UK Banks Show Caution in Credit Conditions

The Bank of England’s credit conditions survey for the first quarter of 2019 was released last Thursday, coinciding with an extended holiday period for many commentators, but certain sections made for interesting reading and are worth highlighting.

As regards secured credit to households, there was little to report in either the availability of, or demand for, credit, while the cost also remained unchanged with the spread to the bank rate holding stable. One interesting point was the demand for remortgaging credit, which increased significantly, and is expected to increase again in Q2. Given the stagnation in the housing market, it is not a surprise to see this feeding into the survey, where it seems that homeowners are deciding to stay put, renovate and re-mortgage, rather than participate in the housing market.

There was also little change in the picture for corporate credit, with supply remaining stable and demand picking up slightly, while spreads were relatively stable.

The outlook for unsecured credit, however, was not so rosy. Despite demand remaining stable, with a slight increase in demand for credit card loans, lenders seem unwilling to step up to the plate and the availability of credit decreased in this sector. This increased caution from lenders also appeared in the credit scoring criteria, which tightened slightly, along with a decline in the proportion of applications being approved. In addition, while loan pricing remained stable for unsecured credit, lenders also tightened conditions for credit cards, with the length of interest-free periods decreasing significantly and further significant decreases expected in Q2. It will be interesting to see how this develops, but currently it does appear that banks are beginning to become more cautious on unsecured lending, and in particular to those weaker applicants who struggle to meet the borrowing criteria. We have seen similar tightening by banks in the past, and it has been followed by a loosening of criteria again as the economy or sentiment improves – time will tell if this is the case again.

The other area of concern – and probably one of the causes of the tightening of credit card lending criteria mentioned above – is default levels on unsecured credit to households, which increased significantly, in particular due to an increase in credit card default rates. This increase in credit card defaults followed an increase we noted in the final quarter of 2018, and apart from a decline in Q3 2018, banks have now noted higher defaults for every period since Q2 2017. While this is somewhat concerning, levels are still significantly below those recorded in 2009, and banks did report that they expected defaults to fall in the next quarter. In addition, it’s worth mentioning that losses given default on credit cards have remained low, with banks reporting lower, rather than higher losses for the quarter.

Overall, the survey provided evidence that banks are being more cautious when lending to the weaker borrowers in the market, which, given the poor sentiment in Q4 2018, should not come as a surprise, and indeed, as investors in banks’ debt, it’s pleasing to see credit scoring criteria being tightened. While there was a degree of tightening noted in the survey, we wouldn’t consider this a quasi-rate hike, since it’s unlikely to negatively impact the economy and we suspect it will have little overall impact.

However, looking forward, we will be keen to see if the second quarter survey points to a continuation of the trend noted in credit cards, or if this survey was simply a response to the negative sentiment at year-end 2018.