Overall Consumer Debt Balances Continue to Increase as Demand for Credit Remains High

Lenders show caution against backdrop of challenging economic conditions

The newly released TransUnion (NYSE: TRU) Q1 2019 South Africa Industry Insights Report reveals that consumer demand for credit remains high, with outstanding balances increasing across all major credit categories when compared to the same time a year ago. This increase in borrowing levels is likely driven in part by the current challenging economic conditions and the need for consumers to use credit as a means to help finance day-to-day expenses as well as larger ticket purchases.

Unsecured credit products, including credit cards and personal loans, which are typically used to fund household expenses and smaller ticket purchases, saw significant YoY growth in outstanding balances in Q1 2019. Credit card balances grew 6.6% YoY, while bank personal loans and non-bank personal loans saw 7.2% and 11.4% YoY increases, respectively. Credit cards and non-bank personal loans saw a large increase in the number of open accounts, up 8.4% YoY for credit cards and 15.8% for non-bank personal loans. Meanwhile, bank personal loans saw a jump in originations growth in Q1 2019, up 11.3% compared to the prior year quarter. These growth trends indicate that consumers are actively seeking new credit as a means to supplement their incomes and meet their obligations.

At the same time, growth for secured credit products to finance home and vehicle purchases saw much more muted growth, with home loan balances increasing 3.1% YoY in Q1 2019 and vehicle finance loan balances growing just 0.2%. New loan originations for these products were weaker as well, with Q1 2019 home loan originations essentially flat YoY at 0.5% and vehicle finance originations dropping 2.5%. These softer growth numbers for products may be an indication that consumers are deferring large-ticket purchases, like homes and new vehicles, in the face of economic uncertainty.

“Consumers and lenders alike are wrestling with the continued volatile economic conditions,” said Carmen Williams, director of research and consulting for TransUnion South Africa. “In the first quarter of the year, we observed a significant increase in the level of borrowing on unsecured lending products. We expect that, in part, this increase is due to consumers using credit to help make ends meet. In these difficult economic times, credit can be a critical lifeline for consumers who may be struggling with their expenses. For lenders, it is important that they continue to make credit available to consumers who may need it, but equally important that they are making prudent lending decisions and manage the risks of their own credit portfolios. This balance is both more difficult and more necessary in light of the current challenges facing the South African economy.”


Personal loans encapsulate changing dynamics of wider lending market


Total outstanding balances increased across both bank and non-bank personal loans over the past year. However, the differences in the YoY changes in originations and account growth show the divergence in consumer focus and lender strategies for these two product categories. Non-bank lenders tend to advance smaller, shorter-term loans, generally aimed at higher-risk consumers with lower credit scores. Banks generally focus their personal loan business on lower-risk customers, many of whom may have broader relationships across other products with the bank.

Bank lenders experienced a significant increase in new accounts originated in the first quarter, up 11.3% YoY. This jump may be attributed to consumers seeking additional credit in the wake of the recent economic downturn. At the same time, non-bank personal loans saw a large drop in originations in the first quarter, down 16.1% YoY. This downturn may be a result of lender conservatism in the most recent quarter in response to rapidly rising delinquency rates. The serious delinquency rate (percentage of account 3 or more months in arrears) for non-bank personal loans jumped 610 basis points (bps) over the past year to 24.4% in Q1 2019. Given the higher-risk borrowers that non-bank lenders typically target, this recent spike in delinquencies may be giving lenders pause to extending new credit as economic uncertainty persists.

Delinquencies reflect challenging economic conditions

Delinquencies have risen for most credit products over the past year, as volatile economic conditions and continued weak household income growth appear to be putting a strain on household finances. In addition to the increase for non-bank personal loans noted above, the serious delinquency rate for bank personal loans increased by 310bps over the past year to 24.8% in Q1 2019.

Of particular concern is the continued increase in delinquencies for secured products, including home loans and vehicle finance. This is the third consecutive quarter that home loan delinquencies have increased, up 60bps YoY to 4.0% in Q1 2019, while vehicle finance delinquency rates also continue to climb, up 70bps to 5.2%. Delinquency rates for secured products tend to be far lower than those of unsecured products like personal loans and credit cards, particularly given that lenders focus much of their originations on lower-risk consumers. But the steady rise in delinquencies for secured products over the past year indicates that even consumers in the lower-risk credit tiers are not immune to the current economic challenges.

The exception to the trend of rising delinquencies is credit cards, which saw serious nonpayment rates actually improve YoY in Q1 2019, down 130bps to 12.6%. In light of economic uncertainty, consumers may be protecting their credit cards to a greater extent in order to maintain access to this most liquid form of credit for future use. TransUnion South Africa recently published a study looking at the payment hierarchy for consumers with multiple products in their wallet, to understand which products they are likely to protect, and which they are more likely to stop paying, in the event of economic distress. The study found that consumers are more likely to prioritize their credit cards ahead of other unsecured products, including non-bank personal loans and retail accounts. This relative prioritization of credit cards speaks to future utility of credit cards for consumers experiencing financial difficulties and their desire to preserve access to their cards.

Williams commented: “With inflation still well above average wage growth, real household incomes continue to fall. This is the second consecutive quarter we have observed this trend for delinquencies – i.e. rising across all categories except for credit cards. It’s fair to say the magnitude of the recent drop in GDP—negative 3.2% for Q1 2019—caught many by surprise, but the weakness we have seen in other economic indicators, including unemployment and wage growth, have been putting pressure on consumers’ personal finances for some time. In light of this, we have seen consumers increasingly using credit, possibly to finance day-to-day living expenses, and are prioritising the payment of credit cards – a product they perceive to be of greater future utility.”

An uncertain road ahead

Although South Africa emerged from its technical recession in the latter half of 2018, the most recent GDP figures could cause further concern and may prompt lenders to reflect and adjust their credit portfolio strategies as a result.

“Lenders will continue to observe key economic performance measures like the rate of unemployment closely. Many had already started to change their underwriting criteria and rebalance their portfolios in anticipation of continued uncertainty. It is important for the market to remain calm and not to have an adverse reaction to the continued economic headwinds. Now, more than ever, financial institutions need to consider a wider range of data when making underwriting decisions. Traditionally, many have focused on a consumer’s financial standing at a single point in time rather than considering if it has been deteriorating or improving over the longer term. By using more advanced data now available, such as trended credit data, lenders have historical views of consumer behavior and deeper insights into credit capacity and ability to pay. These insights can allow lenders to better manage the risk of their current portfolios, and to identify and safely lend to more consumers without increasing their risk levels. Using these advanced tools and insights, lenders can play a critical role in supporting the economy by providing needed access to credit, and doing so in a way that protects their own balance sheets and financial health,” concluded Williams.