FOCUS: UK Banks Could Fall Short On Lending Commitments
July 29 2009 - 6:28AM
Dow Jones News
U.K. consumer lending hit a fresh low in June, the Bank of
England reported Wednesday, underlining the challenge the
government faces in ensuring that banks meet their lending
promises.
The government has stepped up the pressure on banks in recent
days, pressing them to ease credit access for small and
medium-sized firms in particular.
However, analysts say a big part of the problem appears to be a
lack of demand from credit-worthy borrowers. They say forcing banks
to offer more and cheaper loans could backfire, potentially
delaying their recovery and depressing bank share prices if bad
loans keep rising.
With hefty stakes in two of the country's biggest banks - Lloyds
Banking Group PLC (LYG) and Royal Bank of Scotland Group PLC (RBS)
- the government has something of a dilemma. It needs lending to
increase to help the U.K. recover in time for an election due by
mid-2010, but it also has taxpayer money at risk if bad loans pile
up.
"The government needs to balance out its needs. It wants to make
sure the banks do lend, but at the same time also wants to protect
its investments by keeping the banks profitable," said Irfan
Younus, an analyst at NCB Stockbrokers.
On Wednesday, the BOE said net consumer lending grew just GBP414
million in June, the smallest increase since records began in 1993.
Economists had expected a GBP900 million increase.
Net credit card lending rose by its smallest amount since
December 2008, while mortgage lending lifted GBP343 million, close
to May's record low. Mortgage approvals, however, rose for the
fifth month running to 44,169.
The lending report came after Chancellor of the Exchequer
Alistair Darling on Monday hauled in bank bosses to find out why
smaller firms were still struggling to get access to affordable
loans.
After the meeting, Darling demanded banks pass on lower interest
rates and said the government would be combing through banks' books
to examine their lending practices. Paul Myners, the treasury
minister who handles financial services, will start that process
within days.
While government pressures the banks, opposition parties blame
ministers, saying they have sent mixed messages over whether
healthier banks or higher lending is their priority.
"They have been talking about this problem...for months now
while jobs and businesses continue to be lost. Alistair Darling has
been asleep on the job and the public will take his synthetic anger
with a pinch of salt," said Philip Hammond, the No. 2 person on the
opposition Conservative party's treasury team.
Banks Say They Are Helping
The country's four major banks say they are doing their part to
lift the economy and will give further details on loan volumes and
margins when they report first-half results next week.
RBS, which agreed to boost corporate and consumer lending by
GBP25 billion between March 2009 and March 2010 as part of a
government bailout package, indicated there has been less demand
for new borrowing, saying many consumers and companies are reducing
their debts where possible.
But Alan Dickinson, head of RBS' U.K. corporate business, said
the bank is "open for business," and "actively stepping in to
provide substantial mortgage and business finance where overseas
and other banks are reducing their commitments in the U.K."
Lloyds, also part-owned by the government, said it is working
with businesses and retail customers "to help them manage during
this time of unexpected financial turbulence." The bank has
committed to lend an additional GBP14 billion by March 2010 in
return for government support.
In all, Prime Minister Gordon Brown has said banks have
committed to making an additional GBP70 billion in consumer and
business loans available this year. That total includes voluntary
announcements from the likes of HSBC Holdings PLC (HBC) and
Barclays PLC (BCS). Both banks declined to comment Wednesday on the
status of their commitments.
Beyond lending volume, the government wants loans to be cheaper,
but banks argue their own cost of financing has increased in spite
of interest rates that are at record lows. Wholesale funding is
harder to get, and competition for customer deposits has
intensified. The chances of customers defaulting on their borrowing
is simply higher in a recession, too, leading to higher charges on
loans.
The number of companies going bust in the U.K. has been steadily
rising since the end of 2007, according to government statistics,
and rose by more than half in the first quarter of 2009 compared
with the same period of 2008. On Monday, credit analysts at
Standard & Poor's Corp. said they expect U.K. banks' loan
losses to peak next year, at 1.8% of customer loans. Before the
financial crisis, losses were well below 1% of loan books.
-By Margot Patrick and Laurence Norman, Dow Jones Newswires; +44
(0)20 7842 9451; margot.patrick@dowjones.com