TransUnion Consumer Credit Index Shows Need For Ongoing Industry Vigilance

The TransUnion (NYSE: TRU) Consumer Credit Index (CCI) rose again in Q1 2018, implying a notable improvement in consumer credit in the context of a difficult economic environment.

The latest report covers the first quarter of 2018, a period of significant political changes in South Africa after the appointment in February of a new president and new personnel in critical economic and regulatory ministries. The improvement comes amid a surge in consumer confidence and more modest but still notable improvements in business confidence surveys in the first quarter.

The CCI increased by one point to 56 in Q1 2018. Considering that on the zero to 100 scale an index level of 50 is considered the ‘break-even’ point and scores above 50 reflecting improving credit health. The latest CCI index level shows that households are experiencing improvement in their financial conditions even though they are on average still quite heavily indebted.

Stephen de Blanche, regional vice president, financial services for TransUnion Africa, explained that although a rising CCI might seem counterintuitive amid a narrative of economic weakness, the index is in fact corroborated by numerous other data sources. “Is this supported by other consumer-relevant data? Broadly, yes. Retail and wholesale volumes improved in Q1 2018 according to Stats SA, as did business and consumer confidence according to BER and SACCI surveys, while Stats SA's quarterly jobs report showed fairly robust private sector and government hiring in Q1.”

One of the most notable trends in the Q1 report was the ongoing and fairly sharp decline in the proportion of 3-month arrear accounts. According to TransUnion, the number of accounts in early default (3-months in arrears) fell from around 890,000 to 816,000 in the year to March 2018, a drop of 8.3%. While the default picture appears encouraging, the report did note that distressed borrowing ticked up in Q1 2018. De Blanche explained that, despite this movement, distressed borrowing was still relatively benign and below 2015/16 highs, which meant households on average did not face immediate financial or budgetary risks. But he added a word of caution. “It is proving to be difficult for households to pay down credit card and store card debt, and this could be a sign that while households might be feeling some relief due to the improvement in the CCI, they don’t seem financially strong enough to meaningfully reduce debt loads.”

Another noteworthy insight from the report was the jump in household cash flow growth. Household cash flow is an indirectly measured index that takes into account household income, liquidity, and non-discretionary inflation, which is inflation in high-necessity goods like basic food, transport, accommodation and schooling. De Blanche noted that softer inflation in Q1, combined with reasonably good employment and wage growth, helped household cash flow improve. But again, there were words of caution. “Petrol prices have risen sharply in recent months and the trend of rand strength is less certain, making imports potentially more expensive. Household cash flow only turned marginally positive in Q1, so it is still vulnerable to macroeconomic pressures and vigilance should remain the order of the day.”

The Q1 2018 CCI report comes in the wake of a recent decision by the High Court that it is no longer necessary to collect any particular form of documentation proving income when applying for credit. While this judgement may be welcome for some unbanked yet credit-worthy people who were perhaps unfairly frustrated in their efforts to obtain credit, TransUnion thinks it also contains risks pertaining to the potential abuse of the regulation or potential lulling of credit providers into complacency or a lowering of standards. De Blanche believes that while retailers might see this as a victory enabling them to offer more credit, it actually meant they would need to be even more vigilant when granting credit. “Traditional credit scoring models will not suffice as they only provide a limited view of a consumer at a specific point in time. Apart from a significant increase in risk predictability according to our modelling, credit scoring using trended and alternative data also enables the industry to expand the universe that is actually eligible for credit, but for one or another reason is not able to access it.”

The CCI measures borrowing and repayment activity across over 20 million individual borrowers and nearly 53 million credit accounts. The index also incorporates key macroeconomic data compiled in partnership with ETM Analytics, a macroeconomic advisory firm.

About the CCI

The CCI takes into account rates of early defaults, distressed borrowing, household income and inflation, and debt repayment costs to gauge the degree of household financial duress.