By Sinead Cruise and Andrew MacAskill
LONDON (Reuters) – Banks in Britain are on the verge of a price war to try to revive lending subdued by the Brexit vote and to combat pressures on profitability from ultra-low interest rates, which are likely to stay that way for longer.
In the run up to the June 23 referendum, banks had already noted a drop in demand for commercial loans and mortgages, which are traditionally their big revenue earners. In response, banks have flagged plans to beef up unsecured lending activities such as credit cards and financing for start-up businesses to keep profitability and revenue expectations on track.
But a push en masse into higher-risk unsecured lending in such uncertain economic times has led to warnings that some banks may be putting their long-term financial health at risk.
“We normally see these types of strategies when growth in general corporate lending is slower and unfortunately these tend to rely on generating growth by offering lower credit card rates or lower unsecured rates,” Symon Drake-Brockman, managing partner of Pemberton Capital Advisors, told Reuters.
“That approach has at times proven to be very expensive because if there’s a recessionary shock, a lot of those loans do default,” the former global head of debt markets at RBS said.
Britain’s economy started to shrink in the month following the Brexit vote, according to a forecast from the National Institute of Economic and Social Research.
And British consumers already have a lot of debt, with total outstanding balances on credit cards up from 61 billion pounds ($78.7 billion) in December 2014 to 63 billion in December 2015, data from the UK Cards Association showed.
In July, Britain’s Financial Conduct Authority said it was concerned about the “scale, extent and nature” of problem credit card debt, after it found about 2 million people in default, a further 2 million carrying persistent debt and another 1.6 million repeatedly making minimum payments.
But despite this backdrop, banks are under pressure to lend both from shareholders, who want higher profits, and from the government, which wants banks to support the economy.
“Banks know successful loan applications mean more innovation, more new jobs and more plans for businesses to expand,” Eric Leenders, BBA Executive Directorof Retail Banking said. He said that SME finances had improved since 2013 – with four-fifths now reporting a profit and ‘worse than average risk’ ratings down by 8 per cent.
Last month, HSBC launched a price-matching campaign on small business lending and corporate overdraft rates up to 25,000 pounds. On the same day Barclays said it had opened around 2,000 accounts for start-ups in the week to July 20, part of a pledge to support small business customers “through thick and thin”.
On its website, HSBC quotes annual interest rates excluding fees from 5.9 percent for small business loans, compared with a previous rate of 7.9 percent, subject to borrower status.
RBS – provider of one-in-four small business loans – is offering an indicative annual percentage rate of 7.99 percent on a five-year, 25,000 pound small business loan.
RBS saw a 10 percent drop in mortgage borrowing the month after the referendum, but net lending grew by 20 billion pounds in its first half, more than any other UK bank, as it committed to help borrowers cope with a dip in the economy post-Brexit.
Lloyds said its open mortgage book shrank by 1 percent in the first half of 2016, reflecting actions to protect its net interest margin in a highly competitive environment.
But its Consumer Finance business grew 7 percent to 33.7 billion pounds, SME lending rose 3 percent to 30 billion; and auto financing grew by 14 percent to 10.9 billion as Britain’s biggest mortgage lender stepped up lending elsewhere.
Senior bank executives contacted by Reuters said that competition among banks had increased since Brexit but rejected any suggestion that tight lending criteria were being stretched in pursuit of profit.
RBS and Lloyds said all lending decisions were within strict risk appetites. A spokeswoman for HSBC said the bank was committed to supporting and meeting the needs of its customers and its risk and affordability criteria were unchanged.
Speaking to analysts at Barclays’ half-year results, Chief Executive Jes Staley said his bank’s conservative risk profile was evident in its “high credit quality and lower volatility impairments across its consumer and wholesale businesses compared to other UK banks”.
Staley said Barclays’ UK mortgage book had an average loan-to-value ratio of 47 percent, well below the market average, that 77 percent of its SME lending was secured and its Barclaycard portfolio in the UK “was seasoned and diversified”.
A second CEO, who declined to be named, said they would happily give up new business if it put hard-won balance sheet security at risk.
“The market is heating up and it is starting to look that way because banks are looking for assets. Their liabilities are not making any money so most are chasing growth on the other side,” the CEO said.
“If staying within our risk appetite means we get less business, we get less business.”
Not everyone is racing to shore up flagging mortgage lending by chasing higher risk small business borrowers.
Challenger bank Virgin Money
Other commentators said they believed the industry was falling into a trap of chasing earnings to offset the impact of the Bank of England’s cut in interest rates to 0.25 percent earlier this month.
This will put even more of a squeeze on the difference between what banks earn on lending money and what they need to pay depositors.
In addition, the Bank of England’s 100 billion pound plan to help banks to cope with wafer-thin lending margins could encourage some to lend when they otherwise would not have done.
And while the banks look to expand small business lending to make up for low mortgage demand, there are risks building up in that market too.
Property services firm Knight Frank said homeowners with access to savings will find mortgage servicing costs affordable for now but higher inflation due to the weak pound, or quantitative easing, could spark a rate reversal, which would affect mortgage borrowers, especially the most leveraged.
Others in the finance industry said a rush to increase lending to small, untested businesses or consumers already laden with mortgage debt was hazardous, particularly as lower-for-longer interest rates created a culture of ‘free money’ that could backfire in leaner economic times.
“If rates remain at an all-time low despite possible further economic stimulus in the Autumn statement, and unemployment rises, property prices could continue to fall and that could be the trigger for repossessions to rise,”Nick Ogden, founder of payments firm WorldPay
(Additional reporting by Esha Vaish; Editing by Jane Merriman)