U.K. Banks Rein In Risks Of Bad Debt --- Lenders Get Tighter With Credit, Tougher In Consumer Collection
Jitters about rising levels of consumer debt and bad mortgages are spreading globally. In the United Kingdom, where such problems first cropped up, banks have been having some early success in reining in sour consumer loans, even as interest rates rise.
Barclays PLC, Lloyds TSB Group PLC and others are becoming tighter with the credit they give as well as tougher in collecting from customers.
Last week, the Bank of England raised its official bank rate to 5.75% from 5.5%. Unlike the U.S., where the federal-funds rate charged on overnight loans between banks has moved to 5.25% from 2.25% since December 2004, in the U.K., the increase has been gentler. Still, the bump up could eventually make it difficult for many in the U.K. to finance home purchases or other borrowings.
At Lloyds, however, finance director Helen Weir says that if the rate in the U.K. increases to 6%, "we can live with that," but an increase to 6.5% or 7% would reverse the favorable trends of the bank's consumer-loan book.
U.S. banks, meanwhile, are expected to mirror moves by their U.K. counterparts, as U.S. consumers face a tougher time borrowing amid sharper increases in interest rates. Compounding the problem in the U.S. is a slowdown in home sales.
U.K. banking companies increasingly, albeit cautiously, are signalling improvements in their consumer-loan and credit-card books. Royal Bank of Scotland Group PLC, Barclays and Lloyds said they had improvements in delinquencies and bad-debt costs for the first half, a change from last year, when those costs rose as consumers racked up credit-card and personal loans.
The rise in the number of consumers needing special debt-workout programs, called Individual Voluntary Arrangements is slowing, too. IVAs let consumers pay off as little as a quarter of what they owe, and a rise in IVAs hurt bank results last year.
Ms. Weir says charges taken to cover unpaid consumer loans, known as retail-impairment costs, will be flat for the first half from the year earlier. In the first six months of last year, the bank recorded GBP 800 million ($1.61 billion) in total impairment costs -- 20% higher than the same period in 2005. The bank has fewer IVAs and bankruptcies in this year's first quarter compared with the fourth quarter of 2006, Ms. Weir says.
It is, of course, still early. The banks have reported only preliminary financial information, and detailed performance won't be available until late this month or early August. Barclays's finance chief, Chris Lucas, warned last month that the bank's improvements come amid a "challenging environment with rising insolvencies."
Other threats loom. At a recent credit conference in Barcelona, it was debated whether events in the U.S. that contributed to the subprime fallout -- lax underwriting standards and softening home prices -- would be repeated in the U.K. and elsewhere in Europe.
Subprime-mortgage lenders and investors in the U.K. get dinged when borrowers pay off their mortgages early and replace them with new loans. For now, though, the consensus is that the problems in the U.S. won't be replicated in Europe or the U.K. specifically, although the U.K.'s financial regulator recently said it had found weaknesses in lending practices and lenders' assessments of borrowers' ability to pay.
The results aren't reflected in the banks' stock prices. Both RBS and Barclays, which trade at 9.8 times and 10.6 times their expected 2007 earnings per share, respectively, have seen their shares depressed in recent months because they are making opposing bids to buy all or part of Dutch bank ABN Amro Holding NV. This year, RBS shares have fallen 3.7% on the London Stock Exchange, while Barclays's shares are down 1.6%. Lloyds trades at a slightly more expensive 11.3 times, while its stock is down 1.7%.
Antony Broadbent, a bank analyst at Sanford C. Bernstein in London, says falling costs for U.K. consumer unsecured impairment is one reason for his bullish stance. He rates Barclays and RBS the equivalent of "buy," the top rating for stocks the company believes will outpace a market index by 15 percentage points in the year ahead. Mr. Broadbent rates Lloyds and HSBC Holdings PLC "market-perform," or "hold," meaning the two stocks are expected to perform in line with the market index over the next 12 months.
"It's starting to look as if charge-off rates have peaked and are coming down," Mr. Broadbent says. He owns shares of Capital One Financial Corp., and Bernstein does business with U.K. banks, according to the firm's disclosure form. He traces the banks' current improvements to factors such as falling unemployment and their efforts starting at the end of 2004 to tighten underwriting standards.
Lloyds's Ms. Weir says U.K. banks have been racing one another to restructure consumers' debts -- or collect their payments before another bank can get to those customers.
"The provider that contacts them first is most likely to collect the money," Ms. Weir says.
Barclays has added people to its collections department. Last year, Barclays's credit-card and lending business, Barclaycard, said impairment costs rose 36% from 2005 to GBP 1.5 billion. In its update to investors in May, Barclays said a range of actions -- being more selective about new customers, tighter management of its credit limits and a better focus on collections -- had reduced customer delinquencies.
Source: Wall Street Journal
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