Hong Kong Credit Card Lending Reaches Record Levels as Wider Consumer Credit Market Remains Stable
Credit card balance growth outpaces inflation for 5th consecutive quarter
Hong Kong, Mar. 21 , 2019 – The newly-released TransUnion (NYSE: TRU) Q4 2018 Industry Insights Report found that credit card lending continued to fuel the Hong Kong consumer credit market, recording year-on-year (YoY) growth in both origination volumes (up 9.2%) and outstanding balances (up 5.0%) in the most recent quarter. As economic headwinds begin to emerge in Hong Kong, the continued growth and performance stability of the consumer credit market at the conclusion of 2018 positions the lending industry well against these potential external challenges.
New mortgage originations also rose in the third quarter (the latest quarter of available data for originations), up 6.3% YoY, reaching their highest level since 2013. However, there are early signs of the real estate market softening from there. Mortgage enquiries, measuring consumers applying for new mortgages, dropped 23% YoY in Q4 2018. This recent decrease in mortgage enquiries was against a backdrop of declines in real estate prices in each month since August 2018 (as measured by the Centa-City Leading Index).
Importantly for both credit cards and mortgages, delinquency rates remained low and stable in the most recent quarter. This trend in delinquencies was also true of all other major consumer lending categories, suggesting sound fundamentals across the entire market. With GDP contracting 0.3% in Q4 2018 and the 2019 growth rate expected to be below full-year 2018 levels, this stable consumer lending performance is reassuring news.
“Hong Kong’s consumer lending market continued to be led by its most widely held product: credit cards,” said Francis Lau, director of research and consulting for TransUnion Hong Kong. “However, we are seeing some signs of a mixed picture for originations across categories. Credit cards and mortgages recorded increases, whereas other major consumer credit products, including personal loans, auto loans and unsecured revolving lines, recorded declines in year-on-year origination volumes. As well, the outlook for mortgage originations is clouded by the recent drop in mortgage enquiries. Encouragingly though, across the majority of consumer lending categories, defaults remain low, indicating that consumers are managing their personal finances well.”
Credit card balances continue to grow and outpace inflation
Total credit card balances
Source: TransUnion Credit Data / Census & Statistic Department / Haver Analytics
Credit card balances continued to grow ahead of inflation and in contrast to the growth near or below inflation levels seen in 2016 and early 2017.
Although strong at a headline level, growth varied significantly across generations as card usage increasingly shifts to younger age groups. Baby Boomers (born 1946 to 1964) recorded a reduction in total credit card balances of 3.1% YoY compared to Millennials (born 1980 to 1994) who grew by 17.7% YoY. The strongest percentage growth was amongst Generation Z (born 1995 onwards) at 89% YoY, albeit from a significantly lower base level. This group exceeded $1 billion in balances for the first time mid-way through 2018, and at year-end 2018 saw balances expand further to over $1.5 billion.
With the increasing popularity of credit cards continuing to fuel competition in the market, TransUnion conducted a separate research study that was shared at its November 7 Hong Kong Financial Services Summit, examining those factors driving consumer card preferences.
TransUnion’s study revealed that the average Hong Kong cardholder in the super prime risk tier (AA and better according to the TransUnion CreditVision risk score) held just over five cards, well ahead of the U.S. average of just under three. Presented to nearly 150 delegates from Hong Kong’s leading financial institutions, the study revealed that generic bank-issued credit cards—those without a specific rewards feature—are the most common cards in consumers’ wallets. Yet, cards with a prominent air miles program are most likely to be a consumer’s favorite and capture the highest share of total spend. This is particularly true for higher-spending cardholders and younger consumers, and is an important insight for card issuers because “top-of-wallet” cards typically generate eight times as much spend as other cards in wallet.
“The credit card market remains incredibly competitive, and this trend shows no sign of abating. Both younger and more savvy cardholders are focused on interest rates and rewards, not just one or the other. This dual focus continues to drive competition and innovation,” said Lau. “Generic bank cards remain the cornerstone of the market, but with younger consumers seeming to prefer cards with a clear rewards program, the dynamics of the market continue to change.
Mortgage market looks to have reached its inflection point
The total number of mortgage accounts rose to 553,200 in Q4 2018, up 7.3% YoY. However, with indices showing residential property prices peaking in August before falling 7.4% by the end of the year, there are new headwinds. Mortgage enquiries, the measure of consumers applying for new mortgages with lenders, dropped 23% YoY in Q4 2018. This trend bears watching in future quarters to determine if mortgage demand and originations are negatively impacted by the drop in real estate prices or, conversely, if softening prices may represent a buying opportunity for consumers.
At a generational level, Millennials opened 35.9% of all new mortgages in Q3 2018, a larger percentage of the total than in the same quarter last year. This share is still less than Generation X, who accounted for the largest share at 42.2%.
Importantly, mortgage delinquency rates in Q4 2018 remained unchanged from the start of the year at just 0.04%, indicating extremely strong fundamentals.
“Lenders and borrowers alike need to monitor the housing market closely. Falling prices on their own don’t always constitute bad news, often allowing more first-time buyers to enter the market. Lower LTVs pushed by regulation should also protect the market somewhat from negative equity. However, sustained falls can erode security, and have historically been linked to rising delinquency rates,” said Lau. “Even so, mortgage delinquency rates are quite low in absolute terms, and extraordinarily low when compared to other developed economies.”
A robust credit ecosystem looking to cope with economic headwinds
Lau concluded: “Cooling property prices, American-Chinese trade tensions, and generally weakening global demand have weighed on Hong Kong’s economy. Annual GDP grew 3.1% in 2018 but is expected to grow by only 1.6% during 2019. While this will introduce uncertainty and consequently caution, some of which we’ve already started to see, unemployment is still at twenty-year lows and retail spend is still growing. And as indicated by our research, risk remains low in the Hong Kong consumer lending environment.
“At the same time, lenders shouldn’t be complacent. It is important to actively manage lending portfolios and be alert to changing dynamics—especially across different borrower demographics.”
For more information about the Q4 2018 TransUnion Hong Kong Industry Insights Report, please visit here
For more information about the TransUnion Hong Kong Financial Services Summit, please visit here
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