The Consumer Credit Index (CCI) increased marginally in Q3 2016 from 48.6 to 49.0, according to TransUnion, a global leader in credit and information management. The CCI is based on a 100-point scale, where 50.0 is the break-even level of improvement and deterioration of credit health.
The index is made up of three components: consumer credit behaviour (borrowing and repayment), household cash flow conditions, and debt servicing costs. A number less than the 50.0 break-even point shows a decline in credit health.
The index remains below 50.0 despite having risen marginally in the past two quarters. Regional President of TransUnion Africa, Geoff Miller, explained that a slightly rising CCI just below 50 indicates consumer credit conditions are challenging, but not deteriorating rapidly. He added that one reason credit health may not be worsening rapidly, despite a weak economy and job market, is that borrowers and lenders have been more cautious in recent years.
“We know that lending standards in the past three years or so have tightened up after some tough lessons were learned in the unsecured lending boom from 2009 to 2012. We may be seeing some of the rewards of this trend both to lenders and borrowers,” said Miller.
The defaults and distressed borrowing components of the CCI come from TransUnion’s credit market data warehouse which houses information on some 56 million accounts across 20 million active credit users. Defaults are defined as accounts lapsing three months in arrears, and distressed borrowing is the proportion of revolving credit – credit cards and store cards – used as a percentage of one’s credit limit. The rate of new defaults declined in the third quarter, while there was no visible sign of increased distressed borrowing.
Miller took some encouragement from seeing consumer defaults and distressed borrowing rates stabilising, but he cautioned that macroeconomic conditions were still weak. “The South African economy has been through a tough period in 2016. We remain concerned that credit conditions are fragile and could deteriorate if economic conditions worsen.”
Impact on South African Households
Russell Lamberti, an economist at ETM Analytics, the firm that helps TransUnion compile the CCI, echoed Miller’s sentiment on economic conditions, saying that the drop in household cash flow puts present cash flow conditions on par with the difficult period in 2008/09. “Real household incomes are now falling. I think the reason we do not see this have a bigger impact on defaults and distressed borrowing is that many households have deleveraged quite a lot since 2008 and lenders and borrowers appear to have been more prudent.”
The Q3 2016 CCI report draws attention to this greater degree of caution in lending to households. Using South African Reserve Bank data, it shows that bank lending to households is running at just 1.2% y/y, the lowest rate in at least 22 years. The report explained: “Leading up to 2008 – and then extending to 2012 – households took on massive amounts of debt, both secured and unsecured, to improve their lifestyles. Many now find themselves in the payback period where they need to improve productivity and earnings before they can incur more lifestyle debt.”
Lamberti characterised the present credit cycle as one bearing the scars of the period preceding 2012. “The credit boom from 2004 to 2012 was a global phenomenon and unprecedented in scale. The bad news is we are still living with the consequences of that period, but the good news is that it means more caution in borrowing and lending, which in turn cushions households and credit providers in trying times such as this.”
Interest Rate Impact
Another key factor in consumer credit health is the rate of interest. The South African Reserve Bank left the repo rate on hold in Q3 2016, and investor expectations are that rates will remain on hold in Q4 as well.
“South Africa is not facing an acute inflation problem, so if the currency can stabilise or even stage a recovery, there could be scope for rate cuts in 2017. At this stage however the central bank is trying to balance persistent pressure for rate cuts in working to ensure that investors feel adequately compensated for their risk of investing in South Africa,” explained Lamberti. “At this stage, interest rates don’t appear to pose an imminent threat to consumer credit health.”
Released on a quarterly basis to the public, the TransUnion CCI measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt. These aspects are then combined into a single numeric score of consumer credit health. The TransUnion Credit Bureau compiled the index with technical support from market intelligence firm ETM Analytics.
TransUnion’s indicator combines actual consumer borrowing and repayment behaviour obtained from the extensive TransUnion credit database with key, publically available macroeconomic variables impacting household finances. Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses.
Analysis suggests that the CCI may be a good leading indicator for business activity in certain economic sectors, particularly those more closely related to consumer spending. Find a full report on the quarterly TransUnion CCI at http://www.transunioninsights.co.za/CCI/.