Consumers and credit a mixed bag in third quarter

Consumers and their credit behaviour were a mixed bag in the third quarter with small signs of positive developments in the consumer credit market and growth in new credit for clothing, personal loans and home loans, while credit card and vehicle loan originations slowed down.

Looking at the Eighty20 2023 Q3 Credit Stress Report, it seems that South Africans started to see some improvements in their financial circumstances. “It is early days, but the economic and credit indicators from the third quarter highlighted a more positive outlook compared to the past year,” Andrew Fulton, director at Eighty20, says.

Eighty20 is a data-driven consumer analytics and research business and compiles the report to highlight the impact of economic forces on the South African consumer, with particular focus on consumer credit behaviour. The credit data is sourced from the Eighty20 / XDS Online Credit Portal and fuses credit bureau data with external data sets such as Marketing All Product Survey (MAPS).

ALSO READ: SA consumers battling to pay their home loans and credit cards

Beacons of hope for credit and consumers

Fulton says the data shows five beacons of hope:

• Inflation eased further to 5.0% from 6.2% in the previous quarter;
• The unemployment rate dropped below 32% (31.9%), with the number of employed persons up by nearly 400 000;
• Consumer confidence and the leading Indicator of the economy moved upward;
• In the credit space, the percentage of loans in arrears came down to 37.5%;
• The rate of new defaults across all loan products which has been steadily creeping up since the first quarter of 2022 trended down in the third quarter.

The rate of new defaults (the proportion of outstanding loan balances that went into default during the quarter across all loan products), which has been steadily increasing since the first quarter of 2022, trended down with the exception of vehicle asset finance. 

“This is a welcome reprieve from the double-digit year-on-year growth in the rate of new defaults over the last three quarters which is now at 2.51%, up 25% from 2.01% a year ago. Although the annual change in the rate of new defaults remains high, it is down 1.3% on the last quarter. The rate is an early warning sign for the state of credit in the country,” Fulton says.

New retail defaults decreased by nearly 6% and from an Eighty20 ENS segment perspective, it was only the Middle Class Workers who still experienced an increase in overall new defaults from last quarter, but only by 0.2%.

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Reasons for less new credit defaults

Fulton says there are three hypotheses about the reasons for this:

• Things are getting better. Consumers are managing their finances, cutting back on spending and making payments on debt;
• Things literally could not get any worse. Anyone who was going to default has already gone into default;
• Credit providers have become significantly more risk averse in their lending and are therefore giving loans to people less likely to default.

He says the reality is probably a combination of all three factors. “The hypothesis that people have become more responsible about their debt is reflected in the credit card numbers. While balances are still growing across all segments albeit at a slower rate, new defaults are down quarter-on-quarter by 2.1%.

“The four wealthier segments have been relying on their credit cards to make it to the end of the month. As a result, overall credit balances increased more than 30% since Covid compared to overall loan balances that increased by 20%, with retail and unsecured up barely one percent.”

Fulton says the small improvement in the new default rate and slowing growth in credit balances may also support the hypothesis that we have reached the bottom, with most credit stressed South Africans already in default.

“On a positive note, nearly 750 000 people entered the credit market this quarter for the first time, which is a return to pre-covid levels. These individuals were responsible for nearly R8 billion of the R29 billion in new loans value this quarter.”

ALSO READ: Consumers buying homes and clothes on credit despite high interest rates

Mixture of demand and supply for credit

Meanwhile, TransUnion’s South Africa Industry Insights Report for the third quarter showed a mixed picture of demand and supply across lending products. It shows that during the third quarter:

• Clothing, personal and home loans led growth in new credit activity, while credit card and vehicle loan originations slowed down;
• Consumers continued to build credit balances at a healthy rate, against a backdrop of strong growth in the retail sector;
• Portfolio performance in unsecured credit products continued to demonstrate resiliency, while secured products were impacted by higher interest rates and affordability challenges.

Originations, a measure of new accounts opened, saw the strongest year-over-year growth in personal loans (up 7.5%) and clothing accounts (up 11.2%), while new credit card originations declined (down 6.3%) compared to the same quarter in 2022, as did retail revolving loans (down 10.3%) and vehicle loans (down 7.5%).

“Declines in some product originations are likely driven by consumers’ caution in the current high interest rate environment. However, the increase in originations among below-prime consumers may be a sign of distressed borrowing to meet financial needs,” Lee Naik, CEO of TransUnion Africa, says.

“The South African consumer credit landscape in the third quarter is a study in contrasts. While some sectors, such as clothing accounts and personal loans, are expanding their accounts book, others like vehicle finance face challenges due to affordability challenges and the impact of higher interest rates. Across all sectors, risk management remains crucial, as does the need for targeted strategies to sustain confident growth while managing portfolio health.”