No Room for Complacency on South African Consumer Credit Health

The TransUnion (NYSE: TRU) Consumer Credit Index (CCI) declined slightly in Q3 2017, though it continues to reflect marginally improving consumer credit health. The latest report comes in the wake of a period of difficult economic conditions in South Africa, including government debt downgrades earlier in the year, slow GDP growth and exchange rate volatility.

The CCI dropped slightly to 53.9 in Q3 from 54.1 in Q2, but because it remained above 50.0, this is an indication of some improvement in consumer credit health. An index level of 50 is considered the ‘break-even’ point, with lower scores reflecting worsening credit health, which is characterised by an increase of new accounts in default (three months in arrears), as well as distressed borrowing (rising utilisation of store cards and bank-issued credit cards).

“Despite some encouraging trends in the industry in the past few quarters, we have been cautioning for some time now that low economic growth, high unemployment, low wage growth and uncertainty in a volatile global economy all pose significant pressure and risk for consumers,” said Lee Naik, CEO of TransUnion South Africa. “The increases in the CCI since 2016 should not be seen as justification for complacency, but rather the opposite: doing more to restore lenders and borrowers to a healthier, more robust financial position.”

According to the Q3 report, the gradual rise in the CCI since Q1 2016 reflects some of the benefits of cautious lending, deleveraging, a stronger currency, and a global growth upswing since then. However, the index is still not yet reflective of a broad-based, substantial improvement in credit health.

The CCI measures borrowing and repayment activity across 20 million+ individual borrowers and nearly 53 million credit accounts. The index also incorporates key macroeconomic data compiled in partnership with ETM Analytics, a macroeconomic advisory firm.

In compiling insights into distressed borrowing, TransUnion measures over R140 billion worth of revolving credit card debt, assessing how much of their available credit limits consumers are utilising. “We regard rising utilisation of revolving credit as a good indicator of more household financial distress. What’s encouraging is that utilisation has fallen slightly over the past year,” said Naik. The TransUnion South Africa CEO added that data showed the rate of new defaults had been slowing, but cautioned that with millions of accounts deeply in arrears, credit providers faced an important challenge in nursing their loan books back to better health. “The number of accounts more than three months in arrears shows millions of South Africans are in highly distressed credit situations. Typically, wealthier households have far more manageable debt loads. Aggregate data can obscure important differences between consumer segments which show up in some of our more granular data.”

The Q3 report also looked briefly at the problem of rising government borrowing and debt levels and found that a high deficit will likely keep the currency vulnerable and the Reserve Bank more reluctant to cut interest rates. “Volatile macroeconomic conditions keep companies cautious to invest and lend, which in turn raises job and wage insecurity,” said Naik. “We think it is prudent to assume that the economic environment is going to remain challenging, which underscores the importance of well-managed credit policies.”

About the CCI

The CCI takes into account rates of early defaults, distressed borrowing, household income and inflation, and debt repayment costs to gauge the degree of household financial duress.