February 2, 2021 at 10:27 AM
During the COVID-19 crisis, the media has focused much on the weak economy and stressed South African consumers. Figures show an increase in unemployment and for those lucky to be employed, many suffered decreased earnings through salary cuts. All this points to a highly strained economic environment.
This is backed up by credit data courtesy of TransUnion’s “Quarterly Overview of Consumer Credit Trends” released in December 2020 for the 3rd Quarter of 2020 that has shown significant spikes in non-performing loans (here defined as three cycles delinquent or more).
Q2 was characterised by payment holidays that for the most part ceased in Q3, which meant that accounts of stressed consumers rolled forward in quarter 3 to 3+ cycles delinquent. Q3 represents the true extent of the initial COVID-19 shock. The following table, taken from the report illustrates the extent of the deterioration by product.
The table above shows a significant negative shift across all products year-on-year to Q3 2020.
Doom and gloom?
So, is it all doom-and-gloom? The answer is perhaps surprisingly, no. The truth is that not all consumers underwent significant stress during this time. In certain pockets, consumers maintained their earnings and benefitted from an environment that featured:
- lower fuel prices,
- low inflation,
- very low interest rates and
- a stock market that bounced to record highs.
So, whilst many lenders eased off lending during this time, they were perhaps losing out on lending to population segments that were and still are prospering. Moving into 2021, we expect to see a bifurcation with one part of credit book (the significant portion) still exhibiting stress and inability to service debt due to negative economic impact while another part will be prospering with low delinquency rates and higher profitability.
For retailers, as we wait for their results to be published for the festive season (it’s predicted to be down by as much as 15%), there will be pressure to grow sales to catch-up the festive dip. Acknowledgement that most of the market will still be feeling an economic pinch, and that aggressive growth will not be possible will indeed be the general sentiment but ignoring the existence of a prospering segment and not trying to grow there may be a large opportunity lost.
“…ignoring the existence of a prospering segment and not trying to grow there may be a large opportunity lost.”
Taking advantage of the potentially profitable segment of the market
So how does a lender take advantage of this potentially profitable segment? The first course of action should be to identify the segment. Bureau data will be key here and observing whether the consumer had come under pressure during the COVID-19 period on their other debt commitments will give an indication as to whether that consumer is feeling the economic stress or not.
Data to be analysed should include the following:
- Were insurance policies cancelled?
- Were there missed payments on personal loans or retail accounts?
- Missed payments will negatively affect bureau scores too with the most recent behaviour holding the most weight.
In originations, forming a strategy that is conservative in the medium-high risk segments and aggressive in the low-risk segments will be key. For revolving accounts (credit cards or revolving retail credit) offering higher credit limit offers and aggressive authorisation strategies for those with the best risk profile (not just determined by internal behavioural scores, but external bureau scores too) will assist in taking advantage of this phenomenon. Another strategy adopted by lenders in 2020 was to identify these customers by industry in which they are employed.
"In originations, forming a strategy that is conservative in the medium-high risk segments and aggressive in the low-risk segments will be key.”
What to expect in 2021
It is expected that 2021 will continue to be a challenging year for many, with COVID-19 pressures and Eskom troubles persisting. Having said that, National Treasury has forecast a 3.3% economic growth for 2021 which is encouraging. Reduced stress in the system will mean lenders will be able to lend less conservatively at least in the latter part of the year and into 2022. In the first two quarters the opportunity lies within the prosperous segment.