The CCI is based on a 100-point scale, where 50.0 is the break-even level between improvement and deterioration of credit health. Any number greater than the 50.0 break-even point shows an improvement in credit health.
This continued upward trend in the CCI indicates consumer credit health improved at its fastest pace since 2011. However, this nonetheless represents only a moderate improvement in the last two quarters following 11 straight quarters of deteriorating credit health when compared with the strong improvements seen in 2010.
“While the index shows the CCI rising further above the 50 mark, which is encouraging, factors such as loadshedding, labour disputes, a weak job market, and an unstable rand are lurking risks to household financial improvement,” said Geoff Miller, CEO of TransUnion. “Household cash flow improved fairly substantially in the first quarter due to a sharp drop in consumer inflation, but the sustainability of this relief is questionable. Fuel prices are already rising sharply again and income taxes were increased in March. We expect households to begin to feel a little more financial pressure in the second quarter.”
Loan repayment behaviour continued to improve in the first quarter, with the rate of new defaults (accounts three months in arrears) continuing to fall on a year-on-year basis. Miller pointed out that the trend in loan repayments has been an encouraging one for the past few quarters already, and that it showed the credit industry had worked hard at repairing some of the excesses of the unsecured lending cycle. “We noted in 2014 that credit providers had adopted more prudent lending standards, and I think we’re still seeing the benefits of this being felt into 2015.”
TransUnion data shows that repayment behaviour is improving fastest in the personal loan, credit card and telecommunication sectors, all benefitting from more prudent lending practices after arguably excessively loose standards prior to 2014. On a negative note, however, vehicle impairments are up strongly by nearly 20% year-on-year.
In addition, TransUnion’s report found that its distressed borrowing indicator still shows some financial distress, but not enough to raise added concern, while debt service costs were effectively unchanged in Q1 due to stable interest rates and steady repo and prime lending rates. Revolving credit utilisation rose at a rate of only about 1.9% year-on-year in the first quarter, driven predominantly by credit cards but also by other revolving store cards. The usual seasonal spike in distressed borrowing in the 1st quarter was again evident, rising 1.6% q/q, but it was notably less pronounced than in the 1st quarters of 2013 (2.7%) and 2014 (2.5%). .
TransUnion data nonetheless show that currently one third of consumers utilise 70% or more of their credit limits, which amounts a 1.6% y/y increase. “We’re seeing some improvements in lending and repayment behaviour, but there’s still a lot of work to do by credit providers to help the broad base of customers adopt more sustainable credit habits,” cautioned Miller, ”For certain market segments revolving credit is still a key supplement to monthly budgets. This is a long-standing trend now and one which shows just how tough the macroeconomic environment has been.”
Interestingly, TransUnion noted that improving disposable incomes in the first quarter (as a result of lower inflation and low fuel prices) likely continued to support a rise in cash spending relative to credit spending. Miller pointed out this was in line with numerous recent retailer results which indicated greater cash purchases by their customers. “This is hardly surprising when one considers just how sharply unsecured retail lending has slowed in the past two years”, Miller added.
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 the 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.
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.