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Further Moderate Deterioration in Consumer Credit Health in the first quarter

30 April 2014 Geoffrey M. Miller, TransUnion

New loan defaults falling but risks remain due to higher interest rates and inflation.

The TransUnion Consumer Credit Index (CCI) released today shows that consumer credit health deteriorated marginally in Q1 2014, marking the 9th straight quarter in deterioration (below 50 points). 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.

The CCI increased to 49.4 in Q1 2014 from 48.9 in Q4, up over four index points from 45.1 a year ago in Q1 2013. Two years of deteriorating credit health has placed South Africa’s consumer credit market under considerable strain, causing lenders to become more judicious in their lending practices.

TransUnion, a global leader in credit and information management, said that the upward trend in the CCI since Q1 2013 was encouraging, but that it represented more of a stabilisation amid relatively weak consumer credit conditions rather than an outright improvement. Transunion CEO, Geoff Miller, said that loan term restructuring, slowing rates of unsecured lending, and more prudent debt book management by credit providers is helping provide stability to the market, but that it would be unwise to become too complacent.

The TransUnion payment profile database shows that the number of consumer accounts lapsing into default (accounts that are 3-months in arrears) remained stable q/q in Q1 2014, which translated encouragingly into 1.8% y/y drop. "While there are still millions of consumers between 3 to 9 months in arrears, or already written off, under judgment, or in debt counselling, the current trend is welcome news after the surge in new defaults in 2012 and 2013”, said Miller.

However, there is ample evidence to indicate that household budgets remain strained. Miller noted that the rising use of credit cards to supplement household budgets shows that the good news seen in the credit defaults data is not fully supported by household borrowing behaviour. He added, "Budgets clearly remain under considerable pressure and are vulnerable to higher consumer inflation and worsening employment conditions.”

Moreover, the macroeconomic pressures on households may be worsening, something that Miller says one cannot ignore in assessing market conditions for the remainder of 2014. "The data shows that some key consumer prices are outpacing household income growth. Credit provider and consumer behaviour may have been improving, but the reality is that living cost pressures take their toll on credit health. It’s all about more competition for a stretched wallet.”

The other risk factor that seems yet to show through negatively in the default data is the fact that the prime lending rate was increased from 8.5% to 9.0% in January 2014, causing floating rate loan repayments to adjust higher. "While 50 basis points increase in debt servicing cost is relatively small and comes off a historically low base, higher monthly repayment costs will nonetheless impact marginal borrowers who were already struggling to make ends meet and make debt repayments”, Miller cautioned. "It’s quite possible that the rate increase will negatively impact defaults and distressed borrowing trends in Q2 and Q3 2014. That’s why there’s a lot of caution in our optimism about recent default trends.”

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.

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,” 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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