Chancellor Alistair Darling is trying to put the frighteners on banking bosses today.
“You lot just aren’t lending enough,” he’ll say at today’s meeting at the Treasury. “You know how we gave you all that taxpayers’ money to bail you out? Well, now we want you to lend it back to the taxpayers.”
A bank boss with a modicum of back bone might put up his hand at this point, and say: “But wasn’t it unquestioning, reckless lending, done without consideration of the risks involved, which got us into this mess in the first place?”
But instead they’ll probably make various reassuring noises, then run back to their boardrooms, and continue to hoard money.
Why? Because bankers might be self-interested, but they’re not stupid. They know that there’s a whole lot more pain coming down the line. And the taxpayer may not feel flush enough to bail them out next time.
There are more problems to come for banks’ balance sheets
The sub-prime crisis and the housing crisis have all been raked over and kicked around in the media for years now. But these aren’t the only problems threatening banks’ balance sheets – not by a long chalk.
As this morning’s Financial Times flags up, credit card debt is the next big issue to face banks around the world – notably the British banking sector. This is already a big problem in the States. The International Monetary Fund reckons that of the $1,914bn in outstanding US consumer debt, 14% will go bad. For Europe, meanwhile, the IMF reckons that 7% of the outstanding $2,647bn in consumer debt will go bad.
And in Europe, Britain’s the country that’ll bear the brunt of that pain. The British owe far more as a proportion of income (currently at a record high of more than 170%, compared to just over 100% in the early 1990s recession) than any other European nation. And in fact, despite their reputation as consumption machines, the Americans can’t hold a candle to us either. Their personal debt ‘only’ clocks in at around 140% of income.
In the US, credit card default is already at record highs and rising. Losses on credit cards, at 10.8%, are already higher than the current unemployment rate of 9.5%. That’s highly unusual – as the FT points out, “credit card loss rates have in the past closely tracked unemployment, topping the jobless rate on just a handful of occasions”. So this puts the US in uncharted territory, as far as how high defaults could end up going. And the worry is that we’ll face something similar over here.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
Banks won’t be the only sufferers from credit card debt
On top of that, there’s the little question of securitisation. That’s right – it wasn’t just packages of mortgages that were sliced and diced and sold onto investors and banks across the world. Our credit cards got chopped and spliced into little morsels of prime and not-so-prime debt as well.
In other words, as the FT puts it, “if this highly leveraged recession does lead to record levels of credit defaults, it will not just be the banks that suffer.” In Britain, analysts reckon about a third of credit card debt was securitised, while in the US, it was two thirds. So pension funds and insurers who bought said debt, will feel the pain as well.
The threat from growing credit card debt – not to mention the ongoing danger from souring mortgages and commercial property loans – is just another reason why we’re still avoiding the banking sector, and most financials on a more general basis. There are just too many unknowns out there that could easily derail any recovery.
Having the government so heavily involved in the sector is also a problem. If banks are forced to lend, or to cut interest rates against their better judgement, then it’ll be even harder for them to claw their way back to health.
A financial stock to buy now
In this sort of environment, where credit is tight and everyone’s feeling the squeeze, the financials we would be interested in buying are the ones who are practised at dealing with the tougher end of the market.
For example, a genuine sub-prime lender such as Provident Financial (LSE: PFG), the doorstep lender, looks attractive. Despite increasingly cautious lending policies – its Vanquis credit card unit knocked back a staggering 82% of applications in the first quarter (up from 80% the previous quarter) – the group is still seeing customer growth. This is one lender we’d feel pretty comfortable about investing in right now – the share price has been range-bound for quite some time, but with a dividend yield of more than 7%, you’re being amply rewarded while you wait for the market to catch on.
Our recommended article for today
Four Taiwanese stocks to watch
Martin Spring believes the best Chinese investment oportunities over the next five years could lie offshore in Taiwan. Here he lists four stocks to keep an eye on.