TransUnion Consumer Credit Index Shows Need For Ongoing Industry Vigilance

The TransUnion (NYSE: TRU) Consumer Credit Index (CCI) declined slightly in Q4 2017, though it continues to reflect gradually improving consumer credit health.

The latest report comes amid significant political changes in South Africa after the appointment of a new president and personnel in critical economic and regulatory ministries in February. The February 2018 national budget also formed an impactful backdrop to the latest CCI, containing more tax hikes for households to weather in the coming financial year, starting April 2018.

As in Q3 2017, the CCI dropped marginally in Q4 2017, this time from 53.7 to 53.4. The index remains above 50, though, indicating ongoing gradual improvement in consumer credit health. An index level of 50 is considered the ‘break-even’ point, with lower scores reflecting worsening credit health, which is characterised by an increase of new accounts in default (3 months in arrears or “MIA”), as well as distressed borrowing (rising utilisation of store cards and credit cards).

The report highlights the many conflicting trends impacting consumers. On the positive side, rand appreciation, low food inflation, stable-to-lower interest rates and moderate economic recovery are leading to gradual improvements in consumer behaviour. In particular, TransUnion notes, the number of accounts 3-months in arrears continued to fall in Q4, as did the incidence of distressed borrowing by the excessive use of credit and store cards.

However, Stephen de Blanche, regional vice president, financial services for TransUnion Africa, warned that consumers were not in the clear.

“Real household income growth remains weak, the job market is not very strong, and now households will face a raft of new tax increases from the start of the second quarter, including on VAT and the fuel levy. While we’re somewhat encouraged by the trend in the CCI since 2016, now is no time for complacency in the industry,” de Blanche said.

According to the CCI report, accounts that are more than 3 months in arrears (3+ MIA) make up nearly 11% of total outstanding credit balances by value and 22.5% of total accounts. This implies the bulk of the 3+ MIA problem is in low-value accounts, but recently more higher-value accounts have been lapsing into 3+ MIA.

“We continue to see a lot of contrasting points in our extensive data universe, and the Q4 CCI broadly seems to reflect an industry showing both good and not-so-good signs,” said de Blanche. “The proportion of accounts more than 3 months behind on repayments has fallen slightly since 2016, but the total value of those outstanding accounts is rising. Credit providers should pay special attention to this fact.”

In light of the importance of well-managed credit policies during difficult operating periods, TransUnion has developed CreditVisionTM, an improved model for credit scoring. When TransUnion compared the outcomes of generic models run on ‘old’ data to models that use trended and alternative data, they saw an overall increase in risk predictability of 56%. “We found there were three million South African consumers who could not be scored using traditional credit data but were well-performing consumers when they did become credit active.

CreditVision can enhance our ability to assess these so-called thin-file consumers.” de Blanche explained. “We believe this can help credit providers safely expand their borrower universe in a competitive market and we think this is a big informational advantage in tough times.”

The CCI measures borrowing and repayment activiy 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.