Hong Kong Consumer Credit Demand Rebounds as Macroeconomic Conditions Improve

• Consumer demand increased across major lending categories
• Younger generations showed stronger rebound in card balances
• Consumers deleveraging to cope with uncertainties associated with the pandemic

The newly released TransUnion (NYSE: TRU) Q1 2021 Industry Insights Report shows demand for consumer credit rebounded in the latest quarter, mirroring recent GDP and retail sales growth*.

Almost all of the major consumer lending categories recorded strong growth in credit enquiries – a measure of demand – with mortgages recording the largest increase, up 25.1% year-on-year (YoY) in Q1 2021. Credit cards, the most widely held consumer credit product in Hong Kong, also showed strong growth – up 8.3% YoY. The only category to show a decline was unsecured revolving lines, continuing the trend seen in previous quarters where it has repeatedly recorded the largest YoY declines. This is likely a function of relatively higher interest rates for revolving lines when compared to other products and this product’s use for discretionary spending, which has generally decreased.

While consumer demand for new credit appears to be increasing, this renewed demand has not yet been reflected in higher reported new account openings. Reporting for originations, which are a measure of new accounts opened and are a function of both consumer demand and lender willingness to advance credit, lags other indicators by a quarter due to the way data are reported. In Q4 2020, YoY originations declines were most pronounced for unsecured lending products focused on discretionary spending – loan on card (-17.7%), unsecured revolving lines (-15.8%), and credit cards (-13.9%). The recent rebound in enquiries is likely to create positive momentum for origination volumes for Q1 2021.

Growth in total credit card balances, a measure reflective of spending and demand for credit, although still negative YoY, has rebounded faster for younger generations – led by Millennials (born 1980-1994). The Millennial generation, which represents an increasingly larger proportion of credit-active consumers (29%), recorded a small (0.8%) YoY decline in overall card balances in Q1 2021, against an overall fall of 7.6% across the credit-active population.

“Improving macroeconomic conditions are helping to fuel a rebound in consumer demand and spending, but this trend is far from uniform across generations,” said Francis Lau, director of research and consulting, Asia Pacific, TransUnion. “It will be important for lenders to promote relevant offers to enable consumer spending and manage the recovery of supply to keep up with demand in the coming quarters.”

Table 1: Q1 2021 Metrics for Major Consumer Credit Products in Hong Kong

_{Source: TransUnion Hong Kong (except for mortgage balance data which is from the Residential Mortgage Survey (March 2021) published by the Hong Kong Monetary Authority)}

1. _{Originations are viewed one quarter in arrears to account for reporting lag.}
2. _{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.}
3. _{Delinquency data are reported at a balance level except for mortgages, which are reported at an account level.}

Younger generations leading consumer credit market recovery

The majority (58%) of enquiries in the latest quarter were from Millennials (born 1980-1994) and Gen Z (born 1995 or later). Millennials appear to be returning to pre-pandemic spending levels, with credit card balances showing they are recovering at a faster rate than other generations. Although outstanding credit card balances were down overall YoY in Q1 2021, the difference across generations was marked. Whereas Baby Boomers (born 1946-1964) were down by 16.2% YoY and showed only a small recovery in balance growth from previous quarters, Millennials showed a more substantial rebound trajectory in credit card balance growth.

Figure 1: Trajectory of Outstanding Credit Card Balances

_{Source: TransUnion Hong Kong consumer credit database}

Lau commented: “Compared to older generations, Millennials generally prefer applying for credit and shopping or transacting online. For lenders offering a friction-right experience to their existing customers and prospects, this indicates an opportunity to serve and attract consumers during the social restrictions associated with the pandemic.”

Consumers show signs of deleveraging unsecured credit

Despite Millennials showing a rebound in card usage, consumers appear to be deleveraging their unsecured credit balances. During the pandemic, overall outstanding unsecured credit balances decreased YoY in the last five consecutive quarters and are -8.9% lower than they were a year ago.

This emerging trend of consumer deleveraging is being led by older generations, who often have more in savings and/or disposable income and thus greater means to manage their finances prudently. When looking at outstanding unsecured credit balances, Baby Boomers recorded the largest reduction, at -17.9% YoY in Q1 2021, compared to just -1.5% for Millennials.

“A cautious approach to credit and its associated deleveraging is something we’ve seen in a number of our international markets. The uncertainty caused by COVID-19 and its ongoing impact on the global economy have led consumers to cut back on discretionary spending, save more and reduce their debt levels to cope with uncertainties associated with the lingering pandemic. As a result, balances in categories like unsecured revolving lines are now at historical lows in Hong Kong,” said Lau.

Continued shift in portfolio dynamics

Although overall delinquency rates in Hong Kong have remained low compared to international markets, there is still some volatility. Lenders need to monitor those movements closely, especially in below prime segments, where consumers are generally more susceptible to macroeconomic shocks. In the latest quarter, most of the major consumer credit categories saw a YoY improvement in overall balance level delinquency rates, although they are still not back to pre-pandemic levels.

This observation is supported by the latest TransUnion Consumer Pulse study** which showed that 78% of consumers had seen their household income negatively impacted by the pandemic at some point, and that 61% expect income will continue to be negatively impacted in the future. Almost three-quarters (72%) of those negatively impacted were concerned about paying their current bills/loans in full, and 42% stated they will not be able to pay them in less than four weeks.

Lau concludes: “With deleveraging occurring amongst older generations, lenders need to constantly monitor shifts in portfolio risk distribution. There are several healthy market trends that lenders should consider in extending new credit to consumers. As pandemic-related concerns begin to ease, lenders should take note of these positive trends and be prepared to meet the needs of consumers as their credit demand rebounds in 2021.”

* Latest GDP figures show growth of 7.9 % and retail sales figures growth of 7.5% in Q1 2021 (source: Census and Statistics Department)

** Results of TransUnion Consumer Pulse Study conducted March 5-22, 2021.