Consumer Credit Appetite Remains Strong Amidst Rising Interest Rates

•  Origination volumes increased across most credit products, despite the high interest rate environment, and were most notable for home loans and clothing accounts
•   Credit card and vehicle loan delinquency rates improved, with consumers prioritising access to liquidity and private mobility  
• Lenders seem more cautious in their risk appetite for traditional unsecured products, offering smaller average loan amounts and limits on new revolving products

Stronger year-over-year (YoY) demand and lower delinquencies showed that South African credit card holders remained resilient during Q2 2023. In addition, balance growth trended upwards in response to the continued economic headwinds as consumers turned to credit for living expenses. These are some of the findings of the TransUnion (NYSE: TRU) Q2 2023 South Africa Industry Insights Report, which tracks consumer credit trends across key credit products.

The quarter saw yet another repo rate increase of 50 basis points by the South African Reserve Bank (SARB) in May, to 8.25%, with the prime lending rate rising to 11.75%, a 14-year high. However, June figures began to show signs of improvement in economic conditions, with the inflation rate falling to 5.4%, further supported by a drop of 0.3% to 32.6% in the unemployment rate, alleviating some financial strain in the market. Optimism for positive future income trends remained high, with the Q2 TransUnion Consumer Pulse Survey showing that 72% of South Africans expected an increase in household income in the next 12 months.

“The South African consumer credit market has grown compared to a year ago due to the significant number of new accounts originated, with lender appetite having widened over recent quarters,” said Weihan Sun, Director Financial Services Research and Consulting for TransUnion in South Africa. “Consumer credit scores remained relatively consistent compared to a year ago, which reflects the continued resilience of South Africa’s credit-active market.” 

South Africans took out more home loans, but vehicle financing has taken a back seat

Originations – a measure of both consumer demand and lender willingness to advance credit – for home loans grew in volume and value during Q2 2023, with originations increasing by 11.2% YoY despite the high interest rate environment. Average new loan amounts were 16.9% higher over the same period. Outstanding balances increased by 8.1% YoY as a result of higher value loans originated during this quarter, offset by some instances of consumers with the capacity to do so making additional payments towards their principal home loan amounts, in response to the continued interest rate hikes. Account-level balances saw more consumers fall into delinquency, which is unsurprising after the multiple interest rate hikes that have eroded consumers’ liquidity over the last few years.

Although the current high interest rate environment has put pressure on many existing homeowners, demand for homes remained resilient as consumers continued to take advantage of the ‘buyer’s market’ created by the lower-than-inflation home price growth rate of 3.9% YoY. In fact, TransUnion’s recent First-Time Homebuyer’s Study, presented at its August Financial Services Summit, revealed that 72% of home loan originations were made by first-time buyers over the past two years.

In contrast to home loans, vehicle finance (VAF) origination volumes decreased by 4.5% YoY; this aligns to further findings from the Q2 Consumer Pulse Study which showed that more than half (51%) of consumers surveyed had a lower appetite for vehicle purchases. Average new VAF amounts increased by 7.0% YoY, resulting in increases to both outstanding balances by 5.5%, and average balances by 5.8% YoY. Delinquencies decreased by 160 basis points (bps), reflecting South Africans’ dependence on private transport solutions as they maintained focus on paying their vehicle loans.

The lower demand for new vehicle loans was partially driven by significant increases in vehicle prices and high interest rates, making affordability a challenge in the new and used car markets. The TransUnion VPI for new and used vehicle pricing increased to 6.7% and 9.8% in Q2 2023, up from 3.9% and 8.3%, respectively, in Q2 2022. The largest increases for used vehicles was for three-year-old vehicles, which saw a 17% year-over-year (YoY) increase, with new mid-size SUVs and hatchbacks having seen a 7.4% increase.

“In previous TransUnion studies into payment hierarchies that identified which credit products consumers prioritise and pay first when they’re under pressure, we found that consumers place the highest priority on paying their secured lending obligations, and this trend continues to hold true,” Sun said.

Consumers displayed greater demand for unsecured credit products

Credit card origination volumes increased by 10.2% YoY in Q2 2023, with lender caution evident in lower limit extensions on new cards, which decreased by 1.8% over the same period. Growth in origination volumes was primarily driven by existing cardholders (65%) with the remaining 35% contributed by new-to-card (have never had a credit card on file) consumers.

In Q1 2023, new-to-card originations made up 35.5% of all new card issuances, a decline of 8.8 percentage points from Q1 2019 at 44.3%. The rest of the new cards were issued to existing cardholders. This trend underscores a significant opportunity for card issuers. By using advanced analytics and propensity models, they can pinpoint potential borrowers who are new to the product. This approach can pave the way for a more inclusive growth strategy in the card market.

Existing cardholders are leveraging their available credit more, with average balances per account increasing by 7.3% YoY. Account-level delinquencies decreased by 60 bps to 12.4%.

Lender caution was also evident in personal loan originations, where despite volumes having increased by 8% YoY, the average new loan amount was lower by 14.7% over the same period. Outstanding and average balances saw modest growth of 3.9% and 2.4% YoY, respectively. Account-level delinquencies increased by 30 bps to 35.0%.

“As the cost of living continues to increase, growth in demand and growing balances could signify that many consumers are reliant on credit to help pay for everyday living expenses. Our recent research shows that a substantial majority of repeat and new personal loan borrowers tend to choose lenders with whom they have existing relationships,” Sun said. “Lenders should leverage this loyalty dynamic to expand existing relationships and support their customers in a responsible manner, using data insights to tailor loans and products as they navigate a continuously changing economic environment.”

Clothing account growth mirrored the growth in retail sales for textiles, clothing and footwear during Q2 2023, with origination volumes increasing by 17.8%. Outstanding balances grew 8.6% due to a combination of growth in new business and existing clothing account holders continuing to leverage their facilities.

Many South African consumers begin their credit journey with a clothing account. In fact, 79% of these account openings in Q1 2023 were by individuals new to the product, marking their first foray into the credit market. Notably, 66% of those with clothing accounts only have one such account, presenting an opportunity for these consumers to enhance their credit experience by exploring additional accounts or expanding into new products.

“The prevalence of consumers who hold a single clothing account suggests that there’s significant potential for them to diversify and expand their credit portfolios. High-performing top-of-wallet clothing account holders may be receptive to lenders that offer them opportunities to migrate to retail revolving products, promoting upward financial mobility,” Sun added.

“Our recent study of South African consumers’ credit graduation journeys showed that proactive engagement from lenders that includes a focus on credit education encourages consumers to build a more complex wallet by adding new credit types that support their lifestyle needs and ambitions,” he said. “The more that consumers have the opportunity to access and leverage credit products to facilitate upward financial mobility, the greater the level of financial inclusion, and the better the potential for economic growth.”

Table 1: Summary of Q2 2023 Metrics for Major Consumer Credit Products

¹ Originations for Q2 2023 compared to Q2 2022 

² Account-level serious delinquency rate, measured as a percentage of accounts three more months in arrears

³ Inclusive of both bank issued, and non-bank issued personal loans 

Note to editor: 

^*Scores are based on TransUnion’s CreditVision generic scoring methodology. Risk distribution key: subprime (0-625), near prime (626-655), prime (656-695), prime plus (696-720), super prime (721-999).