The TransUnion (NYSE: TRU) Consumer Credit Index (CCI) declined sharply in Q2 2018, marking a decisive change in its upward trend since early 2016, according to a report published by TransUnion South Africa.
The decline in the CCI occurred amid ongoing difficult macroeconomic conditions in South Africa. Following a rise in consumer and business confidence indicators after significant political changes in Q4 2017 and Q1 2018, the report noted that economic indicators turned less positive in Q2. Various business confidence surveys also reflected lingering uncertainty about business conditions, the report said.
The CCI fell by four points to 51 in Q2 2018, now signalling only marginally improving credit health. The fall in the index was mainly due to rising default rates and more constrained household cash flow due to higher inflation and continued weak income growth in the second quarter. On the zero to 100 scale, an index level of 50 is considered the ‘break-even’ point, meaning scores above 50 reflect improving credit health.
Stephen de Blanche, Regional Vice President, Financial Services for TransUnion Africa, explained that the risk of sharp declines in the CCI was a feature of the current economic climate of slow, and at times erratic, growth. “Economic indicators and business confidence surveys appear to have turned less positive in Q2, reflecting lingering uncertainty about business conditions. The more positive economic and sentiment signals in Q4 2017 and Q1 2018 have not continued upward as the year has progressed.”
The biggest contributor to the fall in the CCI in the second quarter was the reversal in the positive trend of loan repayments as measured by the proportion of 3-month arrear accounts. According to TransUnion, the number of accounts in early default (3-months in arrears) rose from around 906,000 to 919,000 between Q2 2017 and Q2 2018, a rise of 1.4%. “This might not sound like a big rise, and it isn’t, but it does represent a marked change from a strongly falling trend in defaults,” explained de Blanche. “The lack of further improvement in the defaults trend constrained the index from staying meaningfully above 50.”
The proportion of 3-month arrears increased by 1.9% y/y in Q2, a marked difference after falling by 5.8% y/y in Q1.
The report also highlighted the trends in distressed borrowing, as measured by the proportion of credit used to total credit limits on household credit and store cards. According to the report, distressed borrowing moderated in Q2 2018, and remained below its highs in 2015/16. De Blanche explained that while this indicated no immediate household financial or budgetary risks, distressed borrowing was still significantly higher than in 2010 and would need to fall considerably further to indicate meaningful restoration of financial health. “The drop in credit utilisation in Q2 was almost entirely the result of rising credit card limits, rather than falling card debt levels. This probably reflects a somewhat higher degree of confidence among lenders over the past year, while households either don't need or are reluctant to take up this available credit”, said de Blanche.
De Blanche added that TransUnion had been cautious about the consumer credit environment and the overall economy for some time, and that the drop in the CCI in the second quarter was a reflection of underlying economic challenges. “Our words of caution to credit providers and borrowers in recent quarters remain in place. It’s important to retain operational and budgetary vigilance.”
TransUnion said it continues to monitor the effects of a recent decision by the High Court that it is no longer necessary to use payslips as the only form of documentation proving income when applying for credit. While this judgement may be welcome for some unbanked, yet credit-worthy people who were perhaps unfairly frustrated in their efforts to obtain credit, it also contains risks pertaining to the potential abuse of the regulation or potential lulling of credit providers into complacency or a lowering of standards.
De Blanche believes that while retailers might see this as a victory enabling them to offer more credit, it actually meant they would need to be even more vigilant when granting credit. “Traditional credit scoring models may not suffice as they only provide a limited view of a consumer at a specific point in time. In time this could lead to less prudent lending, something which could be reflected in a falling CCI. Apart from a significant increase in risk predictability according to our modelling, credit scoring using trended and alternative data also enables the industry to expand the universe that is actually eligible for credit, but for one or another reason is not able to access it.”
The CCI measures borrowing and repayment activity across over 20 million individual borrowers and nearly 53 million credit accounts. The index also incorporates key macroeconomic data compiled in partnership with ETM Analytics, a macroeconomic advisory firm.