Consumer Credit Health Continues Negative Trend in the Third Quarter
Some encouraging news on credit card usage; Household cash flow under pressure
Johannesburg, 19 Sept. 2013 - The TransUnion Consumer Credit Index (CCI) declined to 43.4 in Q3 2013 from 44.8 in the previous quarter. The latest data reflects a near 3-year downtrend in the index from its highs of 63.6 in Q4 2010.
According to TransUnion, a global leader in credit and information management, the fall in the index reflects deteriorating household cash flow as living costs rise and a weak job market take their toll on income security. The TransUnion report also found that the household cash flow situation may be as challenging as it was in early 2009, a recession year. The index has now been below 50.0 for a full year.
The CCI is a unique indicator of consumer credit health based on a 100-point scale. An index above 50.0 indicates improving credit health, below 50.0 represents deterioration. Credit health refers to the ability of consumers to service existing credit obligations within the constraints of monthly household budgets.
TransUnion CEO, Geoff Miller, said that consumer credit health continued to deteriorate and that the same trends from Q2 were largely still relevant in Q3. “Consumer loan defaults continue to rise, distressed borrowing has held steady, but credit card usage nonetheless remains high, and household cash flow is deteriorating. None of these trends are new or particularly surprising.”
Encouragingly the index shows that distressed borrowing is not rising, but there may be other evidence from the TransUnion database that suggest some segments of the market are trying to resort to this type of borrowing behavior. “The demand cycle for unsecured lending is extremely robust. With defaults clearly rising and household cash flow weak, this demand may suggest another form of distressed borrowing not accounted for when looking only at credit card utilisation. This may point to lower income groups experiencing the greatest debt distress,” said Miller.
Miller did however point out that riskier conditions were causing credit providers to become more cautious in their lending practices. “Approval rates by credit grantors have slowed, indicating that they are generally applying a more conservative approach to mitigate their rising risks.” Miller said that this was an important trend for credit providers since their older loan portfolios seemed to be deteriorating, adding, “Previously credit standards were more relaxed than they are becoming now, so this should start to reflect in better performing loan portfolios further down the line.”
However, even with more prudent lending standards, emerging risks to consumer credit markets remain substantial. “Contagion risk in unsecured portfolios could affect secured portfolios in the coming quarters with broader negative consequences for the overall credit market. Even loan portfolios that once looked quite solid could be affected by the contagion of defaults elsewhere, which can ripple through the economy, so this is something all credit market stakeholders need to keep a close eye on,” said Miller.
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 index is compiled by TransUnion Credit Bureau, with technical support from market intelligence firm ETM Analytics.
Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses. “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,” explained Miller.
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. A full report on the quarterly TransUnion CCI can be found on www.transunion.co.za.