South African credit card holders remained resilient during the second quarter of this year according to stronger year-over-year (YoY) demand and lower delinquencies.
The TransUnion Q2 2023 South Africa Industry Insights Report, which tracks consumer credit trends across key credit products shows that in addition balance growth trended upwards in response to the continued economic headwinds as consumers turned to credit for living expenses.
Weihan Sun, Director Financial Services Research and Consulting for TransUnion in South Africa said the South African consumer credit market has grown compared to a year ago due to the significant number of new accounts originated, with lender appetite having widened over recent quarters.
“Consumer credit scores remained relatively consistent compared to a year ago, which reflects the continued resilience of South Africa’s credit-active market,” Sun said.
The quarter saw yet another repo rate increase of 50 basis points by the South African Reserve Bank (SARB) in May, to 8.25%, with the prime lending rate rising to 11.75%, a 14-year high.
However, June figures began to show signs of improvement in economic conditions, with the inflation rate falling to 5.4%, further supported by a drop of 0.3% to 32.6% in the unemployment rate, alleviating some financial strain in the market. Optimism for positive future income trends remained high, with the Q2 TransUnion Consumer Pulse Survey showing that 72% of South Africans expected an increase in household income in the next 12 months.
South Africans took out more home loans, but vehicle financing has taken a back seat.
Originations- a measure of both consumer demand and lender willingness to advance credit for home loans grew in volume and value during Q2 2023, with originations increasing by 11.2% YoY despite the high interest rate environment. Average new loan amounts were 16.9% higher over the same period. Outstanding balances increased by 8.1% YoY as a result of higher value loans originated during this quarter, offset by some instances of consumers with the capacity to do so making additional payments towards their principal home loan amounts, in response to the continued interest rate hikes. Account-level balances saw more consumers fall into delinquency, which was unsurprising after the multiple interest rate hikes that have eroded consumers’ liquidity over the last few years.
Although the current high interest rate environment had put pressure on many existing homeowners, demand for homes remained resilient as consumers continued to take advantage of the ‘buyer’s market’ created by the lower-than-inflation home price growth rate of 3.9% YoY.
In contrast to home loans, vehicle finance (VAF) origination volumes decreased by 4.5% YoY. Average new VAF amounts increased by 7.0% YoY, resulting in increases to both outstanding balances by 5.5%, and average balances by 5.8% YoY. Delinquencies decreased by 160 basis points (bps), reflecting South Africans’ dependence on private transport solutions as they maintained focus on paying their vehicle loans.
The lower demand for new vehicle loans was partially driven by significant increases in vehicle prices and high interest rates, making affordability a challenge in the new and used car markets.
Credit card origination volumes increased by 10.2% YoY in this period, with lender caution evident in lower limit extensions on new cards, which decreased by 1.8% over the same period. Growth in origination volumes was primarily driven by existing cardholders (65%) with the remaining 35% contributed by new-to-card (have never had a credit card on file) consumers.
In the first quarter, new-to-card originations made up 35.5% of all new card issuances, a decline of 8.8 percentage points from Q1 2019 at 44.3%. The rest of the new cards were issued to existing cardholders. This trend underscored a significant opportunity for card issuers. By using advanced analytics and propensity models, they can pinpoint potential borrowers who are new to the product. This approach can pave the way for a more inclusive growth strategy in the card market.
Existing cardholders were leveraging their available credit more, with average balances per account increasing by 7.3% YoY. Account-level delinquencies decreased by 60 bps to 12.4%.
Lender caution was also evident in personal loan originations, where despite volumes having increased by 8% YoY, the average new loan amount was lower by 14.7% over the same period. Outstanding and average balances saw modest growth of 3.9% and 2.4% YoY, respectively. Account-level delinquencies increased by 30 bps to 35.0%.
“As the cost of living continues to increase, growth in demand and growing balances could signify that many consumers are reliant on credit to help pay for everyday living expenses, Sun said.
He said lenders should leverage this loyalty dynamic to expand existing relationships and support their customers in a responsible manner, using data insights to tailor loans and products as they navigate a continuously changing economic environment.”
Clothing account growth mirrored the growth in retail sales for textiles, clothing and footwear during Q2 2023, with origination volumes increasing by 17.8%. Outstanding balances grew 8.6% due to a combination of growth in new business and existing clothing account holders continuing to leverage their facilities.
Sun said the more that consumers have the opportunity to access and leverage credit products to facilitated upward financial mobility, the greater the level of financial inclusion, and the better the potential for economic growth.
BUSINESS REPORT