4 National Indices (CSBDI & CEDI)

National

Regressions24

X3 Target Series

18 Industry Indices (CSBDI)

Industry

Regressions42*

X1 Target Series

14 Regional Indices (CSBDI)

Regional

Regressions14

*Business Gross Fixed Capital Formation data is only available for the Construction, Manufacturing, and Transportation industries. As a result, there are only 42 industry regressions instead of 54 (6 Business Capital Formation regressions + 18 GDP regressions + 18 Employment regressions).

REGRESSION RESULTS

Overall, 46 out of 80 regressions were significant at the 95% confidence

level. The ability of CBDI to explain movements in economic activity and

financial stress at the national and industry levels was impressive.

Target Series

National Level Industry Level Regional Level

95% Confidence

Test

Evidence of Leading

Properties

95% Confidence

Test

Evidence of Leading

Properties

95% Confidence

Test

Evidence of Leading

Properties

Real GDPYES4 / 4

- SOME8 / 18

- - -

EmploymentYES4 / 4

- SOME6 / 18

- SOME5 / 14

-

Business InvestmentYES4 / 4

- YES3 / 6

- - -

Provision for Credit LossesYES4 / 4

YES(3 / 4)

- - - -

Charge for ImpairmentYES4 / 4

YES(2 / 4)

- - - -

Bank Net IncomeYES4 / 4

- - - - -

11

Full Regression Results: 95% Confidence Test & Leading Properties

Note: In interpreting regression results, coefficient p-values were used to evaluate correlation and significance between the CBDI and target series. The r-squared values, which measure regression goodness-of-fit, were secondary to the analysis and therefore are not reported here.

As reported in the above table, the CBDI passed the 95% confidence test if either the concurrent index or its first or second lag (or some combination of the three) had a p-value at or below 0.05.

Several of the regressions showed an inverse statistically significant relationship between the CBDI and measures of economic activity, contradicting expectations. These regressions are not considered to pass the 95% confidence test.

Select National Level Results

Y/Y Percent Change

-100%

-50%

0%

50%

100%

150%

200%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.Q2 2007.Q2 2009.Q2 2011.Q2 2013.Q2 2015.Q2


National 30+ Days CSBDI Provision for Credit Losses*

The National 30+ Days CSBDI is closely tied to growth in Banks’ Provision for

Credit Losses.

Source: PayNet, Inc.; Canadian Bankers Association 13

CSBDI

(Left)

Provision

(Right)

2-QUARTER LEAD

P-value: 0.01

(99% Confidence)

*Total Eight Domestic Banks.

Y/Y Percent Change

-100%

-50%

0%

50%

100%

150%

200%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.Q2 2007.Q2 2009.Q2 2011.Q2 2013.Q2 2015.Q2


National 30+ Days CEDI Charge for Impairment*

Similarly, the 30+ Days CEDI largely mirrors Charge for Impairment growth.

Source: PayNet, Inc.; Office of the Superintendent of Financial Institutions 14

CEDI

(Left)

Impairment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

*Charge for Impairment is reported year-to-date but was transformed to quarterly flow data for regression analysis.

Billions, CAD

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.Q2 2007.Q2 2009.Q2 2011.Q2 2013.Q2 2015.Q2


National 30+ Days CSBDI Net Income*

The 30+ Days CSBDI also shows a solid inverse relationship with Bank Net

Income, as expected, and is generally more stable than the target series.

Source: PayNet, Inc.; Canadian Bankers Association 15

CSBDI

(Left)

Net Income

(Right)

*Total Eight Domestic Banks.

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2005.08 2007.08 2009.08 2011.08 2013.08 2015.08


National 90+ Days CEDI Real GDP

The CEDI is also inversely correlated with measures of economic activity,

including Real GDP growth.

Source: PayNet, Inc.; Macrobond Financial; Statistics Canada 16

CEDI

(Left)

Real GDP

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-3%

-2%

-1%

0%

1%

2%

3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2005.09 2007.09 2009.09 2011.09 2013.09 2015.09


National 30+ Days CEDI National Employment

In addition, the national 30+ Days CEDI shows an inverse relationship with

Employment growth.


CEDI

(Left)

Employment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

2005.Q2 2007.Q2 2009.Q2 2011.Q2 2013.Q2 2015.Q2


National 90+ Days CSBDI Business Capital Formation

Gains in the 90+ Days CSBDI tend to signal slower growth in Business Fixed

Capital Formation, as expected.


CSBDI

(Left)

Investment

(Right)

CONCURRENT

P-value: 0.02

(95% Confidence)

Select Industry Level Results

Y/Y Percent Change

-20%

-15%

-10%

-5%

0%

5%

10%

15%

0%

1%

2%

3%

4%

5%

6%

2005.08 2007.08 2009.08 2011.08 2013.08 2015.08


Manufacturing 30+ Days CSBDI Real GDP, Manufacturing

The Manufacturing 30+ Days CSBDI demonstrates an expected inverse

relationship with Manufacturing GDP growth.


CSBDI

(Left)

Real GDP

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-8%

-4%

0%

4%

8%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2005.08 2007.08 2009.08 2011.08 2013.08 2015.08


Transportation 90+ Days CSBDI Real GDP, Transportation*

Similarly, the Transportation 90+ Days CSBDI trends opposite to

Transportation GDP, although GDP is more volatile.


CSBDI

(Left)

Real GDP

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

*Transportation & Warehousing.

Y/Y Percent Change

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0%

1%

2%

3%

4%

5%

6%

2005.09 2007.09 2009.09 2011.09 2013.09 2015.09


Manufacturing 30+ Days CSBDI Manufacturing Employment

The Manufacturing 30+ Days CSBDI is also inversely correlated with

Manufacturing Employment growth.


CSBDI

(Left)

Employment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-8%

-4%

0%

4%

8%

12%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

2005.09 2007.09 2009.09 2011.09 2013.09 2015.09


Construction 90+ Days CSBDI Construction Employment

A similar inverse relationship exists between the Construction 90+ Days

CSBDI and growth in Construction Employment.


CSBDI

(Left)

Employment

(Right)

CONCURRENT

P-value: 0.05

(95% Confidence)

Y/Y Percent Change

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

2005.Q2 2007.Q2 2009.Q2 2011.Q2 2013.Q2 2015.Q2


Transportation 90+ Days CSBDI Business Capital Formation, Transportation*

The Transportation 90+ Days CSBDI is a reliable inverse concurrent indicator

of Business Investment in Transportation equipment.


CSBDI

(Left)

Investment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

*Real Business Gross Fixed Capital Formation in Trucks, Buses, & Other Motor Vehicles.

Select Regional Level Results

Y/Y Percent Change

-6%

-4%

-2%

0%

2%

4%

6%

8%

0%

0%

0%

0%

0%

1%

1%

1%

2005.09 2007.09 2009.09 2011.09 2013.09 2015.09


Alberta 90+ Days CSBDI Alberta Employment

The Alberta 90+ Days CSBDI has an inverse relationship with Alberta

Employment growth.


CSBDI

(Left)

Employment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

Y/Y Percent Change

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2005.09 2007.09 2009.09 2011.09 2013.09 2015.09


Ontario 30+ Days CSBDI Ontario Employment

Additionally, the Ontario 30+ Days CSBDI peaked as Ontario Employment

growth fell to a multi-year low.


CSBDI

(Left)

Employment

(Right)

CONCURRENT

P-value: 0.00

(99% Confidence)

CBDI “TIMING” ADVANTAGES

29

Monthly vs.

Quarterly

Early Release

The CBDI offer an important “advance look” at lending conditions before other

data are available. The CBDI are updated monthly, while OSFI and CBA financial

stress indicators are released quarterly, and even then, only with a reporting lag.

A full quarter of CBDI data (i.e., three monthly releases) are published before

OSFI and CBA data. OSFI data are released on a roughly two-month lag, and

CBA data are released on an even longer lag. However, the CBDI are published

with only a 45-day lag.

CBDI

Advantage

Importantly, although most of the charts in the preceding slides show the CBDI to

be concurrent indicators of financial stress, they function as leading indicators

because they are available earlier than other key financial measures.

Importantly, the CBDI have clear timing advantages over other financial

measures with respect to the data’s frequency and release schedule.

Note: The OSFI does not have a set release schedule for its quarterly Income Statement data. Additionally, the Canadian Bankers Association publishes quarterly Bank Financial Results with a longer lag than the OSFI; thus, the CBDI also have timing advantages relative to CBA data.

30

An Example of the CBDI Timing Advantage over OSFI financial stress data

January February March

April May

X

X

X

January CBDI

Release

March CBDI Release

(Q1 CBDI data

available)

X

Q1 OSFI Quarterly

Income Statement

Release*

February CBDI

Release

*Estimated data release. The OSFI does not have a set release schedule for quarterly bank financial data.

APPENDIX: FULL REGRESSION RESULTS

National Level Regression Results: SMALL BUSINESS DELINQUENCIES

(1 of 2)

Target Series CSBDI 90% 95% 99%

Real GDP

(Y/Y Percent Change)

30+ Days

90+ Days

Employment


30+ Days

90+ Days



30+ Days

90+ Days —



30+ Days

90+ Days —

Bank Net Income

30+ Days

90+ Days

32

Leading

Concurrent Significant

— Not Significant

National Level Regression Results: SMALL BUSINESS DELINQUENCIES

(2 of 2)

Target Series CSBDI 90% 95% 99%



30+ Days —

90+ Days —

33

Leading


— Not Significant

National Level Regression Results: SMALL & MEDIUM BUSINESS

DELINQUENCIES (1 of 2)

Target Series CEDI 90% 95% 99%

Real GDP


30+ Days

90+ Days

Employment


30+ Days

90+ Days



30+ Days —

90+ Days



30+ Days

90+ Days

Bank Net Income

30+ Days

90+ Days

34

Leading


— Not Significant

National Level Regression Results: SMALL & MEDIUM BUSINESS

DELINQUENCIES (2 of 2)

Target Series CEDI 90% 95% 99%



30+ Days —

90+ Days —

35

Leading


— Not Significant

Industry Level Regression Results: REAL GDP (Y/Y PERCENT CHANGE)

(1 of 2)

CSBDI 90% 95% 99%

Accommodation & Food

30+ Days — — —

90+ Days

Agriculture

30+ Days — — —

90+ Days — — —

Construction

30+ Days — — —

90+ Days — — —

Manufacturing

30+ Days

90+ Days

Other

30+ Days — — —

90+ Days — — —

36

Note: The second lags of the Construction 30+ and 90+ Days CSBDI have statistically significant, yet positive, relationships with Real GDP, along with the Other 30+ and 90+ Days CSBDI.

Leading


— Not Significant

Industry Level Regression Results: REAL GDP (Y/Y PERCENT CHANGE)

(2 of 2)

CSBDI 90% 95% 99%


30+ Days — — —

90+ Days — — —

Retail Trade

30+ Days — — —

90+ Days

Transportation

30+ Days

90+ Days

Wholesale Trade

30+ Days

90+ Days

37

Leading

Concurrent

Note: The Professional Services 30+ Days CSBDI has a statistically significant, yet positive, relationship with Real GDP.

Significant

— Not Significant

Industry Level Regression Results: EMPLOYMENT (Y/Y PERCENT CHANGE)

(1 of 2)

CSBDI 90% 95% 99%

Accommodation & Food

30+ Days — — —

90+ Days — — —

Agriculture

30+ Days — — —

90+ Days — — —

Construction

30+ Days — — —

90+ Days —

Manufacturing

30+ Days

90+ Days

Other

30+ Days — — —

90+ Days — — —

38Note: The Agriculture 90+ Days CSBDI and the Other 30+ and 90+ Days CSBDI have statistically significant, yet positive, relationships with Employment.

Leading


— Not Significant

Industry Level Regression Results: EMPLOYMENT (Y/Y PERCENT CHANGE)

(2 of 2)

CSBDI 90% 95% 99%


30+ Days — — —

90+ Days — — —

Retail Trade

30+ Days — — —

90+ Days

Transportation

30+ Days

90+ Days

Wholesale Trade1

30+ Days — — —

90+ Days — — —

39

1Due to data availability, the Wholesale Trade CSBDI were tested against Trade Employment.

Note: The Wholesale 30+ Days CSBDI has a statistically significant, yet positive, relationship with Employment.

Leading


— Not Significant

Industry Level Regression Results: BUSINESS CAPITAL FORMATION (Y/Y

PERCENT CHANGE)

CSBDI 90% 95% 99%

Construction

30+ Days — —

90+ Days —

Manufacturing

30+ Days — — —

90+ Days — — —

Transportation

30+ Days

90+ Days

40

Leading


— Not Significant

Regional Level Regression Results: EMPLOYMENT (Y/Y PERCENT CHANGE)

(1 of 2)

CSBDI 90% 95% 99%

Alberta

30+ Days

90+ Days

Atlantic Canada

30+ Days — — —

90+ Days — — —

British Columbia

30+ Days — — —

90+ Days — — —

Manitoba

30+ Days — — —

90+ Days — — —

Ontario

30+ Days

90+ Days

41Note: The 30+ and 90+ Days Manitoba CSBDI have statistically significant, yet positive, relationships with Employment.

Leading


— Not Significant

Regional Level Regression Results: EMPLOYMENT (Y/Y PERCENT CHANGE)

(2 of 2)

CSBDI 90% 95% 99%

Quebec

30+ Days — — —

90+ Days — — —

Saskatchewan

30+ Days —

90+ Days — — —

42

Leading


— Not Significant

About Keybridge

43

Keybridge is a boutique economic and public policy consulting firm based in Washington, D.C.

The firm was founded in 2001.

Keybridge provides technical analysis and strategic advice to a diverse clientele that includes

leading non-profit organizations, global financial institutions, multinational corporations, premier

trade associations, and federal government agencies.

Our principals serve as economists, policy experts, and strategic advisers on issues that reside at

the forefront of public policy economics.

We provide clients with a range of analytical and advisory services, including cost benefit

analysis, econometric and statistic modeling, macroeconomic forecasting, policy impact

analysis, program evaluations, and strategic planning.

Keybridge’s founder and president, Dr. Robert Wescott, has performed scores of

macroeconomic studies, provided policy advice at the highest levels of government, and was

Chief U.S. Economist at WEFA Group (now known as IHS Global Insight). At WEFA he managed

the development of large-scale, dynamic macroeconomic models, and was responsible for

the firm’s forecasting activities with these econometric models.

Author Biographies

44

Robert Wescott: Dr. Robert F. Wescott is President of Keybridge and has more than 30 years of professional

experience working on macroeconomic, financial, and public policy issues. Prior to founding Keybridge in

2001, Dr. Wescott served as Special Assistant to the President for Economic Policy at the National Economic

Council at the White House, as Chief Economist at the President’s Council of Economic Advisers, Deputy

Division Chief in the Research Department of the IMF, and Senior Vice President and Chief U.S. Economist at

WEFA Group (today IHS Global Insight). Dr. Wescott holds a Ph.D. in Economics from the University of

Pennsylvania.

Jeff Jensen: Jeff Jensen is a Director at Keybridge. Mr. Jensen specializes in equipment finance and financial

markets, energy and environmental policy, and federal regulation. Before joining Keybridge, Mr. Jensen spent

four years as a Senior Analyst at the U.S. Government Accountability Office, where he evaluated a variety of

federal programs, including airport and mass transit security. He holds a Bachelor’s degree in Economics from

Carleton College, and Master’s degrees in Public Policy and Environmental Management from Duke University.

Cameron Egan: Cameron Egan is an Analyst at Keybridge. Ms. Egan performs statistical analysis with time

series data and helps prepare the firm’s momentum monitors — the firm’s set of leading indicators that track

movements in economic growth and inflation in the G-20 countries, and also movements in a number of

industrial sectors. She also has performed econometric modeling studies with regional/state-level economic

models. She holds a B.A. in Economics from Furman University.

Contact Information

45

Address: 3050 K Street NW, Suite 220Washington, D.C. 20007

Phone: (202) 965-9480 Fax: (202)965-1104

Website: www.keybridgedc.com

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