Small signs of positive developments in consumer credit market

In addition to the good news on the rugby field, it would appear from Eighty20’s 2023 Q3 Credit Stress Report that South Africans have also started to see some improvements in their financial circumstances. It is early days, but the economic and credit indicators from quarter three highlighted a more positive outlook than they have in over a year.

Here are the top five beacons of hope:

1.    Inflation eased further to 5.0% from 6.2% in the previous quarter.

2.    The unemployment rate dropped below 32% (31.9%), with the number of employed persons up by nearly 400 000.

3.    Consumer confidence and the leading indicator of the economy has moved upward.

4.    In the credit space, the percentage of loans in arrears has come down to 37.5%

5.    The rate of new defaults across all loan products, which has been steadily creeping up since 2022 Q1, trended down this quarter.

The rate of new defaults is coming down

The rate of new defaults (RND) – the proportion of outstanding loan balances that went into default during the quarter across all loan products – which has been steadily increasing since 2022 Q1, trended down this quarter with the exception of vehicle asset finance (VAF). This is a welcome reprieve from the double-digit year-on-year growth in the RND witnessed over the last three quarters. The RND is at 2.51%, up 25% from 2.01% a year ago. Although the annual change in the rate of new defaults (CRND) remains high, it is down 1.3% on last quarter. The CRND is an early warning sign for the state of credit in the country.

All loan products except VAF saw a drop in the rate of new defaults QoQ, with new retail defaults down nearly 6%. From an Eighty20 National Segmentation (ENS) perspective, it was only the middle-class workers who still experienced an increase in overall RND from last quarter, but only by 0.2%. 

Unpacking movements in data is complex and there are a few possible explanations – not all of them are necessarily good:

• Hypothesis 1: Things are getting better – people are managing their finances, cutting back on spending and making payments on debt.

• Hypothesis 2: Things literally couldn’t get any worse – anyone who was going to default has already gone into default.

• Hypothesis 3: Credit providers have become significantly more risk-averse in their lending and are therefore giving loans to people less likely to default.

The reality is probably a combination of all three factors.

“The hypothesis that people have become more responsible about their debt is reflected in the credit card numbers. While balances are still growing across all segments albeit at a slower rate, new defaults are down QoQ by 2.1%. The four wealthier ENS segments have been relying on their credit cards to make it to the end of the month. As a result, overall credit balances are up more than 30% since COVID – by comparison, overall loan balances are up 20%, with retail and unsecured up barely 1%,” says Andrew Fulton, director at Eighty20. 

Year-on-year, total credit card debt is up 9.5%, but this is significantly lower than the double-digit growth experienced over the past two years – peaking at almost 15% in 2022 Q2. This drop in the rate of growth was seen across all ENS segments this quarter, with the middle-class at 6.5% YoY growth and the mass credit market nearly 12% YoY growth. Despite this slowing growth, the average credit card loan balances for these segments are still twice their average monthly income.

The average instalment to income ratio is the percentage of a person’s income that goes toward payments on all their loan products. This ratio has continued to rise but, as with credit card debt, not as rapidly this quarter. However, we do still see the middle-class at nearly ¾ of their income going to instalments, heavy hitters at 60%, and the mass credit market approaching 40%.

The small improvement in the RND and slowing growth in credit balances may also support the hypothesis that we have reached the bottom, with most credit stressed South Africans already in default. Furthermore, credit balances for heavy hitters and comfortable retirees have seen reasonable growth, while the mass market and middle-class workers have seen no growth in the value or volume of total loans over the past year.  

Of the R166-billion growth in credit balances over the past year, 95% came from just two segments – the heavy hitters and comfortable retirees, with nearly two-thirds of the value coming from home loan balances.  

Home loan balances (up 9.1% on last year) are unlike other loan products, in that nearly 99% of home loan balances are held by only three segments: the heavy hitters (75%), middle-class workers (17%) and comfortable retirees (7%). The heavy hitter segment accounted for R90 billion (10.8%) YoY growth in home loan balances while middle-class workers’ balances remained flat, bringing the overall increase to R102.7 billion. 

On a positive note, nearly 750 000 people have entered the credit market this quarter for the first time, which is a return to pre-COVID levels. These individuals were responsible for nearly R8 billion of the R29 billion in new loans value this quarter.  

Credit providers tightening their belts

There has been quite a lot of press regarding a slowdown in bank lending. “Growth in bank lending slowed in June to its slowest pace in the last 12 months, signalling caution from financial institutions about low economic growth and increasing consumer debt,” stated a Daily Investor article in August. This may account for the lack of credit growth we have been seeing in the lower income segments.

In their most recent trading updates, all the major banks have been speaking to elevated levels of credit impairments related to consumer banking. Banks pulling back on lending would also concentrate new debt in less riskier segments, resulting in the drop in QoQ new defaults.

“Regardless of the cause, for the first time in many months we have seen credit and economic indicators move in a different direction. Given the year we’ve had, some joy toward the end is welcome,” concludes Fulton.

Description of ENS segments:

Mass Credit Market: This is an employed, lower middle-class, mostly female segment made up of nurses, teachers and administrative workers, some 80% of whom have retail store accounts and 17% who have credit cards. Their average age is 36, with an average personal income of just over R5 000 per month, and a household income twice that. There are close to 12 million people in this segment, who are responsible for about R750 billion in annual expenditure. Nearly a quarter are grant recipients, and almost half are single parents.

Middle-Class Workers: The segment is made up of roughly 4 million middle-income, credit-active individuals with families, mortgages and frequent shopping trips. Their average age is 40 with a personal income of around R15 000 per month (household income of nearly R25 000) and have roughly R720 billion in annual expenditure. They hold roughly 30% of all home and VAF in South Africa, but only 20% of the value of those loans.

Heavy Hitters: This is the wealthiest 5% of the population, more assets than any other segment, mostly male, high Internet penetration and lots of shopping. Two-thirds of this segment are made up of families, with the average age 44, and average personal incomes of R42 000 per month. They make up nearly R1.5 trillion in expenditure. Their current debt load is more than three times that of the Middle-Class Workers segment. This is the most diverse group in terms of income, with some only barely earning above middle-class incomes while those at the top of the segment are earning multimillion-rand salaries. Despite only being a few million individuals, they hold more than half of all home and VAF in South Africa, but 2/3 (VAF) to ¾ (home loans) of the value of those loans.

Comfortable Retirees: Older, high-income credit active and asset rich ex-professionals and middle-class consumers who benefited from high-earning jobs and retirement plans throughout their careers. Two-thirds of them are retired and are downsizing their lives, but still hold 15% of home loans by value and on average have a household income of more than R30 000 per month. Their average age is 68, and they still control half a trillion rand in expenditure.

Students and Scholars: The youth of the nation, with little to no income, no credit beyond retail and no assets. Sub-segments include Future Heavy Hitters and the Lost Youth. Only 40% have a bank account (mainly Capitec), but two-thirds use the Internet daily, with the majority on social media and downloading music.

Hustling Males: Mostly male, average age 33, low income, very little credit (not even retail credit) and high unemployment. Although they grew up on the promise of the new South Africa, this has not been realised due to poor schooling, skills or training. The average income of these 6 million men is less than R1 000 per month due to nearly 60% unemployment, and heavy reliance on grants and household income.

Mothers of the Nation: Low-income, female grant recipients, mainly unemployed or underemployed. These are the domestic workers (500 000) and cashiers of our country. Their average age is 35 with an average personal income of around R1 000 per month, although average household income is 8X that. Nearly half are single mothers and nearly 40% are grant recipients. They feed and clothe their families at Shoprite and Mr Price.

Humble Elders: Low-income, older and mainly female, with very little media or credit consumption. Two-thirds are grant recipients and two-thirds are single. This is the lost apartheid generation who were not able to earn, save or invest throughout their lives so are now reliant on friends and family. Their average age is 67 with an average personal income of around R2 000 per month. Only 10% use the Internet regularly, and when they shop it is at Pep.