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Consumer Credit Health Remained Under Stress in the 4th quarter

31 January 2014 Geoff Miller, Transunion

Consumer loan defaults may be stabilizing; risks to household living costs remain considerable.

The TransUnion Consumer Credit Index (CCI) released today shows that consumer credit health deteriorated at a slower pace in Q4 2013 than in the previous four quarters, but remained under pressure and is indicative of difficult financial conditions.

The CCI increased to 47.2 in Q4 2013 from 46.1 in the previous quarter, above a recent low of 44.4 in Q1 2013. TransUnion, a global leader in credit and information management, said that while the index increased in Q4, it still reflected deteriorating consumer credit health and that it was too soon to become complacent about the risks posed to consumers and credit providers.

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.

"Unsecured loan approval rates have moderated, indicating that credit grantors are generally applying a more conservative approach to mitigate their risk and have, for now at least, been able to stabilise their loan defaults,” said Transunion CEO, Geoff Miller. ”Much will depend on whether overall economic growth and pressures in the job market stabilise in 2014, and this is far from certain at this point.”

The Transunion CEO’s tone of hopeful caution extended to the barometer of households’ distressed borrowing, a sub-component of the CCI. "Growth in distressed borrowing remains in the low single digits and appears to still be manageable. However, since 2010 consumers, in aggregate, have not been able to reduce their credit card utilisation,” said Miller. "When we start seeing a reduction in credit card utilisation that will be a really positive sign.”

Miller pointed out that the index was a measure of the average condition of a South African consumer and that there are often considerable differences between the CCI and what individuals or various income groups might experience. He also gave a reminder as to how to interpret the latest findings, saying that while the index has turned higher, the fact that it remains below 50.0 indicates that credit health among consumers is still under considerable financial pressure. "This is sobering and something we can’t ignore. We need to see the index hit 50.0 and rise above it before we can begin to talk about turning the corner,” said Miller.

Miller added, "A sustainable solution to restoring credit health is for consumers to maintain manageable debt levels. Between more cautious banks and increasingly better credit education for consumers, we think there are some encouraging trends emerging. Hopefully these trends continue into 2014.”

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.

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