Stressed Household Finances Continue to put Downward Pressure on Hong Kong Consumer Credit Market
- Both consumers and lenders take cautious approach to credit as new lending volumes continue to fall
- Consumers are deleveraging, reducing outstanding balances as they increasingly cut back on discretionary spending
- Stressed household finances put pressure on credit performance for major lending products
The newly released TransUnion (NYSE: TRU) Q3 2020 Industry Insights Report reflects the sustained impact of COVID-19 on the Hong Kong economy and consumer credit market. Five consecutive quarters of negative economic growth, starting in the latter half of 2019 and perpetuated by COVID-19 in 2020, has caused unemployment rates in Hong Kong to grow to a 16-year high. There has been a corresponding fall in the demand and supply of credit over the same period.
The level of enquires, meaning new accounts consumers are seeking and thus a measure of demand, fell across all the major consumer credit products year-on-year (YoY) in Q3 2020. For bank credit cards and unsecured revolving lines—two of the most popular credit products in Hong Kong—Q3 2020 was the third consecutive quarter of YoY declines in enquiries. During the latest quarter, the fall in enquiries was most pronounced for unsecured revolving lines – down 38.9% over the same period a year ago.
Originations, as measured by new account openings, also fell across all major consumer credit categories, with the exception of auto loans, which experienced an increase (4.7% YoY), but from a very low base. Originations are a function of both consumer demand and lender willingness to advance credit. During the latest quarter (Q2 2020 due to the standard reporting lag), originations fell by more than the decline in enquiry volumes (consumer demand) for the corresponding quarter. The largest YoY declines in originations were observed amongst unsecured revolving lines (-36.3%), loan on card (-32.8%) and bank credit cards (-32.1%). Recent declines in originations indicate lenders have been taking a cautious approach, given the continued economic stress.
“Although Hong Kong levels of COVID-19 infection are far lower than most other global markets, the pandemic’s impact on consumer credit remains. With little to no international travel and subdued world trade, the sustained decline in domestic and global economic activity continues to impact the credit economy. Consumer confidence remains low, especially as household finances struggle to recover, and this impacts consumers’ willingness to spend and borrow money,” said Francis Lau, director of research and consulting, Asia Pacific, TransUnion.
Table 1: Q3 2020 Metrics for Major Consumer Credit Products in Hong Kong
Credit Product | Q2 2020(i) Originations – Annual Change | Enquires – Annual Change | Outstanding Balances – Annual Change | Balance-Level Serious Delinquency Rates(ii)(iii) | Balance-Level Serious Delinquency – Annual Change (Basis Points)(bps) |
Bank Credit Card | -32.1% | -28.7% | -10.8% | 0.29% | +10 bps |
Loan on Card | -32.8% | N/A | 2.0% | 0.01% | +1 bps |
Auto Loan | 4.7% | -17.8% | -11.4% | 0.18% | +11 bps |
Mortgage | -28.6% | -6.2% | 9.9% | 0.05% | No change |
Unsecured Personal Loan | -18.7% | -5.2% | -1.5% | 0.55% | +11 bps |
Unsecured Revolving Line | -36.3% | -38.9% | -35.2% | 0.52% | +9 bps |
Source: TransUnion Hong Kong (except for mortgage data which is from the Residential Mortgage Survey (September 2020) published by the Hong Kong Monetary Authority
- Originations are viewed one quarter in arrears to account for reporting lag.
- 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.
- Delinquency data are reported at a balance level except for mortgages, which are reported at an account level.
Consumers curtailing discretionary spending
The findings of TransUnion’s latest Financial Hardship Survey* showed a significant proportion of Hong Kong consumers (70%) reporting their household incomes being negatively impacted by COVID-19. Almost half (49%) of financially impacted consumers said they were having to cut back on discretionary spending – mirrored by a 12.9% fall in retail sales** in September 2020. With these transactions often financed via credit cards and other unsecured lending products, a fall in both the demand for new credit and fall in outstanding balances (existing credit) is to be expected.
The Q3 2020 Hong Kong Industry Insights Report shows outstanding balances fell YoY across all the major unsecured lending categories (see table 1), with the exception of loan on card which showed a marginal increase (2.0%). Historically, because of the nature of loan on card credit—a product advanced to existing credit card customers often offered at a lower rate making it more affordable—the loan on card market has experienced fewer shifts in outstanding balances.
Table 2: Q3 2020 YoY Change in Average Balance Per Borrower
Product | Overall (across all active consumers) | Prime and above consumers(i) | Below prime consumers(ii) |
Bank Credit Card | -9.4% | -11.5% | 0.3% |
Loan on Card | 5.2% | 3.7% | 10.2% |
Unsecured Personal Loan | -2.6% | -1.9% | -3.2% |
Unsecured Revolving Line | -18.0% | -15.0% | -19.8% |
Source: TransUnion Hong Kong
i Prime and above consumers have a credit rating of AA-CC
ii Below prime consumers have a credit rating of DD-JJ
When looking at YoY changes in average balance per borrower segmented for risk (table 2), different trends emerge across unsecured lending products. Lower risk borrowers (those considered prime and above) appear to be deleveraging and have reduced average balances across all products with the exception of loan on card. At the same time, higher risk (below prime) borrowers have seen flat or increased average balances for both bank credit cards and loan on card, potentially indicating a greater reliance on these products by riskier borrowers to meet daily living expenses. Higher risk borrowers have also seen a greater drop in average balances for unsecured personal loans and revolving lines compared to lower risk borrowers. This may be an indication that riskier borrowers have faced more difficulty in gaining access to unsecured personal loans and revolving lines, which has resulted in greater reliance on credit card borrowing by these consumers.
“The number of consumers reporting their household finances have been negatively impacted by COVID-19 remains significant. The duration of this hardship means many consumers are having to make difficult choices about which bills and spending to prioritise. Understandably, this is having an impact on their attitude towards borrowing and the discretionary purchases they are willing to make. It is also causing a shift in the dynamics of lender portfolios,” observed Lau. “There are undoubtedly uncertain times ahead, but with a potential vaccination on the horizon and with Hong Kong having low levels of infection by global standards, when the global recovery comes the region will be well placed to bounce back. However, it is how lenders and consumers respond to the financial challenges of the pandemic that will ultimately help determine the shape and speed of any recovery.”
Delinquencies increased as consumers looked to balance their finances
Throughout the year there has been a minimal, yet gradual, increase in YoY serious delinquency rates across all the major consumer credit categories, and this trend continued in Q3 2020. Unsecured personal loans (up 11 basis points or ‘bps’), auto loans (also up 11 bps) and credit card (up 10 bps) recorded the biggest YoY increases in balance-level delinquencies in the most recent quarter.
In the latest Hong Kong Financial Hardship Survey* conducted in early November, almost a third (32%) of negatively impacted consumers said they planned to pay only a partial amount towards a current bill or loan payment. This observation is at its highest level since the survey began in Hong Kong at the end of March 2020.
“The sustained nature of the pandemic means consumers are increasingly having to make difficult decisions. By using trended data and advanced analytics, lenders can often anticipate when a customer is going to face a financial difficulty. Through early interventions and reaching out proactively, lenders can give them the support they need whilst also effectively managing the risk in their portfolio,” concluded Lau. “The impacts of COVID-19 are being felt across the globe. What will distinguish the lenders who recover and emerge for growth faster is how proactive they are in taking the steps needed for the benefit of their customers, themselves and the economy as a whole.”
For more information about the TransUnion Hong Kong Industry Insights Report and to register for TransUnion's Q3 2020 Industry Insights Report webinar scheduled for 3 p.m., December 15, 2020, Tuesday, please visit our dedicated website page.
* Survey conducted week of November 1. Survey sample of 1,000 Hong Kong consumers.
** Census and Statistics Department
