Hong Kong Credit Climate Continues to Cool

Hong Kong Consumer Credit Market Continues to Cool as Economic Impact of COVID-19 Persists

The newly-released TransUnion (NYSE: TRU) Q2 2020 Industry Insights Report shows that the impact of COVID-19 continues to drive shifts in the dynamics of the consumer credit market. Rising unemployment and a fall in consumer spending are having a dramatic impact on both demand and supply of credit in Hong Kong.

The impact of COVID-19 on Hong Kong’s economy has amplified the levels of negative GDP growth seen in H2 2019 prior to the pandemic. Q2 2020 was the fourth consecutive quarter of negative GDP growth* and the economic impact of the pandemic was clearly observed in the most recent quarter’s consumer credit trends, with a decline in outstanding balances and new account openings, coupled with worsening of credit performance.

“Lenders and consumers alike are taking a cautious approach to credit. Our most recent Financial Hardship Survey shows that seven in 10 consumers reported their household income being negatively impacted by COVID-19. As a result, demand for credit has fallen as people rein in discretionary retail spending and prioritise essential bills,” said Francis Lau, director of research and consulting, Asia Pacific, TransUnion.

The pandemic has impacted demand for credit

Credit cards are the most widely-held consumer credit product in Hong Kong. Card enquiry volumes (a measure of new applications) fell by more than a quarter (28.6%) year-on-year (YoY) during Q2 2020. The decline in consumer confidence and spending** has been marked and has contributed significantly to this trend. The fall in enquiries was even higher for unsecured revolving lines, with a YoY decrease of 38.0%.

Of the categories that experienced a decline in enquiries, it was the least pronounced for unsecured personal loans, down just 2.1% YoY in Q2 2020. It is likely that the increased competition in this sector, driven by FinTechs and money lenders, is partly responsible for this trend. Money lenders tend to have a higher risk appetite, and with struggling consumers often seeking them out as an alternative to high street banks, the impact on overall market supply and demand may have been muted.

“The fall in enquiries for most consumer credit categories is a reflection of consumer confidence, especially in the short term. With COVID-19 cases continuing to fluctuate and the shape and speed of any potential economic recovery hard to gauge, consumer appetite and access to credit could have a significant impact on just how quickly retail spending and associated economic growth will return,” continued Lau.

Originations, a measure of new accounts opened, fell for all major credit categories. Originations are a function of both consumer demand and lenders’ willingness to advance credit (supply). During the most recent period (Q1 2020 for originations due to reporting lag), bank credit card (-32.4%) and loan on card(-27.3%)—which are a connected set of products—saw the biggest YoY decline.