South Africa’s Consumer Credit Market Remains Resilient, Despite High Interest Rate Environment

• Growth in credit demand and supply continued during Q4 2023, led by Gen Z and Millennials
• Delinquencies improved significantly across most products, apart from home loans
• Healthy growth observed for retail lending products, especially as performance improved

According to TransUnion’s (NYSE:TRU) Q4 2023 South Africa Industry Insights Report, the South African consumer credit landscape maintained its resilience during the last quarter of 2023 with a significant 11% overall growth in originations – a measure of new accounts opened – across all products.

The new credit activity growth was led mostly by Gen Z (born 1995 to 2010) and Millennial (born 1980 to 1994) consumers, who together accounted for 61% of new products originated during the quarter. Gen Z represents 15% of the country’s credit active population, having grown by 1.7% YoY as more consumers in that generation reached adult age and entered the credit market.

Table 1: YoY Growth in Originations by Product (Q4 2023 vs Q4 2022)

These insights from TransUnion’s consumer credit database are supported by findings in the Q4 2023 TransUnion Consumer Pulse Report, which highlighted that a high percentage of younger Gen Z and Millennial generations were optimistic about their finances for the subsequent 12 months, at 80% and 77% respectively.

The most significant year-over-year (YoY) growth in originations was in non-retail credit products: personal loan (across banking and non-banking sectors) originations increased by 13.4%, home loan originations increased by 17.5% YoY, and credit card originations increased by 4.3% YoY.

The increase in the personal loan originations was likely driven by consumers’ need for liquidity, as this product provides consumers with cash which can be used for any purpose, including everyday living expenses. Separately, the increase in home loan originations is noteworthy given that it occurred at what is perceived to be a peak in the interest rate cycle, which has potential implications on affordability. This growth in home loans may indicate that consumers are looking past the current environment in their goal of home ownership.

“This shift tells a rewarding story of financial inclusion, as more South Africans have access to the opportunity of investing in their own property. As younger consumers drive the growth in credit economy, it is a great opportunity for lenders to serve their expanding needs and build lifetime relationships,” said Lee Naik, CEO of TransUnion Africa.

Table 2: Summary of Q4 2023 Metrics for Major Consumer Credit Products  

¹ Account-level serious delinquency rate, measured as a percentage of accounts three or more months in arrears

² Includes both bank-issued, and non-bank issued personal loans 

Delinquencies improved across unsecured credit products, but deteriorated for secured loans

Despite continued macroeconomic uncertainty, consumer-level delinquencies (the percentage of credit-active consumers who are three or more months in arrears on any major lending product) improved YoY by 90 basis points (bps) from 38.5% to 37.6% in Q4 2023. When assessing individual products, delinquencies improved across all unsecured products. However, vehicle finance remained flat YoY and home loans were the only major credit product with deteriorating delinquencies (by 140 bps). This deterioration in home loan delinquencies could be attributed to payment shock – a sudden change in monthly payment obligations caused by external factors – caused by a rising interest rate environment and high inflation, which in turn has led to a higher cost of living and debt.

This is supported by the Q4 2023 South Africa Consumer Pulse Report, in which nearly half (47%) of South Africans said that they had to cut down on discretionary spending, such as dining out, travel and entertainment, due to inflation and other factors. They also planned to spend less on retail shopping and big purchases.

“Many South African homeowners initially faced payment shocks when interest rates escalated during 2022 and 2023, but the subsequent increase in the cost of living due to higher-than-expected inflation has put them under even more pressure,” said Naik. “While most consumers do indeed have the capacity to absorb the payment shock we have seen over the current high interest rate cycle, lenders can take this opportunity to evaluate risks and opportunities for existing and prospective customers’ behaviours across the entire credit wallet, and to offer adequate response strategies for at-risk consumers.

“Lenders should also focus on maintaining loyalty and share of wallet among the resilient consumers in their existing portfolios. Finally, educating consumers on how to best manage payment obligations can help gain lender preference for payments and loyalty during the shifting economic conditions,” he said.

Clothing credit continues its healthy growth trajectory with credit performance improving

In the fourth quarter of 2023, clothing account originations in South Africa maintained their upward trajectory, registering a 6.9% YoY increase in new accounts. This growth aligns with the broader expansion observed in the retail sector for clothing, textiles, and footwear — which rose 2.7%^[1] over the same period. During December 2023, 87.1% of new clothing accounts were opened by subprime consumers – those with the riskiest credit scores – while 12.9% were opened by consumers with better risk profiles. Retail credit accounts, particularly clothing accounts, are typically availed by consumers with riskier credit profiles, who generally have limited access to other credit products and rely on these products to purchase necessary household goods.

Account-level delinquencies across all three retail credit products improved, with retail revolving loans down by 220 bps and retail instalment loans down by 190 bps. These are notable shifts within the high risk and higher-delinquency products, indicating strong consumer performance across the risk spectrum and opportunities for lenders to continue expanding access to these products.

“Despite some economic challenges, the South African consumer credit landscape in the last quarter of 2023 showed positive signs of demand for credit and showed resiliency with majority of the consumers managing their credit better. This bodes well for the continued growth of the country’s credit market,” Naik concluded.

#ENDS

Note to editor: 

* Scores are based on TransUnion’s CreditVision® generic scoring methodology. Risk distribution key: subprime (0-625), near prime (626-655), prime (656-695), prime plus (696-720), super prime (721-999). 

** Unsecured lending products are those where a loan is not tied to an asset. Examples of unsecured lending products include credit cards and personal loans, among others.

^[1] SA retail sales up 2.7% in December - Retail Brief Africa