Over the last three years, Hong Kong issuers have seen the demand for new credit cards decrease. The number of consumers with access to at least one credit card today is just 11% higher than it was five years ago, and existing customers haven’t been filling the demand gap.
With portfolio growth still a priority for most issuers, the focus has shifted to gaining exposure through credit limits, which have risen by 6% in the last year, and nearly 40% in the last five. But with few new customers and little inflationary pressure, this is essentially a zero-sum game and these higher limits have failed to generate much headline growth—total card balances are up just 2% year-over-year and 20% over five years.
With fast-rising limits and slow-rising balances, it is inevitable that credit limit utilization will fall. And it has: from 12.8% in Q4 2012 to 12.7%, to 12.3%, to 11.9%, to 11.5%, and eventually to 11.1% in Q4 2017. This holds both risk and profit implications for the industry.
While, generally speaking, risk increases as utilization increases, consumers with a low utilization are showing an ability to spend within their means and have access to ready credit should they hit an unforeseen hurdle in their lives. But when utilization drops too low, another problem arises: balance-level delinquency can start to rise.
This is because, no matter the broader trends, customers in financial difficulty tend to use their full limits before going into write-off. In Hong Kong, while the average limit utilization of consumers 0 to 90 days in arrears is 11.1%, the average utilization for consumers 91 to 120 days in arrears is 84.2%. A simple way to think about this is that as ‘good’ customers drop their utilization, it takes more ‘good’ customers to offset every ‘bad’ one. In this case, and admittedly in oversimplified terms, every bad customer cancels out nearly eight good customers—and that ratio is widening.
Here, the bigger impact for Hong Kong card issuers is likely to be on profitability, as the capital cost of building balances increases. There are two major ways that issuers can look to build their utilization rates. Firstly, by targeting more young borrowers and, secondly by focusing on getting their cards to first in wallet
When consumers become credit active, they typically first experience growth in their access to credit and our demand for credit. Then, as they establish ourselves, their demand for credit slows even as access to credit continues to rise. For this reason, younger borrowers tend to have peak utilization, and older generations tend to have peak limits
In Hong Kong, Millennials (born 1980 to 1994) have an average utilization of around 14%, compared to 12% among Generation X’ers (1965 to 1979) and 9% among Baby Boomers (1946 to 1964).
Shifting towards younger borrowers is not without its own costs, since younger borrowers tend to have lower incomes and thus lower balances. But the expected uplift in utilization is usually larger than the expected drop in balances. For example, among super prime card holders, Generation X’ers have average balances that are 8% higher than those of Millennials, but their average limits are 42% higher, so their average utilization is 24% lower.
An age-based strategy is easily replicated, however, so more defendable benefits are achieved by improving the underlying product offering. One way to measure the success of this is by measuring how often an issuer’s cards are first in their customers’ wallets. That is to say, when Bank A’s card is in a consumer’s wallet alongside those of their competitors, how likely is that consumer to place the bulk of their spend on Bank A’s card? The more they like the product, the more likely they are to use that card.
Improving the first card in wallet rate will lead to improvements in utilization rates because consumers do not spread their balances evenly across the cards they hold. As a result, the average utilization of cards in favour is 2.5 to 10 times higher than it is for those lower in the hierarchy.
The larger the proportion of an issuer’s cards that achieve this first card in wallet status, the larger the average utilization will be.
For more insights into the Hong Kong consumer credit market, read TransUnion’s latest quarterly Industry Insights Report and other articles here.