Consumer Credit Index Changes Course for First Time in Nearly Three Years

Lower fuel price, lower inflation offer some relief for consumers

The Consumer Credit Index (CCI), released today by TransUnion, a global leader in credit and information management, indicates that credit health improved slightly in Q4 of 2014 when compared to Q3. The latest CCI figures show an increase from a revised 49.9 in Q3 to a preliminary 50.1 in Q4. This marginal upward trend brings the CCI level above the breakeven level for the first time in almost three years, following 11 straight quarters of credit health deterioration. However, this very slight movement does not yet signal a positive turnaround as macroeconomic factors continue to prevent improvements to the financial situation of consumers.

“While the figure for Q4 of 2014 shows the CCI rising above 50 for the first time in several years, factors such as inflation, on-going strikes, a weak job market and an unstable Rand are mitigating any financial improvement,” said Geoff Miller, CEO of TransUnion. “As a result, we have seen only marginal movement in a shallow trajectory, indicating continued uncertainty in the consumer credit industry. Household cash flow remains under pressure, despite nominal improvement as a result of softer inflation pressure and fuel price relief. “In addition to this sideways trend, consumer borrowing and repayment behaviour is fairly mixed. The decline in the year-on-year rate of new consumer loan defaults halted in the fourth quarter, suggesting that the recent phase of improving repayment behaviour may be over. However, there is no sign yet of materially worsening repayment records.

In addition, TransUnion’s distressed borrowing indicator still shows some financial distress, but not enough to raise added concern, while debt service costs were effectively unchanged in Q4 due to stable interest rates and steady repo and prime lending rates.” While the TransUnion payment profile database shows a steady rate of new consumer loan defaults, the data remains indicative of the more prudent lending measures that have been put in place since 2013. The rate of new consumer arrears does not appear to be nearly as problematic as it was in 2012 and 2013. Repayment behaviour is improving fastest in the personal loans and furniture/appliance sectors, both benefitting from more prudent lending practices after arguably excessively loose standards prior to 2014.

On a negative note, however, vehicle impairments are up strongly by nearly 12% year on year, followed by non-clothing revolving store cards up nearly 8% year on year. This picture of positive indicators balanced by negatives has resulted in the previously highlighted shallow trajectory of CCI improvement. The distressed borrowing indicator, which shows the amount of revolving credit (credit cards and store cards) used as a percentage of a consumer’s credit limit, improved slightly in Q4 after stabilising in the third quarter. While the indicator still shows some financial distress, the level is not sufficient to raise additional concern. “Currently, households are using just over 50% of their credit limits, up from about 40% in 2007. Revolving credit utilisation rose at a rate of about 2.7% year on year in the fourth quarter, driven by both credit card and other revolving store cards. On a quarterly basis, however, utilisation remained steady, albeit with granular divergence – credit card utilisation during the quarter rose by 2.7% on an annualised basis, while other revolving store credit utilisation fell 4%,” says Miller.

Household cash flow improved slightly in the fourth quarter on softer inflation pressure. Nominal household income growth is estimated to have weakened during the period, but fuel price deflation during the quarter aided household budgets at the margin. While fuel price relief is important for consumers, it should be noted that the job market remains weak and that a weak currency not only offsets a large portion of the international oil price decline but also raises the prices of many imported products and equipment. “Overall the household cash flow indicator shows that budgets remain relatively fragile and highly vulnerable to currency, interest rate, and product price swings. It will nonetheless offer some encouragement that household cash flow did not fall on a year-on-year basis in the fourth quarter. Lower inflation in early 2015 may well help this more positive trend continue for a while longer, possibly at least for the first two quarters of 2015,” Miller said. 

The TransUnion report also observed the impact of falling oil prices. While the price of oil in international markets has fallen dramatically in recent months, the weakness of the rand exchange rate mitigates some of this benefit to South African households and firms. In addition, as only around 50% of the domestic petrol price is determined directly by the oil price, petrol prices have only fallen by around 20% since their April 2014 highs. While this is a welcome relief, the overall economic benefit is mitigated by the fact that other imported goods prices have risen substantially due to currency weakness, including much-needed equipment for South Africa’s infrastructure development backlog. While lower petrol and diesel prices by themselves could provide a form of tax relief to households and firms, acute electricity shortages mean that the impact and related cost of load shedding will partly offset this. At the same time, households and firms will also have to ramp up spending on fuel products to run power generators.

On balance therefore, lower fuel prices will lessen South Africa’s strong headwinds rather than stimulate the economy outright. Sectors affected by consumer finances and credit behaviour, including retail, could be at risk of low single digit sales growth in the coming months,” Miller concluded.

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 index is compiled by the TransUnion Credit Bureau 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, publically 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. It is based on a 100-point scale, where 50.0 is the break-even level between improvement and deterioration of credit health. Any number less than the 50.0 break-even point shows a decline in credit health. 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. A full report on the quarterly TransUnion CCI can be found on www.transunion.co.za.