Are banks in South Africa still lending?

New account originations slowed in the fourth quarter of 2018 for major unsecured consumer lending products, including credit cards and personal loans, while new card account limits and originated loan balances increased on a year-over-year (YoY) basis.

This is according to new data from a TransUnion South Africa Industry Insights Report for Q4 2018, which also found that serious delinquency rates increased for the majority of lending products over the past year, likely due in part to the difficult economic environment in South Africa during 2018.

The TransUnion report revealed that lenders issued new unsecured accounts at a slower pace in Q4 2018 compared to the same quarter in 2017. The data showed that credit card originations decreased by 15% YoY, while bank-issued personal loan originations fell by 0.5% over that same period.

At the same time, origination amounts for both product types increased in the most recent quarter, with the average credit limit for new credit card accounts up 16.4% over the prior year and the average new bank personal loan amount increasing 23.7%.

These higher new account amounts are likely due to the shift in lender origination strategy over the past year to lower-risk borrowers.

The percentage of credit card originations to borrowers in the prime and lower risk tiers increased from 87% in Q4 2017 to 94% in Q4 2018, while the share of bank personal loans to prime and lower risk borrowers increased from 62% to 67% over the same period.

Prime and lower risk tiers are comprised of consumers with credit risk scores of 730 and above, as measured by the TransUnion internal risk score.

“As lenders continue to adapt to changing economic conditions, they have shifted their originations strategies to focus more on lower-risk consumers over the past year. A result of this shift in focus is that lenders have been able to issue larger loans and credit limits on these new accounts based on the higher likelihood of repayment by these borrowers.

“It will be interesting to see if this trend continues in the coming months as lenders respond to still challenging, but improving, economic conditions,” said Carmen Williams, director of research and consulting for TransUnion Africa.

In contrast to unsecured lending products, home loans showed the opposite trend, with originations increasing 9.2% YoY in Q4 2018, while the average loan amount to new customers fell by 3.1%.

The strong growth for home loan originations was enhanced by the comparison to what was a weaker originations quarter in Q4 2017, which saw a nearly 1% YoY drop, and is indicative of what has been a volatile home loan market in recent years.

Also in contrast to credit cards and personal loans, the share of home loan originations in Q4 2018 to prime and lower risk consumers dropped from 97% in Q4 2017 to 92%. This marginal increase in the number of higher-risk home loan borrowers likely contributed to the YoY drop in average new loan amount.

The TransUnion report revealed a marked difference between new account originations—which saw mixed growth rates across different lending product types—and total outstanding balances, which were up YoY across all major lending products.

Even credit cards, which saw a 15% YoY drop in originations, saw a marginal 0.1% increase in total outstanding balances.

This growth in the level of overall consumer borrowing indicates that demand for credit in South Africa remains strong and that consumers are continuing to utilise the credit that is available to them.

Delinquency rates for unsecured lending products have seen mixed performance over the past year. The serious delinquency rate for credit cards, measured as the percentage of card accounts three months or more in arrears, fell to 11.6% at the end of 2018, a 160 basis point (bp) improvement from the end of 2017.

At the same time, the account-level serious delinquency rate for bank personal loans increased by 180 bp to 23.1%. The higher overall delinquency rates for personal loans reflects the different consumer risk profile that lenders target for this product compared to credit cards.

A third (33%) of all bank personal loans issued in Q4 2018 were to borrowers with below-prime (higher-risk) credit scores, compared to only 6% of new credit cards.

Those below-prime consumers may have been more affected by the economic downturn experienced in 2018, contributing to the increased personal loan delinquency rate.

Secured lending products have much lower overall delinquency rates than unsecured products, owing to their focus on lower-risk borrowers as well as the collateral that supports the debt obligations. But despite the lower overall levels, delinquency rates for home loans and vehicle and asset finance (VAF) have increased over the past year.

The home loan serious delinquency rate increased YoY by 40 bp to 3.7% in Q4 2018, in contrast to the drop in delinquency seen the prior year. That said, the current home loan delinquency level is roughly on par with the level seen two years ago.

VAF saw an even more marked increase in serious delinquency, increasing 100 bp to 5.0% in Q4 2018. This delinquency increase for VAF continues a trend of rising delinquencies seen over the past two years, over which time the delinquency rate has risen over 50%.

Loan structures for VAF lending may be a factor in the delinquency rise, with many VAF loans structured with large balloon payments due at the end of the repayment term.

Given the current economic environment, an increasing number of VAF borrowers may not be meeting these balloon payments at the end of their loan terms. Despite the overall level of VAF delinquencies remaining low in relation to unsecured lending products, this material performance deterioration in the VAF sector is an issue that lenders should monitor closely.

Read: South Africans are going against the norm when paying off their debts

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Are banks in South Africa still lending?