Household debt in the UK has soared in recent years, but the biggest banks are not to blame. Danielle Myles looks at which firms are behind the surge.

Over the past year, the Bank of England (BoE) and Financial Conduct Authority (FCA) have laid bare their concerns about the UK consumer finance industry. The BoE told lenders to set aside £10bn ($14.2bn) to help cover the circa-£30bn of consumer losses they would face in a severe downturn. Meanwhile, the FCA introduced new rules to protect highly indebted credit card customers at risk of financial difficulties.

Rising interest rates, coupled with Brexit uncertainty and a global economic expansion in its ninth year, have pundits guessing when the market will turn. When it does, the first cracks are expected to appear in the consumer credit sector.

The high street example

Data collected by the BoE and the trade group UK Finance suggest the regulators’ concerns are warranted. Consumer debt – consisting of credit cards, loans and overdrafts – has soared since 2014, growing up to 10% year on year. At the end of February, UK consumers owed more than £209bn, with credit cards the biggest culprit. Even after adjustments for write-offs, balances outstanding increased 8.3% in the 12 months to February 2018, the fastest growth rate since early 2006.  

The main high street banks have done their bit to deflate the problem. Analysis by UK Finance shows that, collectively, consumer credit extended by Barclays, HSBC, Lloyds, RBS, Santander UK, TSB and Virgin Money is growing at one-tenth the pace of the lending community as a whole. These seven banks are also decelerating credit growth more than their peers. Between February 2017 and February 2018, this figure dropped more than two percentage points (despite a small uptick earlier this year).

Over the same period, UK banks, building societies and specialist lenders collectively grew their consumer credit books by more than 9% (although the pace has slowed by one percentage point over the past year). This discrepancy goes some way towards validating UK fixed-income investors’ preference for top-tier banks, on the basis some smaller ones have been willing to compete on price – and potentially credit quality – to gain consumer market share.

Lift off in 2017

The Banker data gives a more granular snapshot of individual lenders’ exposure to household debt. Among high street banks, total retail loans and advances (TRLA, a datapoint that includes mortgages) nudged up at Santander UK, Lloyds, Barclays and HSBC in 2017 after steadily dropping since 2012. At RBS, which is still 70%-government owned, exposure to household debt was relatively flat for the third year running as the bank continues to rationalise its balance sheet.

Virgin Money and TSB, which are usually categorised as challengers, have followed a different trajectory. The former’s credit card book has swollen to £3bn, accounting for nearly 10% of its customer loan exposure, while TRLA has nearly doubled since 2012. TSB has grown its TRLA by 27% since splitting from Lloyds in 2013. Meanwhile, Metro Bank has more than doubled its TRLA over the past two years, although its aggregate exposure is a slither of its more established competitors. Leeds Building Society’s TRLA leapt 24% in 2017 after steadily growing since 2010.

The BoE’s latest Credit Conditions Survey found that the availability of unsecured household credit dropped significantly over the first three months of the year, and is expected to be flat in the second quarter of 2018. This is the result of changing risk appetite and a tightening of credit scoring criteria. This has coincided with a significant drop in demand, led by credit card spending, and gives regulators cause to be cautiously optimistic that both consumers and lenders have heeded their warnings.

Outstanding UK consumer credit

Data sourced from The Banker Database, the BoE and UK Finance.

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