U.K. Banks Unsecured Bad Debts Set to Increase, Says S&P

Thursday 6 Sep, 2007

U.K. banks may see an increase in unsecured bad debts in the "short term'' as consumers find it harder to repay credit amid rising living costs and after insolvency rules introduced two years ago made defaulting less onerous, said credit analysts at Standard & Poor's Rating Services. "Unsecured impairments are likely to climb further,'' said the London-based analysts led by Nick Hill in a statement. "Competition is likely to restrain any attempt to increase margins to compensate for the additional risk.'' Rising energy costs and interest rates and rules making it easier to negotiate so-called individual voluntary arrangement orders among those who default, have driven up unsecured bad debt by 70 percent in the last two years among the U.K.'s biggest banks, said the analysts. Pretax profit at the U.K. units of seven British banks including HSBC Holdings Plc rose by an average of just 2 percent in the first-half of this year. Overall profits at the five biggest lenders climbed 22 percent, driven by overseas lending and corporate banking, said the analysts. Lloyds TSB Group Plc, the No. 1 provider of unsecured loans in the U.K., "has the greatest sensitivity to a further deterioration'' in consumer bad debts, said the analysts. A 50 percent increase in its bad-debt charge could reduce pretax profit by 18 percent. On the same measure, Barclay's profit would drop 11 percent and HSBC's 3 percent, the analysts said. The pace of growth in bad debts is expected to slow as banks have tightened their lending criteria. Still, "indebtedness in the U.K. is unlikely to decline quickly,'' the analysts said. Prospects for growth in unsecured lending are "low'' due to pressure on fee income, as the U.K.'s Office of Fair Trading's probes so-called payment-protection insurance, which is sold on loans and credit cards. U.K. household debt is at a record 1.19 trillion pounds ($2.3 trillion), the bank of England said in May. Individual insolvencies in England and Wales rose in the second quarter to the highest since records began in 1960.