Unsecured Credit Balances Increase as Consumers look to Bolster Household Finances
- Outstanding balances continued to increase for all major lending categories, while originations growth declined
- A generational divide has emerged, with younger consumers increasing their credit card balances more than their older peers
- Credit performance, a lagging indicator, continued to deteriorate with delinquencies for non-bank lenders accelerating the most
TransUnion (NYSE: TRU) today released the findings of its Q1 2021 South Africa Industry Insights Report. This latest analysis covers a period where economic headwinds prevailed, and consumer confidence continued to be negative*.
The report shows how the ongoing uncertainty and financial hardship caused by COVID-19 have impacted the consumer credit market. Consumer and lender appetite for new credit remained subdued in the latest quarter, with originations—a measure of new accounts opened that is a function of both supply and demand—continuing to fall across all major consumer credit categories. Overall, the number of consumers participating in the credit market has reduced by 3% over the last year.
In contrast, outstanding balances have increased across all consumer credit categories – indicating lenders are focused on extending credit to existing customers rather than onboarding new borrowers. However, when looking at the drivers of change in balance growth, there was a continued divergence between consumers who had been financially impacted by the pandemic and those who hadn’t. There were also a number of emerging trends between generations and lender types when viewing the performance of unsecured lending products (credit cards and unsecured personal loans).
In the unsecured lending space, balance growth is reflective of the liquidity provided by these products, and suggests that financially impacted consumers are utilising these much-needed sources to help balance household finances. In the home loan market, increased balances are reflective of housing supply** slowing while demand is still increasing. Consumers that have managed to maintain or even improve their income during the pandemic have driven demand and are increasingly prevalent in the market. Supply has generally fallen as consumers continue to work from home and construction of new homes has declined. This supply/demand mismatch has caused a significant rebound in house prices*** and has caused the average new loan amount to increase 44% year-on-year (YoY) in Q1 2021 as a result.
Delinquencies continued to climb for most of the major consumer credit categories, with the exception of vehicle finance loans, which showed a small improvement. As in previous quarters, the increase in missed payments has also contributed to growth in outstanding balances across most products.
Carmen Williams, director of research and consulting for TransUnion South Africa, said: “The impact of COVID-19 on consumer finances remains the primary driver of credit-market trends. Lenders continue to focus on managing risk within existing customer portfolios rather than attracting and bringing on new borrowers as they implement tighter risk management policies. Consumers are very much polarised, with those experiencing financial hardship relying on existing sources of credit to help them through these difficult times. On the other hand, those who have maintained or improved their income still have significant purchasing power and capacity to borrow to finance home purchases.”
Credit card balance growth shows a generational divide
Outstanding credit card balances, which are a function of multiple factors—including reliance on credit for liquidity, delinquency build-up, and even shopping habits—continued to increase YoY in Q1 2021 (up 7.7%). However, increases weren’t evenly distributed, and a clear generational divide has emerged. Younger consumers increased their outstanding credit card balances more than older generations. The Q1 2021 YoY change for Millennials (born 1980-1994) was 9%, compared to 4% for Gen X (1965-1979) and a decrease of 1% for Baby Boomers (born 1946-1964).
Younger generations tend to transact more online, and the utility a credit card provides is fundamental to this activity. At the same time, according to the TransUnion Consumer Pulse Study****, when compared to other generations, a higher proportion of Millennials experienced job loss or reduced working hours as a result of the impact of the COVID-19 pandemic, and are also using cards more as a means of liquidity for day-to-day purchases.
Delinquency increases most pronounced for non-bank lenders
Credit performance is a lagging indicator, with consumers typically exhausting other sources of funds before defaulting on a loan. In the latest quarter, there was a continued deterioration across most of the major consumer lending categories with the exception of vehicle finance loans. The continued deterioration in delinquencies is reflective of the impact of the pandemic and, more recently, the end of deferral programs for many borrowers.
The latest TransUnion analysis shows the difference in delinquency performance between bank and non-bank lenders across the personal loan’s category. Both recorded an increase in delinquencies, but it was far more pronounced for non-bank unsecured personal loan lenders. This trend pre-dates COVID-19, but has been amplified by the impact of the pandemic.
Figure 1: Unsecured Personal Loan Delinquency Rates
(accounts three or more months in arrears)
Williams observed: “The increase in delinquency rates for non-bank lenders is to be expected, given the typical risk profile of customers served by this group. Often, they are higher risk and thus more susceptible to income shocks. Non-bank lenders have very different business and risk models compared to more traditional banks, and their loan pricing and risk management practices reflect this.”
Across lending categories, delinquency performance is expected to remain under pressure in the coming months. The latest TransUnion Consumer Pulse Study showed 62% of consumers are still being impacted financially as a result of the pandemic, and 87% of those impacted are concerned about paying their bills over the next three months. Unsecured lending categories topped the poll of those products consumers were most worried about paying: mashonisa loans (46%), unsecured personal loans (44%), retail store accounts (39%), and credit cards (38%).
However, the same Consumer Pulse Study showed that, despite the continued uncertainty caused by the ongoing pandemic, the majority of consumers were either somewhat (30%), very (28%) or extremely (19%) optimistic about the future. This positive sentiment was further reinforced with over half (53%) of those financially impacted by the pandemic saying they expected their finances to fully recover in the next 12 months.
Williams concludes: “As the South African consumer credit market continues to navigate these difficult times, lender focus is shifting to one of recalibration and recovery. Lenders need to update their risk models and ensure they are able to quickly adjust to any emerging trends. At the same time, they also need to focus on identifying consumers who may be struggling or are approaching hardship. By finding those in potential difficulty and proactively reaching out, they can take action early and, if done in the right way, can support their customers when they need it most – ultimately, helping create long-term loyalty as a result.”
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.