New data from consumer credit reporting agency, TransUnion shows that despite a declining supply of new credit, credit card balances increased as lenders in South Africa continue to focus on increasing limits for existing cardholders.
The findings of TransUnion’s Q2 2021 South Africa Industry Insights Report covers a period where unemployment was still rising, but prior to July’s civil unrest and peak in the third wave of Covid-19 cases.
The report shows that a number of the trends, seen immediately after the outbreak of Covid-19 more than a year ago, have continued to advance with some notable exceptions, especially when looking at delinquencies.
Understanding the delinquency picture
Delinquency rates during the pandemic have been influenced by a number of important factors, the credit specialist said. Deferrals, payment holidays and other accommodations by lenders have helped borrowers in need. A decline in new borrowing in the past year since the onset of the pandemic has also shifted the overall ratio of good versus bad debt within lenders’ portfolios.
While a general increase in overall debt has been apparent, the total number of new loans and accounts has decreased as a result of the decline in originations. This means that while the numerator in the delinquency equation (i.e., existing accounts with delinquencies) is rising, the denominator is not growing at the same pace, said TransUnion.
Add in other drivers for which accounts financially distressed consumers choose to repay – e.g., prioritising product utility such as credit card functionality for online payments or car loan payments to ensure you can avoid public transport- and it’s clear that there are often multiple drivers for changes in delinquency levels, the group said.
Typically, delinquencies have often followed wider macroeconomic trends such as GDP growth and changes in unemployment.
In the latest Q2 2021 figures, although there were improvements in most of the major consumer credit categories, unsecured personal loans recorded a significant increase in balance-level delinquencies – bank personal loans were up 260 bps YoY and non-bank personal loans 700 bps.
A higher delinquency rate for non-bank personal loan providers is to be expected as they have historically targeted higher-risk consumers who are more likely to default and will be less resilient to sustained financial hardships, such as those caused by the pandemic.
“Finding and funding resilient consumers becomes even more crucial during challenging economic periods when looking to maintain a healthy portfolio delinquency ratio.
“The key is to fuel new credit growth by finding good consumers, who are likely to perform within lenders’ target thresholds and in return can help maintain a healthy bad-to-good ratio for longer-term lending growth,” said Carmen Williams, director of research and consulting at TransUnion South Africa.
Credit demand in a post-pandemic world
Throughout the pandemic, TransUnion’s data has shown reduced appetite from both consumers (demand) and lenders (supply) for new account openings (as measured by originations), and this continued in Q2 2021.
“However, with the world economy slowly starting to reopen and vaccination programs gaining pace, the future shape of the consumer credit market will depend on a number of important variables,” it said.
Historically, macroeconomic conditions have been an important factor in the pace of credit growth. Equally, consumer sentiment also has a significant bearing. Although the latest IIR data is for Q2 2021, TransUnion also conducted its regular Consumer Pulse Study in August 2021, which was post the civil unrest and the initial peak of wave three Covid-19 infections seen in early July.
This study showed a number of important trends relevant to potential future demand and direction of the market in South Africa, the credit specialist said.
The number of South African consumers anticipating in August that they would apply for new credit or refinance existing credit within the next year was just under a third (31%). Personal loans (43%) and new credit card (35%) applications continued to be top of the list, said TransUnion.
“There continues to be significant turbulence in the South African consumer credit market, with a number of potential new trends emerging, especially in the delinquencies space. Wider economic and political news continues to impact consumer sentiment and outlook, and these will shape the recovery as it continues to emerge,” said Williams.
“Lenders need to constantly monitor for shifts in consumer behaviours and adapt to the changing demand and future preferences of consumers if they are to succeed. There is no doubt the road to recovery will be a bumpy one, but by being informed, lenders will have the best possible chance to compete and succeed.”
Credit card is the only credit product to show high levels of continued origination decline since the beginning of the pandemic (down 23% YoY in Q2 2020, 63.2% YoY in Q3 2020 and 48.6% YoY in Q4 2020 and 42.7% YoY in Q1 2021). This is largely due to lenders implementing tightened credit-granting policies in the midst of economic uncertainty, said the credit specialist.
Lenders remain focused on extending credit to existing customers rather than onboarding new borrowers. Average balances increased by 17.6% and total credit limits increased substantially by 15.2% while new loan amounts increased by only 2.2%.
Outstanding balances for credit cards (up 10.6% YoY) have been driven by consumers’ need to balance household budgets, maintain liquidity, and finance subsistence purchases, especially where incomes have been negatively impacted. 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 Q2 2021 YoY change for Millennials (born 1980-1994) was 9%, compared to 6% for Gen X (1965-1979) and only 3% 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. Credit card account-level delinquencies were down 50 basis points (bps) from their peak in Q2 2020, and in Q2 2021 stood at 12.3%, and were at the same level as Q2 2019.
This improvement provides further evidence that credit cardholders are protective of and value the revolving functionality that this product holds, TransUnion said.