South Africa Consumer Credit Market Remains Subdued as Pandemic Continues to Impact Household Finances
- Lenders remain cautious and target lower risk borrowers
- Two-speed credit market emerging, with a marked difference in demand/supply characteristics of secured and unsecured lending products
- Delinquencies increase overall but show a mixed picture, reflecting consumer payment preferences
TransUnion (NYSE: TRU) today released the findings of its Q4 2020 South Africa Industry Insights Report. This latest analysis covers a period when unemployment in South Africa hit a new record* and GDP fell**, and these macroeconomic drivers are reflected in the key consumer credit market indicators.
During the latest period, enquiries—a measure of consumer demand—and originations—a function of both supply and demand—both fell across all major consumer credit categories. At the same time, delinquencies continued to climb for most products with the exception of credit cards, which saw a marginal improvement. The increase in missed payments also contributed, in part, to an increase in outstanding balances across most product categories.
Where lenders are advancing new credit card accounts, analysis suggests they are focused on less risky consumers (consumers with a higher credit score). Issuers are being ultra-cautious, especially when granting new credit cards. Compared to the same period in 2019, in the third quarter of 2020 the portion of new credit card originations to super prime consumers*** was up by 6 percentage points, from 57% to 63%, and was significantly up from the 48% seen in 2018. As a result of a greater focus on lower risk consumers for new credit card openings, the average credit limit for cards was up 14% year-on-year (YoY).
Carmen Williams, director of research and consulting for TransUnion South Africa, said: “Challenging economic conditions mean household finances remain stretched, and both consumers and lenders continue to take a cautious approach to credit as a result. Like many other markets around the world, consumers are having to make difficult decisions about which debts to prioritise. Although annual trends indicate a challenging credit market, when we measured the recent quarters, we see a road to recovery. However, there is still significant uncertainty around the vaccine rollout, general easing of restrictions, and the rebound in macroeconomic conditions, and as such it is too soon to expect a sustained recovery in key credit metrics.”
Originations continued to fall, but show signs of a rebound
Originations were down YoY in Q3 2020 (latest available quarter due to reporting lag) across all major credit products. However, compared to the YoY declines seen in prior quarters of 2020, there were improvements in quarterly movements across all of the major consumer credit categories, with the exception of credit cards.
New vehicle finance loans saw the smallest YoY decline of just -6.0% in Q3 2020. Compared to the YoY fall of -53.7% in Q2 2020, which followed the economic impact of the initial wave of COVID-19, it was a significant improvement in annual trends. Similarly, home loans, a major secured lending category, also recorded a comparatively lower fall of -14.2% YoY in the most recent quarter (-62.4% YoY in the previous quarter). These are positive indicators of a rebound in demand and supply in the credit market. While there is a tremendous level of recovery still needed to fully operate at pre-pandemic levels, the steady trends in new auto and mortgage loans observed in Q3 2020 are promising.
On the contrary, credit cards continued to see a significant decline in originations, down almost two-thirds (-63.2%) YoY in Q3 2020 (YoY Q2 2020 -23.1%). Bank (-39.6%) and non-bank (-26.0%) personal loan originations, although still down significantly YoY, declined at a lower rate than the previous quarter (YoY Q2 2020 bank personal loans -60.9%, non-bank personal loans -51.1%).
Williams observed: “During the latest quarter, we witnessed an emerging divide between secured and unsecured lending categories. Although annual origination growth was negative across all consumer credit categories, the rate of decline was far less marked for secured lending products. This reflects the longer-term nature and utility of the purchases that these loans finance, and the fact that consumers continue to need to purchase homes and vehicles, to provide a safe place to live and in many cases a mode of transport away from the perceived risk of public transport in these unprecedented times.
“The difference between secured and unsecured credit metrics is also an indication of the vast income disparities across the country and that fact that those who have been financially unaffected by the pandemic still have significant purchasing power at their disposal to buy large-ticket items. Equally, on the supply side, these categories have lower underlying delinquency rates and provide lenders collateral against default, and are thus perceived to be less risky compared to their unsecured alternatives. In addition, typically secured products tend to be granted to lower risk consumers who are less likely to default and more able to cope with financial shocks. These dynamics appear to be drivers of the faster recovery seen in secured lending products,” continued Williams.
Balances continued to creep up as delinquencies rise
Outstanding balances, which can be impacted by both increased consumer reliance on credit and the pace of consumer repayment, increased across most product categories. Vehicle finance balances (up 10.2% YoY Q4 2020) increased as price inflation rose in the most recent quarter, driving higher amounts for new loans originated. The latest TransUnion South Africa Vehicle Pricing Index (VPI) showed a 9% fall in agreement volumes, but a 9.6% increase in the VPI for new vehicles.
At the same time, home loan balance increases (up 6.1% YoY Q4 2020) point to consumers investing in their homes due to work-from-home pandemic circumstances as well as improving affordability because of all-time low interest rates which has resulted in higher amounts financed as well as increased originations. Total outstanding balances for home loans were also boosted by a 31.6% YoY increase in the average new home loan granted.
It should also be noted that some of the growth in balances across most categories was a result of accrued interest that accumulated on unpaid balances as a result of increasing delinquency rates. Credit card was the only consumer credit product category not to record an increase in balances (broadly stable at -0.6% YoY) whilst also showing an improvement in delinquencies (down by 10 basis points (bps) YoY in Q4 2020). Vehicle finance loans delinquency rates also remained broadly unchanged, increasing by just 20 basis points over the same period. The relatively stable performance of these two categories compared to others reflects the relative payment priorities of South African consumers as they focused on preserving the utility of credit cards (especially for online purchases) and the convenience and perceived safety of private vehicles during the pandemic.
Williams concludes: “The payment priorities of consumers are becoming even more defined as we navigate through the current crisis. Lenders need to be constantly monitoring and adjusting their underwriting criteria and portfolio risk management strategies in order to accommodate increasingly challenging household finances. Trended and alternative data continue to be lenders’ best mechanism for understanding shifts in consumers’ financial behaviours. By applying these learnings, they can better anticipate likely scenarios and often intervene to help consumers before their situation is critical. At the same time, lenders can leverage enhanced data and insights from the recent crisis to lend to resilient consumers and ensure they have a healthy, balanced approach to enable portfolio growth.”
More information about the TransUnion South Africa Industry Insights Report, including details about a variety of credit products, can be found here. It includes more information about balance and delinquency trends, including for credit cards, personal loans, vehicle finance and mortgage loans.
* Source: Statistic South Africa 4th Quarter 2020 ‘Quarterly Labour Force Survey (QLFS)’ which showed an increase in the unemployment rate to 32.5% (up from 30.8% in Q3).
** Source: Stats SA – 09 March 2021: Annual real GDP growth decreased by 7.0% in 2020
*** TransUnion South Africa scorecard risk tiers: subprime 0–615; near prime 616–729; prime 730–821; prime plus 822–917; super prime 918–999.
About the South Africa Industry Insights Report
TransUnion’s South Africa Industry Insights Report is an in-depth, full population-based report that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across virtually every active credit file on record. Each file contains hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyse market dynamics over an entire business cycle, helping to understand consumer behaviour over time. Businesses can access more details about and subscribe to the Industry Insights Report. The South Africa Industry Insights Report looks at major consumer lending categories: credit cards, personal loans, home loans, vehicle and asset finance (VAF), and clothing. The report primarily focuses on three dimensions across these categories: originations (new accounts opened), balances (outstanding total and average lending balances) and delinquencies (accounts in payment arears).