Credit Cards and Loans on Card Lead Growth in Hong Kong Consumer Credit Market

• Hong Kong continued to see a revival of consumer credit activities, fueled by borders reopening and improved consumer sentiment. 
• High interest rate environment caused a higher ratio of credit cardholders to become transactors. 
• Consumers with loans on card tend to hold more credit cards and spend more, presenting growth opportunities for card issuers. 
• Top-of-wallet card holds typically three-fifths or more of consumers’ credit card balances, while fewer consumers hold five or more cards than before. 
   

Credit demand and supply reflected a revival of consumer credit activities during the last quarter of 2022, amid the backdrop of borders reopening, improving labour market conditions, and reviving private consumption, according to the latest Q4 2022 Industry Insights Report released by global information and insights company TransUnion (NYSE: TRU). In Q4 2022, Hong Kong saw its labour market continue to improve with the unemployment rate trending down to 3.4%[1], while at the same time, private consumption recovered to pre-pandemic levels[2]. This was despite the Hong Kong economy overall contracting by 4.2% year-on-year (YoY) during the last quarter, with the consumption growth possibly buoyed by anticipation of an influx of visitors and investors amid a general reopening and relaxation of travel restrictions.

Originations[3] – a measure of new accounts opened – recorded growth in three major consumer credit product lines in Q3 2022 (latest available data for originations): credit cards, loans on card, and unsecured revolving lines. Loans on card saw the most pronounced growth at 29% YoY. Unsecured revolving lines increased by 2.1% YoY, albeit at a slower pace after two years of rapid growth. Credit cards, the most widely held credit product, continued a growth trajectory with 1.8% growth in originations YoY.

When looking at outstanding credit card balances, it grew by 7.3% YoY in Q4 2022. This growth and general resurgence in the credit card market indicates reengaged consumers, largely attributable to improved consumer sentiment and sustained momentum in consumption. According to TransUnion’s Consumer Pulse Study Q4 2022, Hong Kong consumers showed increased optimism in their household finances, with a majority (78%) saying they expected their income to remain stable or increase in the following months.

“In Hong Kong, consumer sentiment seems to have remained unaffected by the current inflation and high interest rate environment,” said Kevin Chen, principal, Financial Services Research and Consulting at TransUnion Asia Pacific. “This positive momentum in consumer sentiment is translating into growth in the major consumer credit products. Lenders need to capitalise on this growth trajectory by better serving consumers’ product preferences and needs as they reengage with the credit market.”

Not all product categories recorded overall growth. Following a strong rebound in 2021, the unsecured personal loan market softened in 2022, with a decline of 9.7% in originations YoY during Q3 2022. This decline occurred across generations, except Gen Z (born in 1995 onwards), where originations increased by 10% YoY, mainly due to the continued increase in the number of adult consumers in this generation each year. Despite the overall origination decline, outstanding balances for unsecured personal loans were up 8.7% YoY in Q4 2022.

Mortgages – the second largest product in Hong Kong’s consumer credit market in terms of number of borrowers – continued to be pressured by an ongoing correction in the housing market and rising interest rates. Origination volumes in Q3 2022 decreased noticeably from the same quarter in the previous year but rebounded from the lower level seen in the prior quarter of Q2 2022.

Q4 2022 Metrics for Major Consumer Credit Products in Hong Kong

Source: TransUnion Hong Kong (except for mortgage data which is from the Residential Mortgage Survey (December 2022) published by the Hong Kong Monetary Authority)

i. Originations are viewed one quarter in arrears to account for reporting lag.

ii. Serious delinquency rates are 90 or more days past due for credit cards and 60 or more days past due for all other credit products.

iii. Delinquency data are reported at a balance level except for mortgages and loan on card, which are reported at an account level.

Consumers shift from being credit card revolvers to transactors amid high interest environment

Hong Kong’s base rate[4] increased seven times during 2022, rising from 0.5% in January to 4.75% in December. The relatively high interest rate environment and consumers’ improved confidence in their future incomes seem to have engendered a shift in credit card management behaviours.

The proportion of credit cardholders that revolved their cards – meaning paying a partial amount of their total card balances each month – gradually decreased alongside rising interest rates, down from 56% in Q4 2021 to 54% in Q4 2022. At the same time, credit cardholders that managed their accounts as a transactor – paying the total balance each month to avoid paying interest and/or late fees – increased gradually from 44% in Q4 2021 to 46% in Q4 2022.

“Despite more credit cardholders paying off their balances in full each month, there was still significant growth in credit card balances, indicating a rebound of consumer spending on the back of Hong Kong’s reopening and revival of economic activities, and potentially higher balances maintained by those that did still revolve. At the same time, the growth in loan on card originations and balances may also suggest that consumers were shifting their balances to new loans on card with lower interest rates to cope with rising interest rates and inflation,” added Chen.

Cardholders with loans on card tend to spend more

Loans on card offer additional credit access to consumers who already hold a card with a lender, giving lenders the opportunity to earn additional interest income and increase overall share of wallet.

Simultaneously, consumers with loans on card were observed to hold nearly double the number of cards than those without loans on card. Super prime* consumers with loans on card held an average of 7.7 cards in their wallets, compared to the 4.4 cards held by super prime consumers who did not hold a loan on card. For the prime plus risk band, consumers with loans on card held an average of 7.4 cards in wallet, compared to the 3.9 cards held by consumers without loans on card. The trends were similar for near prime and prime consumers.

The Q4 2022 report also observed the average card spend among prime and above consumers holding loans on card was three times greater than that of consumers of a similar risk profile and without loans on card. These insights indicate that consumers who hold loans on card tend to be more engaged and credit active, offering greater growth potential.

Consumers who took out loans on card are mostly Millennials (born 1980-1994) and Gen Z (born in 1995 onwards). Millennials accounted for 41.5% of originations in loans on card during Q3 2022 (latest available data for originations). Gen Z borrowers made up 36.9% of new loans on card, compared to 34.7% during the same quarter of 2021.

“Gen Z consumers are the most rapidly growing group of borrowers, and they present an opportunity for lenders seeking growth-driven revenue sources,” Chen said. “Consumers with loans on card leverage their credit cards in building higher balances, making this a profitable consumer segment for credit card issuers. Lenders can leverage trended data and algorithms to predict consumers likely to open loans on card and hence fuel smart portfolio growth.”

Top-of-wallet card wins up typically three-fifths or more of outstanding card balances

TransUnion found the average number of cards per cardholder reduced when comparing Q4 2019 to Q4 2022. Previously, 40% of super prime Hong Kong residents had five or more credit cards in wallet, whereas just 35% have this many cards in wallet now. On average, each super prime cardholder held 4.9 cards in Q4 2019 versus a slight drop to 4.4 cards in Q4 2022. The super prime segment represented a significant 70% of overall cardholders in Q4 2022.

Among those super prime cardholders with five cards or more, the top-of-wallet card reflected 58% of the overall consumer-level balance across all cards. The second most used card held only 22% of overall consumer-level card balances, and the remaining three or more cards held just 20% of their balances. Among super prime cardholders with four cards, the top-of-wallet card typically reflected 69% of their card balances. The top-of-wallet card for super prime consumers with three open cards held 75% of their balances, while the top-of-wallet card among those with two cards accounted for 84% of their balances. With top-of-wallet cards holding a significant share of balances, being the top-of-wallet card issuer becomes increasingly critical in an environment where interest rates are rising and consumers are reengaging in the market as the economy recovers.

When it comes to loyalty relating to the top-of-wallet card share, TransUnion’s data shows 61% of consumers turn to the financial institution issuing their top-of-wallet card when applying for a loan on card.

“Lenders need to invest in and diversify their strategies to become or remain the top of wallet card and ensure a meaningful share of consumers’ credit card balances, especially when there are fewer cardholders with five or more cards in wallet,” Chen said. “In this environment where competition for balances is stiff, lenders can grow portfolios by promoting alternative products. The fact that so many loans on card are originated off consumers’ top-of-wallet credit cards suggests that lenders seeking to expand the number of products accessed by their highest-balance consumers should focus on promoting this product, leveraging the credit and relationships that they already have.”

For more information about the TransUnion Hong Kong Industry Insights Report, please visit our dedicated website.

*TransUnion CreditVision® risk score: super prime = AA; prime plus = BB; prime = CC; near prime = DD to HH; subprime = II to JJ. Prime and below = CC to JJ.

[1] “Hong Kong Economic Situation – Latest Developments” by the Office of the Government Economist of Hong Kong

[2] “GDP and its Main Expenditure Components at Current Market Prices” by the Census and Statistics Department of Hong Kong

[3] All originations in this press release are based on Q3 2022 data due to reporting lag.

[4] “Hong Kong Interest Rate” by Trading Economics