Mortgages Buck Trend and Continue to Grow as Wider Consumer Credit Market Adjusts to Challenging Economic Conditions

• Latest results show an increase in mortgage originations and balances, while most other major consumer credit categories saw a reduction in originations or balances, or both

• Delinquencies still at historically low levels despite increases in some categories

• Consumers continue to grow balances on credit card products

The newly-released TransUnion (NYSE: TRU) Q4 2019 Industry Insights Report shows that the Hong Kong recession is having an impact on the consumer lending market. The only retail credit category to record an increase in both originations (a measure of new accounts opened) and outstanding balances was mortgages. All other major credit product categories recorded a decline in either originations or balances, or both, in the most recent quarter.

During Q4 2019, delinquencies for most products remained broadly stable or showed a slight increase year-on-year (YoY). The largest increases were in the unsecured personal loan and unsecured revolving line categories, which were up 9 basis points (bps) and 8 bps, respectively. Typically, these categories have a higher proportion of borrowers with below-prime* risk scores, and because these higher risk consumers are often more financially stretched to begin with, they can be more susceptible to external factors as well as changes in their personal finances.

The latest Industry Insights Report data also showed lenders continued to adopt a more conservative approach in originating new accounts, with a sharp fall in YoY originations in the most recent quarter for both credit cards (-4.3%) and loan on cards (-10.4%). However, at the same time both categories recorded increases in outstanding balances – up 2.7% YoY for credit cards and 14.1% for loan on cards. This increase in balances, especially for loan on cards, suggests consumers are continuing to use their existing card accounts despite the economic downturn.

Other than mortgages, the only other categories to record a YoY increase in originations were unsecured revolving lines (up 8.7%) and unsecured personal loans (up 5.0%). Despite this increase in new account originations, outstanding balances for both products fell over the past year – down 4.4% and 3.1%, respectively, YoY – due to lenders issuing smaller credit limits on new accounts. This may indicate that lenders have been managing their exposure in these product categories which typically have a higher-risk borrower base.

“With two consecutive quarters of negative GDP growth, we are now in a technical recession. Despite this, the performance of the Hong Kong consumer credit market remains relatively sound. Lenders are still advancing credit, but originations are down year-on-year for credit card products. Meanwhile, new accounts have risen for unsecured revolving lines and unsecured personal loans, which are typically focused on higher-risk borrowers, who are likely in more need of liquidity in light of the recent economic headwinds,” said Francis Lau, director of research and consulting for TransUnion Hong Kong. “In general, consumers continue to honor their credit commitments. There are signs in some categories of increased financial stress, but despite some small rises, delinquencies are still at historically low levels and far below those seen in previous periods of economic volatility.”

Q4 2019 Metrics for Major Credit Products in Hong Kong

Source: TransUnion Hong Kong

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 because of the way data are collated.

Mortgage market shows strong growth, but rise may be short term

Q3 2019 originations (the latest available originations data due to reporting lag) showed a 16.1% increase in new mortgages compared to the same period the year before. Outstanding balances increased by a similarly strong number YoY in Q4 2019, up 9.5%.

This uptick in mortgage activity may, in part, be as a result of the recent decline in house prices observed in Q3 2019, making property more attractive and affordable to buyers, especially first-time buyers. The factors that have potentially driven the recent fall in house prices include affordability issues and rising mortgage rates; the adverse impact of the US – China trade war; as well as the bearing of the recent demonstrations and civil unrest. While the recent drop in house prices may have brought buyers into the market in the second half of 2019 and contributed to the observed originations and balance growth, wider macroeconomic conditions and events, including the Coronavirus—Covid-19—outbreak in early 2020, may have a limiting effect on the mortgage market longer term.

Lau commented: “People often make the decision to buy property based on their confidence in their longer-term financial situation as well as what they think will happen to property prices. During times of economic uncertainty, this can sometimes lead to a lag in changes in demand, and it can sometimes take a period of time before we see any material movement in the mortgage market. It will be important to watch originations and balance trends over the next several quarters to understand the full impact of recent developments, including the Coronavirus spread, on business results and consumer confidence.”

Often more revealing than the number of originations is the number of mortgage enquiries in a given period, as these give an indication of what will happen in subsequent quarters. In Q4 2019, mortgage enquiries rose 9.2% compared to the same period the year before. While mortgage enquiries typically dip in the fourth quarter of each year due to seasonality, the fact that mortgage demand showed YoY strength in Q4 indicates that originations may see healthy growth for at least another quarter.

Although low, delinquencies start to rise for some groups

Delinquencies in the Hong Kong market are some of the lowest in the world, and are far below other developed credit economies like the U.S., Canada, and the U.K. However, the latest quarterly results do show modest increases in some categories – most notably unsecured personal loans and unsecured revolving lines. The borrowers for these credit product types are typically higher risk, with more than 70% of account originations to consumers in below-prime risk scores; these consumers are often more impacted by economic downturns and constrained in their ability to meet their financial obligations. Moreover, the share of originations to below-prime borrowers has been increasing for both these product types for the past two years, which may be contributing to the rise in delinquencies seen over the past year.

In contrast to unsecured personal loans and unsecured revolving lines, other major credit products categories, including credit cards, loans on cards, mortgages and auto loans, are predominantly targeted at prime and above consumers. In these other product categories, serious delinquency rates were largely unchanged over the past year and remained at very low levels, indicating that Hong Kong consumers generally continue to do well at managing their debt obligations.

Lau concluded: “While there have been some delinquency increases for credit products focused on higher risk borrowers, the fundamentals of the Hong Kong consumer credit market remain sound. However, the recent uncertainties caused by economic and social developments put additional pressures on lenders to remain diligent. With the recent disruption caused by the Coronavirus—Covid-19—inevitably putting a strain on already challenging economic conditions, lenders need to ensure they have a deep understanding of consumer risk and any potential changes in repayment behavior. Advanced analytical models and the use of alternative and trended data can help give a greater level of insight and allow them to adapt and support consumers as required.”

For more information about the TransUnion Hong Kong Industry Insights Report and to register for TransUnion's Q4 2019 Industry Insights Report webinar scheduled for Wednesday, 18 March at 3 p.m. (GTM +8), please visit http://transu.co/HK-IIR-Q4-2019.

* Risk tier conversion for Hong Kong – below prime is DD to JJ