Millennials and Rising Interest Rates to Likely Impact Next Chapter of Hong Kong Consumer Lending Market

As 2017 concludes under the premise of a favourable Hong Kong consumer lending environment, two factors will likely have the largest impact on performance in 2018 – Millennials and potential rising interest rates. These conclusions are based on TransUnion’s (NYSE: TRU) recently released Q3 2017 Industry Insights Report.

“The Hong Kong consumer lending environment remains strong, with low levels of credit risk existing alongside positive, albeit slow, levels of growth,” said Brendan le Grange, director of research and consulting for TransUnion Hong Kong. “This is reflective of an economy that shows some solid numbers, with positive GDP growth expected through 2018 and a continued favorable employment situation.”

TransUnion noted that the Hong Kong government estimates 2017 GDP growth of 3.7%, with 2018 growth forecasted to remain positive but at a lower 2% to 2.5%. Meanwhile, interest rates, which have seen increases in 2017, are likely to continue to rise in 2018. The Hong Kong Monetary Authority policy rate is tied to the US fed funds rate, and the US Federal Reserve has recently reconfirmed its forecast for a cumulative 0.75% to 0.85% increase by the end of 2018.

“2018 is expected to deliver more of the same positive trends. Our consumer credit outlook is stable, but impacted by two key factors—the threat of rising interest rates on the negative side, and the increasing prominence of Millennials with their inherent growth momentum on the positive side,” le Grange added.

The Hong Kong consumer credit market may feel some pressure as a result of rising interest rates. In a brief published last year, the Research Office of the Legislative Council found that 40% of a family’s monthly, spend, for family living in private housing, was going to pay for accommodation – the cost of an average mortgage has already risen 10% since that survey was done, is set to rise a further 9% in 2018, and may rise another 7% again in 2019.

According to TransUnion research, if interest rates rise by 75 basis points before the end of 2018 (as some economists forecast), the cost of the average mortgage booked in 2017 will increase by $1,500 per month, 9%. Approximately 4 out of 5 mortgage holders in Hong Kong should be able to absorb that increased monthly mortgage payment in the short-term simply by moving to lower or minimum monthly payments on their credit cards. However, about 1 in 15 mortgage holders would need to find more than $1,000 per month from other sources to keep meeting their current obligations. Further, nearly 33% of those consumers currently have credit scores that are below prime.

“While this is a small number of consumers overall, this development should be monitored. Many of these consumers may have other resources they can reallocate to cover monthly their debt service – investment or savings contributions, for example – while others may need to reduce spending on discretionary items to cover the higher monthly payments,” said le Grange.

On the positive side, the second major trend shaping the 2018 outlook is the growing prominence of Millennials, those consumers born between 1980 and 1994.

Bankcards remain the most widely held consumer credit product in Hong Kong by a significant margin, In Q3 2017, Millennial cardholder balances were up 12% year-over-year compared to Generation X (up 1%) and Baby Boomers (down 6%). This growth in Millennial card usage is in contrast to the market overall, one in which Q3 2017 was the eighth consecutive quarter with year-over-year balance growth below inflation levels—in other words, a decrease in real dollar buying power exercised through card credit.

“Millennials are positioned to help swing the equilibrium in the credit card market, with headline growth expected to approach 2% in 2018 and 3% in 2019. The next two quarters present Hong Kong lenders with an opportunity to capture festive season credit demand. But in the longer term, lenders will need to find ways to appeal to the high-growth Millennial segment and ensure that credit cards remain a primary vehicle for purchasing and borrowing against the growing number of options available,” le Grange said.

Inside The Hong Kong Consumer Credit Market – Q3 2017

The Industry Insights Report found that credit cards and mortgage loans were the only major credit products experiencing year-over-year account growth. Credit card account volumes grew 1.2% to close Q3 2017 at 18.58 million accounts. The average credit lines available to a consumer also increased 4.1% in the last year to $282,969, while serious credit card delinquency rates (90 days or more past due) remained unchanged at 0.07%.The number of mortgage accounts increased nearly 9% to finish Q3 2017 at 506,100 accounts. Serious delinquency levels (60 or more DPD) for mortgage loans dropped two basis points to 0.05%.

Most Popular Hong Kong Credit Products

Unsecured personal loans remain the second most popular credit product with 623.5 thousand accounts, though this was a 5.3% decline from the previous year. Interestingly, even as the number of consumers with an open personal loan declined in the last year, the average balance per consumer rose about 8% between Q3 2016 and Q3 2017 to $254,700. A possible reason for this balance increase is consumers borrowing to support new home purchases, as mortgage originations have risen sharply over the same period and at least 1 in 5 of the larger value personal loan borrowers have also opened a new mortgage over the past year. The 60 or more DPD delinquency rate on personal loans experienced a year-over-year decline of 5 bps to 0.92% in Q3 2017.

The number of unsecured revolving lines did not change materially in the last year, closing Q3 2017 at 561.8 thousand. Delinquency rates (60 or more DPD) for these lines dropped three basis point in the last year to 0.36% in Q3 2017. While the number of consumers carrying a revolving account balance declined about 2% in the last year, average balances per consumer rose minimally by 0.2% to $129,600.

“We continue to see minor divergences in the popularity of credit products in Hong Kong. Much of this is likely due to the increased presence of Millennials in the overall consumer credit picture and differences in their credit usage and preferences compared to earlier generations. Overall, we see the Hong Kong consumer credit market as strong and stable, with consumer-level delinquency flat or declining and expected to remain at very low levels. Overall, this picture is one of improving prospects for consumer credit demand in future years,” concluded le Grange.

For more information about the Q3 2017 TransUnion Hong Kong Industry Insights Report, please visit here.

Note: Transunion does not make its own interest rate forecasts, but rather relies on the government forecasts of the HKMA¹ and the US Federal reserve²

1. http://www.hkma.gov.hk/eng/key-information/press-releases/2017/20170615-3.shtml

2. https://www.federalreserve.gov/newsevents/pressreleases/monetary20170920b.htm

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