Consumer credit market resilient, personal finances stabilise a little

South Africa’s consumer credit market remains resilient, despite high interest rates, while personal finances also stabilised somewhat, although remaining generally weak.

Growth in credit demand and supply continued during the fourth quarter, while delinquencies improved significantly across most products, apart from home loans and healthy growth was observed for retail lending products, especially as performance improved.

According to TransUnion’s 2023 South Africa Industry Insights Report for the fourth quarter of 2023, the South African consumer credit landscape maintained its resilience with a significant 11% overall growth in originations, a measure of new accounts opened, across all products.

Lee Naik, CEO of TransUnion Africa, says the new credit activity growth was led mostly by Gen Z (born 1995 to 2010) and Millennial (born 1980 to 1994) consumers, who together accounted for 61% of new products originated during the quarter.

Gen Z represents 15% of the country’s credit active population, having grown by 1.7% as more consumers in that generation reached adult age and entered the credit market.

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Younger generations opting for credit

These insights from TransUnion’s consumer credit database are supported by findings in the Q4 2023 TransUnion Consumer Pulse Report, which highlighted that a high 80% of younger Gen Z and 77% of millennials were optimistic about their finances for the subsequent 12 months.

The most significant year-over-year growth in originations was in non-retail credit products: personal loan (across banking and non-banking sectors) originations increased by 13.4%, home loan originations increased by 17.5% and credit card originations increased by 4.3%.

Naik says the increase in the personal loan originations was likely driven by consumers’ need for liquidity, as this product provides consumers with cash which can be used for any purpose, including everyday living expenses.

“Separately, the increase in home loan originations is noteworthy given that it occurred at what is perceived to be a peak in the interest rate cycle, which has potential implications on affordability. This growth in home loans may indicate that consumers are looking past the current environment in their goal for home ownership.”

This shift tells a rewarding story of financial inclusion, as more South Africans have access to the opportunity of investing in their own property, Naik says. “As younger consumers drive the growth in the credit economy, it is a great opportunity for lenders to serve their expanding needs and build lifetime relationships.”

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More people paying their debts

Delinquencies also improved across unsecured credit products but deteriorated for secured loans. “Despite continued macroeconomic uncertainty, consumer-level delinquencies (the percentage of credit-active consumers who are three or more months in arrears on any major lending product) improved by 90 basis points from 38.5% to 37.6% in the fourth quarter.”

When assessing individual products, delinquencies improved across all unsecured products. However, Naik says, vehicle finance remained flat and home loans were the only major credit product with deteriorating delinquencies.

“This deterioration in home loan delinquencies could be attributed to payment shock, a sudden change in monthly payment obligations caused by external factors, caused by a rising interest rate environment and high inflation, which in turn has led to a higher cost of living and debt.”

This is supported by the Q4 2023 South Africa Consumer Pulse Report, where nearly half (47%) of South Africans said that they had to cut down on discretionary spending, such as dining out, travel and entertainment, due to inflation and other factors. They also planned to spend less on retail shopping and big purchases.

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Are consumers getting used to higher interest rates?

“Many South African homeowners initially faced payment shocks when interest rates escalated during 2022 and 2023, but the subsequent increase in the cost of living due to higher-than-expected inflation has put them under even more pressure,” Naik says.

“While most consumers indeed have the capacity to absorb the payment shock we have seen over the current high interest rate cycle, lenders can take this opportunity to evaluate risks and opportunities for existing and prospective customers’ behaviours across the entire credit wallet and offer adequate response strategies for at-risk consumers.”

He says lenders should also focus on maintaining loyalty and a share of wallet among the resilient consumers in their existing portfolios. Finally, educating consumers on how to best manage payment obligations can help gain lender preference for payments and loyalty during the shifting economic conditions.”

Clothing credit also continues its healthy growth trajectory with credit performance improving. In the fourth quarter of 2023, clothing account originations in South Africa maintained their upward trajectory, registering a 6.9% increase in new accounts.

Naik says this growth aligns with the broader expansion observed in the retail sector for clothing, textiles and footwear that increased by 2.7%  over the same period. During December 2023, 87.1% of new clothing accounts were opened by subprime consumers (consumers with the riskiest credit scores), while 12.9% were opened by consumers with better risk profiles.

“Retail credit accounts, particularly clothing accounts, are typically availed by consumers with riskier credit profiles, who generally have limited access to other credit products and rely on these products to purchase necessary household goods.”

Account-level delinquencies across all three retail credit products improved, Maik points out, with retail revolving loans down by 220 basis points and retail instalment loans down by 190 basis points. “These are notable shifts within the high risk and higher-delinquency products, indicating strong consumer performance across the risk spectrum and opportunities for lenders to continue expanding access to these products.”

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Household finances stable, but still under pressure

Meanwhile, the economists at the Nedbank Group Economic Unit, Johannes (Matimba) Khosa and Nicky Weimar, say according to the Reserve Bank’s Quarterly Bulletin, household finances stabilised somewhat in the fourth quarter of 2023.

Real personal disposable income increased by 0.1% compared to the third quarter, after shrinking over the previous three quarters. The boost came from a rebound in other income sources (profits, dividends, rents and interest), while compensation of employees remained under pressure.

However, households’ debt metrics were mixed. The ratio of household debt eased ever so slightly to 62.3% in the fourth quarter from 62.4% in the third quarter as the increase in nominal PDI narrowly exceeded that in household debt.

Going forward, they say the pressure on household finances will likely continue throughout the first half of the year before gradually lifting during the second half. “The outlook for real disposable income remains relatively subdued. The higher wage and salary settlements negotiated for the year ahead and the anticipated downward shift in inflation later this year should lift real incomes towards the backend of the year.

“However, the lack of tax relief means that a significant portion of individuals’ wage increases will be consumed by taxes, partially containing the boost to disposable income. Even more concerningly, the fall in employment in the fourth quarter may only be the beginning of a widespread restructuring drive within the private sector aimed at reducing costs in a bid to restore profitability badly eroded during last year.”