TransUnion Consumer Credit Index Shows Credit Health Remained Broadly Stable in Q4 2016

The Consumer Credit Index (CCI) declined marginally in Q4 2016 to 49.6 from 50.3 according to TransUnion (NYSE: TRU), a global leader in credit and information management. The CCI is based on a 100-point scale, comprising three components: consumer credit behaviour (borrowing and repayment), household cash flow conditions and debt servicing costs. A level of 50.0 is the break-even level of improving and deteriorating credit health.

The past year has been one of the most stable periods for the index on record, hovering either just below or just above the 50.0 level for three full quarters. Russell Lamberti, an economist at ETM Analytics, the firm that helps TransUnion compile the CCI, explained that this doesn’t mean consumer credit health has improved, but that it is getting neither appreciably worse nor better. “We know that many households struggle to cope with their debt loads in South Africa and this has been a worry for credit providers. Lingering credit health problems have been managed into stability. The challenge now is to manage them into health again.”

TransUnion Africa CEO, Lee Naik, said the stabilisation in the index was in part a testament to more prudent credit management by all stakeholders in the industry since the credit boom of 2003-2012. “South Africa had a prolonged period of household credit expansion along with the rest of the world, and like many other countries it is now trying to nurse itself back to credit health.” He added that if the industry has managed to create stability in consumer credit health, the next task is to bring about improved credit health through sustained industry prudence.

ETM’s Lamberti noted that the road to better credit health also requires better long-term macroeconomic growth conditions. “There is obviously only so much the industry can do. The bigger picture is that the South African economy has become relatively uncompetitive, wages are stagnating and business investment conditions are too weak to raise employment levels enough.”

The defaults and distressed borrowing components of the CCI come from TransUnion’s credit market data warehouse which houses information on some 53 million accounts across 20 million active credit users. Defaults are defined as accounts lapsing three months in arrears, and distressed borrowing is the proportion of revolving credit – credit cards and store cards – used as a percentage of one’s credit limit. The rate of new defaults declined in the third quarter, while there was no visible sign of increased distressed borrowing.

Naik noted that revolving credit utilisation has essentially been steady since early 2014. “It’s a welcome hiatus from the rise of distressed borrowing which increased substantially from around 2009 to 2014. This trend once again attests to improved credit management in the industry and a more judicious use of revolving credit by households.”

For Naik, the lack of growth in new consumer defaults is encouraging, but he warned that macroeconomic conditions were still weak enough to warrant caution in assessing the health of the industry. Household budget conditions are a case in point as the measure of household cash flow used in the CCI report dipped again in Q4 2016, to its weakest level since 2009.

“A recent uptick in business cycle conditions may turn out to be wage supportive if the trend is sustained, but it is simply too early to tell, and there is not enough macroeconomic corroboration yet that household cash flow will improve meaningfully in the quarters ahead,” said Lamberti.

Creating some respite for consumers is the hiatus in interest rate hikes by the South African Reserve Bank (SARB). As a result, debt servicing costs have stabilised. The report explains that the Reserve Bank “has kept the benchmark repo rate steady since March 2016, nearly a full year now. Investors had expected the SARB to hike rates even further, but stabilising currency conditions and weak GDP growth have discouraged the SARB from hiking.” Unmet rate hike expectations have arguably aided consumer credit health.

“Banks remained cautious to lend in 2016 in the event that rates spiked, while household debt service costs stabilised as rates steadied,” explained Lamberti. ”This seems to be a far healthier situation than elsewhere in the world where household indebtedness has arguably risen too quickly.”

Released on a quarterly basis to the public, the TransUnion CCI measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt. These aspects are then combined into a single numeric score of consumer credit health. The TransUnion Credit Bureau compiled the index with technical support from market intelligence firm ETM Analytics.

TransUnion’s indicator combines actual consumer borrowing and repayment behaviour obtained from the extensive TransUnion credit database with key, publicly available macroeconomic variables impacting household finances. Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses.

Analysis suggests that the CCI may be a good leading indicator for business activity in certain economic sectors, particularly those more closely related to consumer spending. Find a full report on the quarterly TransUnion CCI at http://www.transunioninsights.co.za/CCI/.

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