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TransUnion, a consumer credit reporting agency, has released the findings of its South Africa Industry Outlook Report for the third quarter of 2020. The results show the continued impact of Covid-19 on the consumer credit market and difficult decisions some consumers must make to balance their household finances.
Although the latest data relates primarily to a period when Covid-19 measures were less stringent than during the initial lockdowns seen earlier in the year, there was still a drop in consumer demand.
Application volumes decreased as consumer confidence remained low, with lower appetite for new credit reflecting higher unemployment and high levels of financial distress.
In the third quarter of 2020, year-on-year (year-on-year) inquiry volumes fell by double digits across all major consumer loan categories. The drop was steepest for credit cards (49% less) and non-bank personal loans (29% less).
Originations (measured by new accounts opened) also fell double digits year-on-year for all major consumer credit categories. In the most recent period (Q2 2020 for originations due to reporting delay), the decrease in volume was
more pronounced for clothing accounts (69.4% less) and less pronounced for credit cards (23.1% less).
Serious-level delinquency (accounts with three or more payments past due) increased in all major consumer credit categories as consumers continued to experience financial stress.
Carmen Williams, Director of Research and Consulting at TransUnion South Africa, said: “With the protracted nature of the pandemic, it is clear that the economic impact has been significant and sustained. Consumer confidence and the risk appetite of lenders have been seriously affected, and the latest results show the changing dynamics of both the demand and supply of credit. “
Third quarter 2020 metrics for the main consumer credit products
Automatic summary
The auto market continued to show signs of sustained tension as origination and inquiries declined and delinquencies continued to deteriorate. Lender portfolio management and effective risk reduction strategies from origination and throughout the account life cycle are critical to mitigating this persistent deterioration in performance as delinquencies continue to accelerate dramatically.
Auto origination volumes for the second quarter of 2020 decreased (-53.7% YoY) as social distancing lockdown restrictions during the second quarter of 2020 continue to affect the industry. As vehicle prices continue to slow year-over-year for both new and used vehicles and have stayed below inflation for the past two years, these assets have become more affordable.
In the third quarter of 2020, VAF’s total balances grew steadily at 10.9% year-on-year. Refinancing options, low interest rates, renewed purchasing activity in Q3 2020, and a shift to higher priced vehicles (validated by higher average new account loan amounts increasing 6.7% YoY to R315,160) have contributed to this increase.
Severe auto delinquencies have been deteriorating steadily for the past three years, more than doubling during this time and stood at 7.2% in the third quarter of 2020. TransUnion recently conducted a study aimed at discovering performance factors for the automotive market to better understand the cause of increased non-performing loans.
The findings indicate that industry dynamics of longer terms and higher loan values, coupled with an increased appetite for risk, has driven this increase in delinquencies.
The NPL impairment rate accelerated considerably during the last two quarters, rising 190 bp and 160 bp year-on-year compared to the second quarter of 2019 and the third quarter of 2019, respectively, a sustained and worrying trend that requires immediate attention due to part of the lenders.
Home loan summary
The mortgage market showed slow balance growth and drastically reduced origination growth due to lockdown restrictions. The general upward trend in delinquencies is a cause for concern and has become more pronounced in recent quarters.
Mortgage loan origination followed a trend similar to that of most product categories, declining 62.4% year-on-year due to severe closing restrictions imposed nationwide in the second quarter of 2020. Increase in loans average amounts of new loans (46.4% y / y).
With interest rates at an all-time low, affordability for many South Africans has increased, allowing for much higher home purchase values than before.
Mortgage balances increased marginally by 2.6% YoY. The growth in the balance is largely attributed to an increase in the average balance per account (3.1% year-on-year). An additional factor contributing to rising balances is the fact that, with interest rates so low, consumers with equity in their homes would prefer to tap into that surplus if they need additional liquidity rather than supplementing their finances with an unsecured loan.
Account-level severe delinquency rates (3+ MIA) increased year-over-year by 350 bps to 7.8% in the third quarter of 2020, marking the ninth consecutive quarter that mortgage loan delinquencies have increased.
Having more than doubled in the last year, the delinquency rate on mortgages is now higher than auto loans.
This pronounced trend requires intervention, especially as home loan lenders increase their exposure by financing more of the total price. “This is of particular concern given that most of the paid holidays granted as a result of the Covid-19 pandemic have come to an end or will be in the near future,” said TransUnion.
Survey on difficulties
TransUnion’s latest Financial Hardship Survey in South Africa showed that nearly four in five (79%) South African consumers report that Covid-19 negatively impacts their household income. The survey also showed that among these affected consumers, concerns about their ability to pay bills and loans remain high at 85%, and 29% expect to find a deficit within a month.
“Due to the ingenuity of many consumers when facing financial difficulties, there tends to be a lag in the level of delinquency. Consumers tend to work through a variety of options before defaulting on a
Loan: use savings, other formal loan facilities, or even borrow from friends and family, before they miss a payment.
“Many lenders have been proactive in offering treatment, and hopefully your continued support will reduce the severity of any impacts down the road. NPL trends warrant ongoing analysis, and understanding how consumers prioritize payments in the coming months will be critical, ”said Williams.
Read: This is how many South Africans say they can’t pay their bills right now
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