South African Consumer Credit Market Emerging for Growth as Credit Health Stabilises

  • Delinquencies stabilise across all major consumer credit products, with the exception of unsecured personal loans
  • Outstanding balances continue to increase across all major consumer credit products
  • Almost a third of South African consumers plan to apply for new credit or refinance in the next 12 months, with personal loans and credit cards topping the list

TransUnion (NYSE: TRU) today released the findings of its Q2 2021 South Africa Industry Insights Report. This latest analysis covers a period where unemployment was still rising* but prior to July’s civil unrest and peak in the third wave of COVID-19 cases. The report shows that a number of the trends, seen immediately after the outbreak of COVID-19 more than a year ago, have continued to advance with some notable exceptions, especially when looking at delinquencies.

Although the overall number of consumers participating in the credit market has not materially grown compared to pre-pandemic levels (falling year-on-year (YoY) in three of the last four quarters and remaining broadly flat YoY in Q2 2021, at 0.8%), the total amount borrowed as measured by outstanding balances has continued to increase for all major consumer credit products. However, as seen in previous quarters, this is often for very different reasons depending on the product. Home loans recorded a 15.3% increase in outstanding balances YoY in Q2 2021. This was primarily driven by consumers who have maintained or improved their income and credit access and hence have been able to finance house purchases, with rising home prices contributing to higher new home loan balances. In contrast, outstanding balances for credit cards (up 10.6% YoY) have been driven by consumers’ need to balance household budgets, maintain liquidity, and finance subsistence purchases, especially where incomes have been negatively impacted.

In recent quarters, a general rise in delinquencies across most major consumer lending categories had also contributed to growth in outstanding balances, as missed payments accrued and principal amounts remained outstanding. However, in the latest quarter, with the exception of personal loans, delinquencies stabilised and decreased. Credit card balance-level delinquencies were down 50 basis points (bps) from their peak in Q2 2020, and in Q2 2021 stood at 12.3%, and were at the same level as Q2 2019.

Carmen Williams, director of research and consulting for TransUnion South Africa, said: “Consumer credit market conditions remain volatile and are an evolving picture. Any potential impact from the recent civil unrest and spike in COVID-19 cases won’t be seen until Q3 data are published, but in Q2 there were some noticeable improvements – especially in delinquencies. Whether this improvement can be sustained is yet to be seen and warrants close monitoring in the coming months.”

Understanding the delinquency picture

Delinquency rates during the pandemic have been influenced by a number of important factors. Deferrals, payment holidays and other accommodations by lenders have helped borrowers in need. As well, a decline in new borrowing in the past year since the onset of the pandemic has shifted the overall ratio of good versus bad debt within lenders’ portfolios. While a general increase in overall debt has been apparent, the total number of new loans and accounts has decreased as a result of the decline in originations. This means that while the numerator in the delinquency equation (i.e., existing accounts with delinquencies) is rising, the denominator is not growing at the same pace. Add in other drivers for which accounts financially distressed consumers choose to repay—e.g., prioritising product utility such as credit card functionality for online payments or car loan payments to ensure you can avoid public transport**—and it’s clear that there are often multiple drivers for changes in delinquency levels.

Typically, delinquencies have often followed wider macroeconomic trends such as GDP growth and changes in unemployment. In the latest Q2 2021 figures, although there were improvements in most of the major consumer credit categories, unsecured personal loans recorded a significant increase in balance-level delinquencies – bank personal loans were up 260 bps YoY and non-bank personal loans 700 bps. A higher delinquency rate for non-bank personal loan providers is to be expected as they have historically targeted higher risk consumers who are more likely to default and will be less resilient to sustained financial hardships, such as those caused by the pandemic.

Williams observed: “Finding and funding resilient consumers becomes even more crucial during challenging economic periods when looking to maintain a healthy portfolio delinquency ratio. The key is to fuel new credit growth by finding good consumers, who are likely to perform within lenders’ target thresholds and in return can help maintain a healthy bad-to-good ratio for longer-term lending growth.”

When economic shocks stress the consumer credit ecosystem adversely, lenders have difficulty identifying resilient consumers. Another TransUnion study in South Africa, being revealed at its 2021 Financial Services Virtual Summit, will highlight how insights from enhanced trended data—such as consumers’ overall utilisation of credit, payment behaviors across all trades, and overall debt-level changes over time—can signal resiliency or vulnerability. The study illustrates how lenders can leverage these insights from enhanced trended data to further complement a credit score and create segmentation strategies to find and fund good consumers.

Credit demand in a post-pandemic world

Throughout the pandemic, TransUnion’s data have shown reduced appetite from both consumers (demand) and lenders (supply) for new account openings (as measured by originations), and this continued in Q2 2021. However, with the world economy slowly starting to reopen and vaccination programs gaining pace, the future shape of the consumer credit market will depend on a number of important variables.

Historically, macroeconomic conditions have been an important factor on the pace of credit growth. Equally, consumer sentiment also has a significant bearing. Although the latest IIR data is for Q2 2021, TransUnion also conducted its regular Consumer Pulse Study in August 2021***, which was post the civil unrest and the initial peak of wave three COVID-19 infections seen in early July. This study showed a number of important trends relevant to potential future demand and direction of the market in South Africa. The percentage of South African consumers optimistic about the future dropped to 69% in August, down from 75% in June and 76% in March, with a similar drop in the percentage saying they were confident that their household finances will fully recover in the next 12 months (47% in August, down from 52% in June). At the same time, the number anticipating they would apply for new credit or refinance existing credit within the next year was relatively unchanged, at just under a third (31%). Personal loans (43%) and new credit card (35%) applications continued to be top of the list.

Williams concludes: “There continues to be significant turbulence in the South African consumer credit market, with a number of potential new trends emerging, especially in the delinquencies space. Wider economic and political news continues to impact consumer sentiment and outlook, and these will shape the recovery as it continues to emerge. Lenders need to constantly monitor for shifts in consumer behaviors and adapt to the changing demand and future preferences of consumers if they are to succeed. There is no doubt the road to recovery will be a bumpy one, but by being informed, lenders will have the best possible chance to compete and succeed.”

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.

*The latest Statistics South Africa figures show record unemployment of 34.4% in Q2 2021 (latest available data).

**For further information on repayment prioritization of credit products see our recent Global Payment Hierarchy study.

***Latest wave of TransUnion South Africa Consumer Pulse Study – data collected 10-16 August 2021 in an online survey of 1,100 adults.