Lender Caution and More Selective New Account Growth Drive Hong Kong Consumer Credit Dynamics
- Consumers used their credit cards more during Q2 2024, likely related to summer travel spending
- Lenders tightened supply of new personal loans in response to slightly increased delinquency risk
- Two in three revolving line originations were supplied by virtual banks, a significant increase from last year
Against a backdrop of positive macroeconomic indicators in Hong Kong, including a 3.3% growth in GDP and a 7.5% year-over-year (YoY) growth in exports1, the local credit market remained healthy during Q2 2024. Although origination growth slowed somewhat across all credit products apart from revolving lines, consumer balances on existing credit facilities increased during Q2 2024 as consumers used credit to fund summer travel and offshore spending, aligned to the trends observed in the tourism sector2.
These are some of the findings of TransUnion (NYSE: TRU) Hong Kong’s latest Industry Insights Report for Q2 2024, which provides lenders with insights into the current trends driving the local credit market.
“The Hong Kong credit market showed both growth and caution during the second quarter, as lenders focused on higher-quality borrowers to manage risk, while consumers continued to demonstrate responsible borrowing habits,” said Weihan Sun, Principal of Research and Consulting for Asia Pacific at TransUnion.
The credit card market continued to experience mixed trends during this quarter, with a 5% YoY decline in inquiries, which reflects reduced demand for new cards. Card originations increased slightly by 0.6% YoY during Q1 20243 (the most recent quarter for which originations data are available). Although the YoY change in originations was marginal, the comparative period of Q1 2023 saw substantial volumes due to Hong Kong’s re-opening during that quarter, indicating that the participation rate for cards remains steady despite waning demand. Gen Z4 consumers’ share of card originations (20%) increased by 3.4% YoY as more consumers reached adulthood and began their credit journey.
Lenders exercise caution amid summer season spending
Amid a shift towards more subdued local retail consumer spending patterns5, lenders were also cautious, with the average credit limit extended on new cards to consumers during the period falling by 7.8% YoY, a trend observed across all risk tiers6. The shift in origination mix among consumer risk tiers is particularly significant, as prime plus and super prime borrowers accounted for 77.1% of total originations in the most recent quarter, reflecting a 1.6% upward shift from the previous year. This trend indicates that lenders are increasingly focusing on higher-quality borrowers, which can help mitigate credit risk but may also limit access for consumers with lower credit scores.
Despite the slowdown in originations growth during Q1 2024, outstanding balances on credit cards increased by 7% YoY during Q2 2024, with average balances per consumer increasing by 4.9%. This growth in balance activity in part reflects the increased overseas travel and offshore spending over the summer period, and indicates that despite lower demand for new credit cards, consumers continue to actively use the existing cards in their wallets. At the same time, the number of consumers carrying a balance grew by 2% YoY, likely driven by the continued influx of new Gen Z cardholders.
Recent momentum for loans on cards slowed after consecutive quarters of significant YoY growth, with originations decreased by 7.8% YoY during Q1 2024. Prime and above risk tiers accounted for 68.7% of originations, reflecting a 2% increase from the prior year, indicating that lenders extended these facilities to higher-quality borrowers, which can help mitigate risk. Even though outstanding balances increased slightly YoY in Q2 2024, by 0.7%, the average balances per consumer for the period decreased by 2.1% YoY. The number of consumers carrying a balance increased by 2.9% over the same period, but on average their balance was of lower value.
Table 1: 2024 Q2 Metrics for Major Consumer Credit Products in Hong Kong
Credit product | Q1 2024 (i) originations – annual change | Outstanding balances – annual change | Balance-level serious delinquency rates (ii) (iii) | Balance-level serious delinquency – annual change (basis points) |
Credit Card | 0.6% | 7.0% | 0.19% | 3 bps |
Loan on Card | -7.8% | 0.7% | 0.01% | 0 bps |
Unsecured Personal Loan | -4.9% | 0.6% | 0.52% | 10 bps |
Unsecured Revolving Line | 32.2% | -8.5% | 0.69% | 20 bps |
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 loan on card, which is reported at an account level.
Despite a 1% increase in personal loan inquiry volumes, originations decreased by 4.9% YoY during Q1 2024, with the average new loan value also down, by 2.0%. Notably, the share of personal loan originations to subprime borrowers saw significant declines across the various lender segments: the share for traditional lenders dropped from 7% to 4%, money lenders decreased from 47% to 45%, and virtual banks fell from 13% to 8%. This trend highlights a growing reluctance to extend credit to higher-risk borrowers, which may impact overall market accessibility and New-to-Credit participation.
Virtual banks became increasingly dominant in revolving lines
Revolving lines was the only product to show significant YoY growth during Q2 2024. Inquiry volumes increased 19% YoY, with origination volumes climbing by 32.2% – although the average new account limits offered by lenders decreased substantially, by 40.7%. These trends indicate that lenders have continued to meet demand but did so with caution in the face of slightly higher delinquency risk and the continued growth in the number of consumers carrying balances (up 10.5% YoY). The impact of lower opening limits has resulted in a 17.2% decrease in average balances per consumer, bringing down total outstanding balances by 8.5%.
A noteworthy trend in Hong Kong is the increasing dominance of virtual banks in the revolving lines market, where they accounted for 69% of new account originations in Q1 2024, up from 49% in Q1 2023. This shift indicates that virtual banks are rapidly gaining market share from traditional banks and money lenders, likely due to their ability to offer more convenient and accessible services. As virtual banks continue to innovate and attract consumers, traditional lenders may need to reassess their strategies to remain competitive in the evolving landscape.
Delinquencies remain relatively stable with a growing need for enhanced early detection
Across all credit products, the consumer-level delinquency rate – measured as 60 or more days past due (DPD) on any account – slightly increased by two basis points (bps) YoY to 0.31%. The marginal deterioration in repayment performance was primarily observed in the unsecured personal loans and revolving lines portfolios. Specifically for personal loan, account-level 60+ DPD rates increased by 5 bps YoY to 0.86% in Q2 2024, and balance-level delinquencies were up 10 bps to 0.52%. In response to these increases, personal loan lenders have scaled back on new account originations over the past year.
To further evaluate the deterioration in repayment performance for personal loans, TransUnion conducted deeper analysis into vintage performance – comparing delinquency rates on accounts originated in different time periods at the same number of months on book. Analysis showed that recently originated loans within the near prime and subprime risk segments (representing 60% of active loan accounts) performed worse than earlier cohorts, at 12 months after origination. Among subprime consumers, 5.75% of accounts originated in Q2 2023 were over 60+ DPD after one year, compared to 4.95% for loans originated in Q2 2022. Among near prime consumers, 2.89% of accounts originated in Q2 2023 were over 60+ DPD, compared to 2.47% for loans originated in Q2 2022.
This aligned with the findings of TransUnion Hong Kong’s Q2 2024 Consumer Pulse Study, in which 20% of respondents said that they expected to be unable to pay any of their current loans or bills in full, up three percentage points from Q2 2023. This was particularly noteworthy among younger consumers, with 23% of Gen Z consumers indicating that they could not pay their current bills or loans in full. A decline in optimism about household finances is a further indication that small portion of Hong Kong consumers are struggling to meet their financial commitments: 44% of consumers were optimistic about their household finances over the next 12 months in the Q2 2024 survey, down from 62% who said the same thing in the same quarter in 2023.
“Deteriorations in payment performance, while modest, suggest a concern about repayment capabilities within certain risk segments, particularly in the current high interest rate environment,” said Sun. “Lenders should remain vigilant and consider implementing proactive measures to manage credit risk, such as monitoring consumer performance across all obligations and implementing early risk indicators. Enhancing financial literacy initiatives to support responsible credit use among consumers is also a positive step that could be taken, to ensure that all consumers, and particularly New-to-Credit borrowers, can navigate their financial obligations effectively.”
