Mixed Road to Recovery for South Africa Consumer Credit Market
- New unsecured credit demand and supply showed positive signs of recovery
- Secured lending experienced significant balance reductions as consumers took a cautious approach to larger financial commitments
- Lenders increased risk appetite in search of portfolio growth
TransUnion (NYSE: TRU) today released the findings of its Q1 2022 South Africa Industry Insights Report. Our analysis shows that with rising stagflation risks on the horizon, characterised by high inflation combined with high unemployment* and stagnant demand, the consumer credit industry is facing new challenges to return back to pre-pandemic norms of activity.
TransUnion’s latest report showed there were notable increases in unsecured lending originations—which measure new accounts opened and is a function of both consumer demand and lender willingness to advance credit—indicating a renewed demand for credit by consumers. However, outstanding credit balances declined across all major consumer lending categories year-on-year (YoY) in Q1 2022, with the exception of non-bank unsecured personal loans, which recorded a modest increase of 0.9%. Outstanding balances are often a reflection of consumer sentiment and related willingness to spend, and these findings were further supported by the results of TransUnion’s Q1 Consumer Pulse Study** during the same period. This study showed that almost a third of consumers (32%) experienced a decrease in household income. Looking forward to the next three months, more than half (53%) said they plan to decrease discretionary spending.
In the secured lending categories (home and vehicle finance loans) both originations and balances were down. Here the drivers for the declines in outstanding balances were different from the declines in unsecured lending balances. Whereas unsecured lending outstanding balances are often a reflection of current purchasing activity, for secured loans, which typically represent significant repayment amounts given the underlying assets they relate to (homes and cars), they are often reflective of a consumer’s long-term financial planning. Insights suggest consumers have looked to reduce their financial commitments against a backdrop of rising interest rates. For home loans there has been an influx of originations for lower value homes (and thus loans), with the new average loan amount down -5.8% YoY in Q4 2021 (latest quarter for originations due to reporting lag). In the auto industry there is a trend of consumers settling vehicle finance loans earlier by selling ‘extra’ vehicles due to rising prices of quality second hand cars, with the Q1 2022 TransUnion VPI*** showing used vehicle price inflation increasing from 3.7% to 7.9%.
The recent decrease in secured lending balances was also reflected in the sentiment of TransUnion’s Consumer Pulse Study over the same period, which revealed that almost one in three (32%) consumers said they intended to pay down current debt faster.
Lee Naik, CEO of TransUnion Africa, said: “We’re still seeing a mixed picture of recovery. The South African consumer credit market was still trending back to pre-pandemic levels of activity when the shock of inflationary pressures associated with the conflict in Eastern Europe hit. Although some sectors of our economy, such as mining, have benefited from increased demand, overall consumer sentiment and household disposable incomes have been negatively impacted. Based on our latest insights, it’s clear that the South African consumer credit market recovery will be elongated and remains volatile.”
Recovering unsecured credit demand and supply still below pre-pandemic levels
Despite a recovery in originations growth in a number of key categories compared to depressed 2020 levels, overall, the number of consumers participating in the consumer credit market has remained relatively flat – up just 0.3% over the last year. Whilst many have opened new accounts, others have taken a prudent approach and are not leveraging credit at previous levels.
A closer look at origination trends in the most recent quarter (Q4 2021 due to reporting lag) reveals the differing fortunes of many consumers, driven by macroeconomic pressures and a change in lender appetite for risk.
It should be noted that although originations were up YoY for the majority of categories, the volumes lagged pre-pandemic observations for all major consumer lending categories. However, there were early signs of growth emerging following a recovering Q4 2021. A look at credit enquiries by consumers in Q1 2022 shows levels continued to trend upwards, and based on the corresponding indexed monthly average of 2019 (i.e. compared to pre-pandemic times) have reached 88% of historic volumes.
Figure 1: Credit Enquiry Volumes (All Products) Over the Last Two Years
Retail (revolving) and other unsecured originations (including credit cards and unsecured personal loans) experienced increased interest from consumers looking to leverage credit for additional liquidity to offset the price increases on goods resulting from high inflationary pressure. At the same time, secured lending products (home and vehicle finance loans) experienced the reverse and recorded declines in originations and outstanding balances. Here, smaller home loan values and supply shortages in the auto industry have driven these trends. Anecdotal lender feedback also suggests some consumers have potentially looked to reduce their monthly repayment commitments by increasing overpayments on these larger financial commitments against a backdrop of the three interest rate (benchmark repo rate) rises seen between November 2021 and March 2022.
Instalment loans were the only unsecured category to record a YoY fall in originations in Q4 2021. However, although origination volumes remained below pre-pandemic levels (down 26.6% compared to Q4 2019), Q4 2021 was still the highest volume of originations recorded in the last four quarters.
For the unsecured lending categories that recorded YoY originations growth, this activity was focused on certain risk segments. Insights show that growth has been centred on below prime consumers across multiple categories as lenders have had to revise their risk thresholds in order to grow their portfolios. For credit cards, 68% of total origination volumes during December 2021 were in the subprime tier**** – up 4.5% YoY. This number was of a similar magnitude for bank personal loans (63% – up 9.4%) and non-bank personal loans (68% – broadly static YoY). A higher overall level for non-bank personal loans (compared to bank personal loans) is to be expected as this category has historically catered for the needs of higher-risk consumers.
Naik continued: “We are seeing growth in new business volumes – particularly for credit card and personal loan products. During times of uncertainty, these products are increasingly in demand as they can provide consumers with much needed liquidity to finance any increase in the cost for everyday essentials. Lenders need to be particularly aware of this trend and use advanced analytical techniques to help determine which consumers are likely to be resilient and be able to continue to repay. Only by using deep insights can they continue to grow their portfolios whilst effectively managing risk. Recovering to pre-pandemic levels of activity continues to be a challenge against a backdrop of changing macroeconomic conditions.”
Delinquency changes driven by multiple factors
Whilst overall changes in consumer delinquencies showed a mixed picture across categories, some credit products did experience higher deterioration in the recent quarter compared to others, with non-bank personal loans showing the largest change – up 290 basis points (bps) YoY in Q1 2022. Lender feedback also suggests that at least some of the positive change seen in clothing accounts (down 290 bps), retail revolving (down 50 bps) and retail instalment loans (down 30 bps) wasn’t necessarily because of improved household finances, but rather because of concerted collection efforts by lenders in this space.
Naik concluded: “With continued global macroeconomic headwinds impacting South Africa, it is important that lenders and consumers remain vigilant. Rising inflation and interest rates caused by the impact of the Ukrainian conflict and global supply shocks have added additional pressure to an already stretched consumer credit market that was still recovering from the impacts of the COVID-19 pandemic and floods earlier in the year. Although we expect to see continued fluctuations in performance across product categories and consumer groups, lenders that continuously monitor their portfolio and adjust their lending strategies accordingly will be the ones that prosper and be best placed to serve consumer needs.”
*Statistics South Africa shows unemployment still at elevated levels despite a fall in latest quarter (headline unemployment rate in Q1 2022 of 34.5%). In March 2022 consumer price inflation was also high, up at 5.9%, which is within the upper band of the target range of 3-6% set by the South African Reserve Bank.
**Q1 2022 wave of TransUnion South Africa Consumer Pulse Study – data collected 8-17 Feb 2022 in an online survey of 1,050 adults.
****TransUnion South Africa scorecard risk tiers: subprime 0–615; near prime 616–729; prime 730–821; prime plus 822–917; super prime 918–999. Below prime < 730