Hong Kong Consumers and Lenders Continue Cautious Approach to Credit

• Largest decline in consumer demand and lender supply observed for credit products used for discretionary spending – credit cards and unsecured revolving lines
• Millennials’ demand for and use of unsecured credit more robust than other generations
• Delinquencies remain much lower than in other mature credit economies, but have risen for credit cards, amidst a challenging economic environment

The newly released TransUnion (NYSE: TRU) Q4 2020 Industry Insights Report continues to reflect the impact of the global economic slowdown caused by the ongoing COVID-19 pandemic, with consumers and lenders both continuing to take a cautious approach to credit.

Enquiries, a measure of consumer demand, were down year-on-year (YoY) in Q4 2020 across consumer credit products associated with discretionary spending, and this drop was most pronounced in the unsecured revolving line (-35.7%) and credit card (-27.1%) categories. Mortgages experienced a resurgence in enquiries – up 8.3% YoY – as improved housing affordability enabled consumer demand.

Originations, which measure new accounts opened and is a function of both consumer demand and lender willingness to advance credit, fell YoY in the third quarter of 2020 (latest available data for originations) across all the major consumer lending categories. With the decline in originations and the negative impact of consumer pessimism on credit utilisation, outstanding balances also fell YoY for most credit products, with the exception of mortgages. Outstanding balances for mortgages grew significantly – up 10.1% YoY, primarily driven by the surge in mortgage lending – a phenomenon observed across other credit economies.

Unsecured revolving lines, typically used for discretionary spending, recorded the largest YoY decline in outstanding balances (-36.2%) and enquiries (-35.7%) and the second largest drop in originations (-30.8%). This decline is reflective of the general fall in retail spending. It may also be driven by the relatively higher interest rates charged on these products as consumers take a more cautious approach to their finances, leading them to pay down outstanding credit lines and focus on more affordable products.

Despite the sustained consumer financial impact from subdued economic activity, delinquencies remained significantly lower than in other international credit markets. However, while most credit products experienced an improvement YoY, credit cards showed a slight deterioration in performance at the end of 2020.

“The continued impact of the pandemic and associated fall in retail spending have had a significant impact on consumer demand in the credit market. Lenders also remain cautious as they continue to adjust their risk appetite and business models to accommodate prevailing conditions,” said Francis Lau, director of research and consulting, Asia Pacific, TransUnion. “Although headline figures show an overall decline in consumer credit market activity, when we look deeper into generational behaviors, there are some meaningful trends emerging that may shape the outlook for 2021.”

Table 1: Q4 2020 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 2020) 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 driving credit growth

Credit behaviors and preferences vary significantly by generation. For the two most widely held consumer credit products, credit card and unsecured personal loans, we observed how the younger generations are driving growth in these markets, in contrast to older generations, which have been pulling back their participation levels.

Despite the overall YoY decline in originations for unsecured personal loans (-18.0%), Millennial (consumers born between 1980 and 1994) and Gen Z (consumers born in 1995 or later) consumers recorded increases in new account openings by 2% and 20%, respectively. A similar observation was made for change in outstanding balances, which fell -2.8% YoY for the overall product, but for Millennial and Gen Z consumers who have these loans, outstanding balances grew by 5% and 38%, respectively.

While YoY growth in Gen Z consumers is calculated from a very low starting point (only 2% of unsecured personal loans are concentrated within Gen Z), the growth trend observed for Millennials is meaningful as these consumers represent 33% of the unsecured personal loans market.

Although originations (-17.6%) and outstanding balances (-7.8%) fell YoY for the overall card market, for Millennials these negative changes were less pronounced, at -8% and -2%, respectively. For Gen Z consumers, outstanding balances actually grew by 24%, again measured from a very low starting base.

Lau commented: “Whilst you’d expect a general increase over time across key indicators for Gen Z as more consumers in this group become old enough to apply for and use credit, for Millennials it shows just how robust credit demand is in this key demographic. Originations and balance growth have fallen pre-pandemic levels for Millennial consumers, like all generations, but the fact there is still opportunity for growth is very important for the likely future trajectory of the wider consumer credit market.”

Many Millennial consumers are entering or approaching ages where their credit needs are maturing and a wider range of products is needed. As a result, this generation is also driving other key growth indicators – within mortgages, millennials accounted for 50% of all new account enquiries in Q4 2020.

Delinquencies improved amidst economic turmoil, except for cards

Delinquency rates in Hong Kong continue to be significantly lower than in other mature consumer credit economies. As of Q4 2020, credit performance trends show that, despite pressures on household finances, the measures consumers have put in place to reduce spending and better manage their budgets have enabled them to maintain credit commitments. Results showed a YoY improvement in delinquency performance for most credit categories, with the exception of credit cards. Recent TransUnion research looking at the consumer payment hierarchy showed that consumers prioritize credit card payments last against other major credit products. Economic pressures persist, as 69% of consumers recently reported still being financially impacted by the COVID-19 pandemic*, with 58% of them being concerned about paying their bills. These financial pressures, coupled with consumer payment hierarchy preferences, explain why cards have experienced an increase in delinquencies, unlike other credit products.

Lau concludes: “Despite subdued economic conditions and a general cooling in the consumer credit market, it is encouraging to see so many Hong Kong consumers managing to maintain their household finances. Lenders need to prepare for market growth beyond the pandemic. Conservative lending during times of distress and pessimistic demand from good consumers can cause an imbalance of risk in portfolios. Timely identification, interventions and control measures, balanced with a continuous effort to find and fund the good customers is essential for managing risk and sustaining growth.”

For more information about the TransUnion Hong Kong Industry Insights Report and to register for TransUnion's Q4 2020 Industry Insights Report webinar scheduled for 24 March, Wednesday at 3:00 p.m., please visit our dedicated website page.

^{* Results of TransUnion Financial Hardship Survey conducted week of November 30.}