We have written time and time again in MoneyWeek about the dangers inherent inthe record levels of personal debt held by the British. And it seems that we have been worrying for good reason. Last week, in its quarterly statement, retail-banking giant Barclays announced that “impairment losses rose significantly, reflecting increased delinquent balances and severity rates in the UK cards business and changes in recognition methodology”. Roughly translated, this means that they are having trouble getting their money back from those they have lent it to.
This made Barclays the first major bank since the recession of the early 1990s to issue a warning that bad debts are growing sharply, says George Trefgarne in The Daily Telegraph. But not the last: the very next day, HSBC followed Barclays’ lead and issued its own warning, and within a week HBOS had admitted it was in the same situation. Does this mean that things are on their way to being as bad as they were back in 1990? Not yet, says Lex in the FT. Critically, arrears on mortgages and overdrafts are rising only slightly. It would take a “much bigger jump in interest rates or unemployment than anyone currently expects seriously to imperil the banking sector’s profits”.
That said, the latest Government data show that individual insolvencies are running 44% above their previous peak in the early 1990s and total lending to individuals has more than doubled since 1997, to more than £1trn. And while repossessions are nowhere near early 1990s levels – 6,320 houses were repossessed last year, compared to 78,000 in 1991 – they still rose more than 30% in the first quarter of the year. It’s also worth noting that it isn’t just bad debts the banks have to worry about. The British Bankers Association recently reported that consumers repaid more on their credit cards than they borrowed in April. That’s the first time that has happened for ten years and if consumers really are going to cut their borrowing, that is going to hit thbanks’ revenues from their credit-card divisions too.
It looks like the unprecedented boom of the last few years – which has beefuelled by cheap money and rising property prices – has come to an end, says Neil Collins in The Daily Telegraph. And that is something the banking sector’s shares are already reflecting: they moved roughly in line with the market in May, but have underperformed the market as a whole by 6% since January. Barclays itself is still rated positively by many of the City’s analysts for now, thanks to the fact that the loan defaults so far mainly fall under its Barclaycard wing, which makes up less than a fifth of profits, and the other divisions are doing well. But, as a report from Credit Suisse First Boston concedes, it still leaves the group’s double-digit income-growth target uncomfortably dependent on continued strong trading at the group’s Barclays Capital investment bank. Even more vulnerable, says Lex in the FT, are the other UK retail banks, which can’t even claim that kind of diversification.
The sector may have produced £30bn worth of profits last year, but lending to individuals is at all-time highs and not all banks have been as prudent about credit checks and repayment abilities as they might have been (54,000 households are three to six months in arrears on their mortgages). There are probably better stocks to have in your portfolio than those of retail banks