U.K. Banks Hit by Consumer Defaults

By SARA SCHAEFER MUñOZ, CARRICK MOLLENKAMP and ALISTAIR MACDONALD LONDON -- U.K. banks grappling with frozen credit markets and mortgage defaults are facing a new threat to their bottom lines: consumers unable to pay off credit-card bills and personal loans. View Full Image Pete McArthurAs the U.K. economy heads into a steep downturn, Britons, among the world's most indebted consumers, are increasingly struggling to make ends meet. Personal insolvencies rose 8.8% to 27,087 in England and Wales in the third quarter from the second quarter. One in six U.K. consumers say they can't handle their debts, according to a recent PricewaterhouseCoopers poll. Debt-counseling centers are seeing record call volumes. That's bad news for the biggest players in the U.K.'s consumer-lending market, such as Royal Bank of Scotland Group PLC, Barclays PLC, Bank of America Corp.'s MBNA and HSBC Holdings PLC. As of October, lenders had £235 billion ($348 billion) of credit-card, personal and overdraft loans outstanding to U.K. customers, up 5.5% from the previous year. Research firm Sanford Bernstein estimates lenders will have to take more than £17 billion in impairments on those loans over the next two years, almost as much as they will have to take on mortgage loans. "It's just another element that is going to cause them problems," says Simon Adamson, an analyst at research firm CreditSights in London. "It is going to add to the pressure on earnings." U.K. banks are trying to limit the damage. They have been paring growth in credit-card lending and tightening standards since at least 2007, in response to concerns about the coming economic downturn and a change in the U.K.'s bankruptcy law that eased debt forgiveness. They are also moving aggressively to make claims on the assets of some delinquent borrowers. But as the financial crisis hits the U.K. economy, pushing the unemployment rate up 0.4 percentage point to 5.8% in the third quarter, the effect of consumers' troubles on banks is beginning to show. At MBNA, some 7.06% of cardholders were 30 or more days behind on their payments as of October, up 0.63 percentage point since May, according to data compiled by Sanford Bernstein from securitization trust filings. At RBS, the delinquency rate was 7.99%, up 0.49 percentage point. At HSBC it was 2.81%, up 0.12 percentage point. Only Barclays saw a drop in delinquencies of 30 days or more since May, down 0.18 percentage point to 3.52%. In a recent report, Moody's Investors Service said it expects delinquencies to rise further, followed by an increase in charge-offs, which apply to borrowers more than 180 days delinquent and tend to lag behind economic downturns by about six months. In some cases, banks might mask the severity of the problem, delaying charge-offs by allowing borrowers to enter debt-management programs, Moody's said. "We are looking for a significant increase in the amount of charge-offs," said Jean Dornhofer, Moody's senior vice president in London. "We do have the sector on a negative outlook." Representatives for Barclays, HSBC and MBNA said their credit-card lending standards are high and delinquencies aren't a major concern. The banks all said they work with borrowers behind on payments. A spokeswoman for RBS declined to comment. Borrowers are flooding advice centers at record levels. The U.K. Insolvency Helpline, which provides free and impartial debt advice, receives about 40,000 calls and emails a month, up about 40% from a year ago, says Social Policy Coordinator Ian Boden-Smyth. In the past year, the helpline added about 30 people to the staff of 100 in its Manchester call center to handle the influx, he says. Mr. Boden-Smyth says one problem area is so-called credit-card surfers, or people who in the past got relief from their interest payments by transferring their balance to another card for a low introductory interest rate. These offers, made when banks could better afford to compete for customers, obscured many people's debt problems, says Mr. Boden-Smyth. Now that such offers are unavailable, he said, consumers are having troubling paying up. Some banks are quietly placing liens on the homes of people who have large unpaid debts, in the hope they will be able to recover money if and when the properties are sold. Lenders made 132,000 applications for such so-called charging orders in 2007, up 42% from 2006, according to the U.K. Ministry of Justice. Data for 2008 aren't yet available, but credit-counseling services say they have noticed an uptick in calls from clients complaining about charging orders in the past two to three months.