LONDON (Reuters) - A surge in consumer lending and a revival of no-deposit residential mortgages are stoking fears that Britain’s biggest banks may be chasing riskier business to boost flagging returns.
Facing record-low interest rates and rivals keen to steal market share, HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland have signalled aggressive lending ambitions in blueprints for profitability.
But signs of looser lending standards in the crowded markets for home loans and unsecured credit have revived memories of a similar hunt for income just before the 2007 financial crisis, which exposed widespread reckless lending at many banks.
Analysts and investors who have spotted the parallels worry that stiff competition could erode margins of safety on high-risk loans and pave the way for a spike in defaults later on.
“There are signs of hubris in the banking industry right now,” said Henderson Global Investors fund manager Ian Tabberer.
“To use a baseball analogy, we are getting towards the sixth or seventh inning of a classic banking cycle, which is when banks start to ease their credit standards and start lending to people who can’t really afford it,” he said.
Consumer credit in the UK stood at 182 billion pounds at the end of March, according to Bank of England data, the highest level since 2010, while the annual growth rate in total consumer credit is 9.3 percent, the highest since 2005.
Net mortgage lending rose by 7.435 billion pounds in March, the biggest monthly increase since October 2007.
Bank of England Governor Mark Carney told the BBC on Sunday that he was concerned about the level of household debt in Britain, saying it could compound an economic slump in the event of a British exit from the European Union or another economic shock.
“The challenge is to ensure not too many of the British public are over-borrowed, because that will make a downturn that much more severe,” Carney said on the BBC’s Andrew Marr Show.
PRESSURE ON SHARES
The banks’ search for income reflects investor pressure.
Shares in Barclays, HSBC, Lloyds and RBS have fallen by an average 30 percent in the last 12 months, a trend that bosses have vowed to reverse with cost cuts and business growth.
In a presentation to investors in March, HSBC said it was looking to acquire new customers through unsecured personal lending products and expand its mortgage broker network.
Over 3.2 billion pounds’ worth of loans were advanced to customers buying cars on credit in the UK in March, according to the Finance & Leasing association, up 17 percent on a year ago.
But a survey by Markit showed British households’ financial situation weakened at the fastest rate in nearly two years this month, partly due to a lack of wage growth, underlining the perils of a sector-wide push to expand lending.
“The economy might be recovering but many families have never really seen a recovery of their own – and there is a risk that some households are turning to credit as a short-term fix to a long-term problem,” said Joanna Elson, chief executive of the Money Advice Trust.
There are signs that banks in the euro zone, where economic growth is even more sluggish than in Britain, and interest rates even lower, may be taking a similar approach.
Consumer credit in the euro area was up 5 percent year-on-year in March and February, according to European Central Bank data - the fastest rate since June 2008.
Overall mortgage lending was up 3.6 percent in the last quarter of 2015 from a year earlier, according to the most recent figures available from the European Mortgage Federation.
In Germany, some banks are now willing to lend the entire purchase price of a property, instead of typically requiring a minimum 20 percent deposit. The rise in home loan lending has sparked talk of a house price bubble in cities such as Frankfurt and Hamburg.
In Britain, Barclays now offers a ‘Family Springboard’ mortgage enabling buyers to borrow 100 percent of a property price with the help of a temporary deposit by a relative in a linked account.
A Barclays spokeswoman said all loan decisions were based on income and expenditure to ensure repayments were both affordable and appropriate and lending remained responsible and sustainable.
Halifax, part of the Lloyds stable, has increased its upper age limit for mortgage borrowers from 75 to 80, against a backdrop of record low rates, now below 3 percent on average for the first time on record, according to Bank of England data.
Lloyds, meanwhile, reported a 30 percent rise in auto finance for the first quarter of 2016 compared with the same period a year ago, as well as 4 percent growth in credit card balances.
RBS, which already provides one in four loans to small firms in Britain, has sent 12,500 ‘statement of appetite’ letters offering up to 8 billion pounds of loans to small business customers, more than six times the net new lending the segment achieved in 2015. The state-backed bank also saw its strongest growth in mortgages since 2009 last year.
While UK economic output slowed to 2.2 percent last year, there were, admittedly, signs of a pickup among small and medium enterprises, where turnover rose 50 percent.
All the banks dismissed concerns that they were taking on undue, untimely or poorly-priced risk. They pointed to broad structural changes such as tougher affordability screening and regulatory capital constraints on balance sheets that aim to prevent lenders and borrowers from hurting themselves, or the economy, if loans later turn sour.
Lucian Cook, head of residential research at Savills, said regulators had acted to prevent a repeat of last decade’s boom-and-bust property cycle by raising the stamp duty on buy-to-let purchases to curb investor demand.
But others said the temptation to increase profits by lending to those least able to repay would remain until interest rate rises helped banks to earn higher net interest income.
“This is a problem that QE (quantitative easing) has brought on the banking system,” Henderson’s Tabberer said. “Banks need a steep and positive yield curve. Without it, all the responsibility of curtailing credit risk is on the management.”
Additional reporting by Andrew MacAskill, and by John O’Donnell in Frankfurt; Editing by Kevin Liffey
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