Geoff Miller on the unhealthy state of consumer credit in SA

Consumer credit health has deteriorated in the second quarter of this year according to the Consumer Credit Index. This decline is not surprising when one considers increasing inflation in South Africa paired with a subdued job market and flat wages. The problem is that even if formal lenders are not lending to consumers, there is a burgeoning informal sector that will supply loans to consumer at very high interest rates. Making for a consumer that is under pressure from all aspects of the economic environment. Alec Hogg was joined by Geoff Miller, CEO of TransUnion to discuss the latest index, what we can expect from it in future and what needs to happen for it to turn around. – LF

ALEC HOGG: Welcome back to Power Lunch. The Consumer Credit Index shows that consumer credit health deteriorated – only marginally, though – in the second quarter of this year. Joining us to look at these numbers is Geoff Miller, the CEO of TransUnion. Geoff, why do you guys do this survey?

GEOFF MILLER: It’s actually not a survey. It’s empirical evidence, so it’s information that we glean off of our database as well as macroeconomic factors that we pull from stats such as Reserve Banks etcetera. I think we do it for a number of reasons: (1) is for our clients, so our clients understand their portfolios, but they won’t understand what the economy looks like, and then (2) it’s just to give the country, the Reserve Bank and others a sense of where consumer credit health is. I think that’s actually a very important metric.

ALEC HOGG: But it’s an interesting point, isn’t it. We have a country that has many great data, which gives us a good understanding. We don’t have to look in the rear view mirror. We can look very closely at what’s happening on a day-to-day basis, and this is one of them. When you unpack the index though, 50, like a lot of these indices now, is an important number. Why?

GEOFF MILLER: It’s much like the Kagiso PMI. What we’re saying is below 50, consumer credit health is deteriorating. Above 50, it’s improving. We’ve been below 50 since 2012. We had a slight bump in Q1 and now we’ve fallen back a full point in Q2. If you look at the macroeconomic conditions, things aren’t getting better. Consumer wages are flat. Inflation is high.

ALEC HOGG: So the consumer position is deteriorating from an already ‘not great’ spot where it was in 2012. When you look back as long as your index goes for, how badly are we doing compared with the past?

GEOFF MILLER: We’re not as bad as we were in 2008, but this is the ninth straight quarter of being in a deteriorating position. What we feel is that the macroeconomic conditions are basically not healthy in terms of improving the condition of consumer credit health, although we don’t necessarily see it falling off the cliff either. We think we’re kind of bouncing along the bottom here. Really, what happened this quarter was wage growth remained flat and I think part of this was obviously the wages in the mining sector as well as inflation, especially non-discretionary inflation – up double digits. If you look at meat, vegetables, and some of those others, and so the consumers that are hurt the most are those lower LSM ones.

ALEC HOGG: What is going to turn it around?

GEOFF MILLER: Certainly, employment is going to have to turn it around. Just overall, economic growth is going to be very, very critical. I think lenders have become much more cautious, so I don’t think they’re necessarily lending perhaps as recklessly as was done in the past. They’re being much more cautious. I think lenders are more cautious in who they lend money to. I think we feel that consumers are aware that they’re under stress and are trying to pull back (those that can). Obviously, those that are in a hopeless position are in a wide credit, no matter what, but real income growth and job creation is the only way this is going to turn around.

ALEC HOGG: You made an interesting point there about reckless lending. When we spoke with (particularly) Abil, who have fallen off a cliff, as we well know, during the time that they were expanding their book aggressively, they said ‘well, if people don’t borrow from us, they’re going to borrow from the loan sharks’. Presumably, the loan sharks haven’t gone away, but Abil isn’t lending as much as it was in the past, because that recklessness is now out of the system. Can you record any of that?

GEOFF MILLER: Yes, we’re only in the informal sector. We have hundreds of lenders that provide information to us, so we see the formal sector – absolutely. The informal sector is obviously still kind of behind a curtain, but you’re absolutely right. If the formal sector is declining an individual, they’re going to go the informal route – at least, those that have no other alternative – so it’s a ‘lose/lose’.

ALEC HOGG: How bad are things in the formal sector, which is what you do monitor?

GEOFF MILLER: Delinquencies have really levelled and stabilised. They’re increasing, but at a much lower rate. If you look at this period last year, they were growing at 13 percent and now they’re only growing at two percent. That’s because banks, over the last 24 months, have been more cautious and more prescriptive in who they’re giving money to, so I think that the lenders have stabilised. However, that doesn’t help the consumers that are already wallowing in debt.

ALEC HOGG: And the point being that once that starts improving – because people are paying off their debt presumably, those who can – that would be the time that we might see some glimmer of hope at the end of the tunnel.

GEOFF MILLER: Yes, and I think lenders are going to look very hard at income, expenses, and affordability. There’s actually some additional legislation that’s coming out around that, but I think lenders are going to remain cautious. I think they want to grow as well, so they’re going to make money available, but they’re going to do so in a way that limits their risk as much as they can.

ALEC HOGG: Geoff, from left field: would you buy Abil shares, where they are at the moment?

GEOFF MILLER: I’m not quite sure. I think they’ve exposed a lot and they’ve written off an awful lot. I’m not sure if there’s much left. I would have to say, if I did invest it would be one of my riskier investments.

ALEC HOGG: You require a little more clarity. I guess most sensible investors do. That was Geoff Miller, Chief Executive of TransUnion, giving us an insight into what’s actually happening in the lending market.

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