Each month we are forensically analyzing the credit markets and the economy, to understand how things are changing, or have changed. We explore all pertinent issues too: are changes short or long-term? What is required in order to mitigate the risks, while protecting the interests of consumers and businesses? How will the wider economy impact credit markets?
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So, what are the headlines seen through May?
The British Government continue to develop recovery strategies
In May, the Government released an update to their plans for a COVID-19 recovery strategy (read it here). They extended the Coronavirus Job Retention (furlough) Scheme, making it available until 31 October and on June 1st, they announced plans to ease the lockdown rules in England – with select years returning to school, and businesses reopening in a phased return.
Q2 saw a greater economic impact than seen through any quarter of the 2008 crisis
From an economic view, the picture isn’t pretty, stark trends are emerging and a recession is inevitable. Despite this, our forecasts do highlight we will see some positive change towards the latter part of the year. Key economic headlines include:
- Unemployment saw a sharp rise in Q2 – levels were double what they were pre-lockdown.
- Unsurprisingly spending is likely to continue to decline. Important to note is that levels of unsecured debt also saw a significant decline in April the Bank of England reported in June, that credit card debt reduced by £5bn in April, and personal loans also fell by a further £2.4bn.
- There is however, still an expectation that we will see more highly indebted households, even without factoring any impact from payment holidays through the summer months.
New credit data shows indicative trends of rising vulnerability, and income shock
- At the end of May, 7 million British workers were furloughed, and applications for Universal Credit soared.
- 41% of people saw a drop-in income of more than 10%, 57% of these were in the furlough range
- There was small, but consistent trends towards greater credit utilisation, and some emerging defaults were starting to come through. We believe emergency payment holidays are masking any initial risks.
At the time of you reading this, its likely further economic and market change will have occurred. Therefore, continuous analysis of the changing trends is evermore critical. In response to the changing environment, we see three key challenges facing lenders in their attempt to respond, and resolve risks:
- Preparations are largely underway to manage any rise in collections cases – preparations include seeking access to more frequent data, alongside access to more effective automaton tools
- Enhancing understanding of changing affordability, including continuing monitoring of change – including assessing income shock and levels of indebtedness
- Questions are also being raised about the implications of payment holidays on risk, and many are looking at how they can best review credit risk policies and strategies in response.
Many of the problems experienced today are not new. Naturally the pandemic has accelerated them considerably. The stress on this economic crisis is far greater than any previously modelled scenario – and the need for speed and automation has never been more of a requirement.
Based on this month’s analysis, there are some key – immediate – measures that can help. In today’s unique circumstances, several specific KPIs offer particularly powerful insights:
- Granular economic scenarios – A household view of macroeconomics can provide you with a forensic view of your portfolio and customer segments. Their risk against unemployment for example. You can start to analyse by ranking of risk and understand if you are overconcentrated or over indexed in any particular area – therefore your potential economic exposure.
- The Consumer Indebtedness Index (CII) – keeping an eye on consumers’ indebtedness is going to be key now, and in the future.
- Credit utilization – monitoring this can give you greater clarity around how a consumer is performing and using their credit.
- Analysis of new applications – while fewer applications are expected, it’s important to carefully examine those still coming in, so you can understand each customer’s position and how vulnerable they might be.
- Historic, trended data – by accessing this, you can better understand whether trends emerging today correlate to the past, or not – also how score profiles which are similar, will change in behaviour and need over the near-term.
- Income shock and turnover changes – tracking and interpreting these more frequently can give you vital insight into affordability.
All of the above, and more, Experian can help you with. We have invested heavily in our capabilities; data and insight to create tools that are fit for the current environment.
We are in a unique position to help you understand what you’re up against.
Our economists believe these evolving consumer circumstances will impact credit providers’ performance across a multitude of dimensions. What’s inevitable, is that they won’t impact all portfolios equally. Such understanding through bespoke models, as well as access to alerts, triggers and portfolio change, can help you mitigate and manage risk fast – our capabilities are often implementable within days, and can greatly contribute towards your speedy response.
Importantly, we don’t just provide the latest data, market insights and recovery scenarios – we offer you in-depth support, consultancy and strategic problem solving. We’re ready to create bespoke models that assess your customers’ probability of default, your organisation’s exposure and your likely losses in the face of today’s unprecedented challenges. At the same time, we have the tools to identify new, sustainable avenues for robust, responsible growth.
Stay informed – sign up to our insight series
Make sure you sign up to our next insight series – you can register here. In the meantime, there is furthermore in-depth reading available on our Covid-19 resource hub. The hub is designed to bring you the latest packaged insight into the core emerging themes and trends.
If you want to understand more about the trends through a personalised showcase, our consulting team are armed with insight dashboards covering consumer and commercial trends and are happy to arrange a time to walk you through them. They can also tailor them to your own portfolio giving you immediate insight that can help you understand risk and opportunity. Afterall – forewarned is forearmed.
 On a sample population of 16m current accounts, 41% showed an income drop of greater than 10% between March and April. Of the 41% of accounts which showed an income drop of greater than 10% between March and April, 57% were in the ‘furlough range’ of 10-39% income drop