Younger consumers driving growth in consumer credit

Younger consumers driving growth in consumer credit

Loan originations have increased year-on-year across all major lending categories, except credit cards. However, the South African consumer credit market remains below pre-pandemic levels, according to TransUnion’s latest overview of credit trends.

Origination volumes in the unsecured lending space are between 10% and 41% lower than their second-quarter 2019 levels. Recovery has been more pronounced in the secured lending market, where volumes are less than 10% below their second-quarter 2019 levels.

Younger consumers are driving much of the growth in several categories. For example, in the non-bank personal loans category, Millennials (born between 1980 and 1994) accounted for 41% of total originations, a year-on-year increase of 100.6% in the second quarter of 2021. And they accounted for 52% of all home loan originations in the second quarter, followed by Gen X (1965 to 1979) at 41%.

“Although an increase in lending to younger generations should be anticipated over time as their income and credit needs grow, what is so significant about this trend currently is that it starts to reverse what we saw earlier in the pandemic, when younger generations were the first to withdraw from the market. In most categories, lending to younger generations still isn’t back to pre-pandemic levels, but this latest round of figures shows significant momentum in closing the gap,” said TransUnion Africa chief executive Lee Naik.

The total number of credit accounts declined by 8% YoY in the third quarter, 12.9% lower than pre-pandemic levels (Q3 2019). The decline in overall account volume was primarily driven by unsecured lending (-8.2% YoY and -14% pre-pandemic). Secured lending account volumes are flat compared to the prior year – 1% lower than pre-pandemic levels – with home loans experiencing an increase of 4.2% YoY and 3.7% (2019).

Despite the decline in total account volumes, overall outstanding balances in the third quarter of 2021 were 10% higher than in the prior year, primarily driven by credit cards (14.4%), personal non-bank loans (15.2%) and home loans (16.9%). The high level of outstanding balances can be attributed to customers’ increasing utilisation, compounded by the continued rise in delinquencies.

Payment hierarchy dynamics (the decisions consumers make about which loans they pay first) and a low interest rate have improved delinquency rates in the home loan and vehicle finance categories. In contrast, delinquencies continue to trend negatively in the unsecured lending categories.

Credit card originations continue to fall

Since the start of the pandemic, credit cards are the only credit product to show a significant decline in originations (down 23.5% YoY in Q2 2020; 63.2% YoY in Q3 2020, 48.6% YoY in Q4 2020; 42.7% YoY in Q1 2021).

Lenders continue to impose restrictive credit lending policies due to economic uncertainty. Credit card providers still prioritise extending credit to existing customers rather than onboarding new clients.

Younger generations are increasing their outstanding credit card balances faster than older generations. The third-quarter YoY change for Millennials and Gen Z (born 1995 to 1980) was 11% and 12%, respectively, compared with 9% for Gen X and only 6% for Baby Boomers (born 1946 to 1964).

Serious delinquencies (more than three months of missed payments) on credit card accounts have increased to 13.4%, the highest level since the first quarter of 2018 (13.9%). The increase in the delinquency rate reverses the progress made since the second quarter of 2020 (12.8%). For the past four quarters, delinquency rates have remained around 12%.

Increase in non-bank personal loans

The significant increase in non-bank personal loan originations reversed the consecutive declines experienced over the past four quarters (-51.1% YoY in Q2 2020; -21.2% in Q3 2020; -17.9% in Q4 2020; and -7.2% in Q1 2021). However, the volume recorded for the second quarter remains 10% below pre-pandemic levels.

The high level of delinquencies is due to the high-risk profiles of individuals seeking non-bank personal loans. Millennials are the primary segment driving the poor performance (up 5.2% YoY).

Younger borrowers drive bank loans

Despite the significant growth in bank personal loan originations compared to the second quarter of 2020, originations are 30% lower than pre-pandemic levels. Originations were driven mainly by younger borrowers, with Gen Z and Millennials accounting for 54% of new borrowers.

The average new account loan amount (R30 979) remains 6.6% lower than last year, indicating banks remain cautious in approving new loans.

The average balance per account increased by 17.8% YoY – the sixth consecutive quarter in which the increase was above 10%. The average balance value per account (R47 100) is at an all-time high.

Serious delinquency rates deteriorated YoY in the third quarter, marking the sixth consecutive quarter of worsening performance. This is attributed to Millennials (up 3.1%) and Gen X (up 2.6%), representing 84% of the market.

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