The big banks such as Barclays (LSE: BARC), Lloyds Banking Group (LSE: LLOY), Royal Bank of Scotland Group (LSE: RBS) have so many ‘in yer face’ problems that it’s easy to ignore those lurking in the background.
Brutal fines for mis-selling and rate-rigging scandals, investment bank troubles, stiff capital adequacy demands, tougher competition and government part-ownership all weigh heavily on the sector.
Behind all this, there is the underlying concern over the underlying economy. If the banks’ customers are struggling, the banks will continue to struggle as well.
And despite the recent recovery, ordinary people are in the mire.
Till Debt Do Us Part
The Bank of England has just concluded that the high level of household debt was one of the main reasons the 2008 financial crash was so long and so deep.
Britain’s household debt topped 160% of GDP in 2007, a dramatic increase from 100% in 2000. After years of maxing out their plastic, panicky consumers slashed their spending in a bid to stay afloat amid the post-crisis uncertainty.
And it worked, to a point. Household debt subsequently fell to below 140% of GDP. So all those ’20 ways to save money’ articles I wrote for the newspapers after the crash actually worked.
Perhaps a more important factor was that credit was so hard to get hold of, as the banks cut back.
The paradox of all this thrift is that it hurt the economy, by sucking money out of the high street. And it was bad for bank lending figures as well.
Verum’s Verita Serum
It’s no coincidence that as the economy has recovered, so has household debt, led by mortgage debt.
Those aged 35 to 44 now have the highest debt levels, as they have taken out big mortgages to climb on the property ladder, and are struggling to repay them as wages stagnate, according to a new report by financial research firm Verum.
That’s a worry because spending is this age group has typically driven economic growth.
The longer interest rates stay low, the more debt Britons are likely to accumulate.
The Office for Budget Responsibility has estimated that household debt it will have reached its previous peak in the 2016/17 tax year, and then continue rising.
Have we learned nothing?
Tight Times
While interest rates stay low, mortgage arrears and default rates will also be contained. But once they start rising, many will slide into difficulties.
Two million would struggle to meet their mortgage repayments if base rates rose by just 2%, according to research from Nutmeg. And one-third wouldn’t be able to afford their mortgage should rates hit 5.5%, a level seen as recently as 2008.
That’s why the Bank of England and Financial Conduct Authority has been clamping down on mortgage lenders, forcing them to carry out stress tests and limiting high loan-to-income mortgages.
More tightening could follow.
Debt Is A Four-Letter Word
If interest rates do start rising, household debt will suddenly leap back into the foreground. Then we will remember it is one of the biggest problems afflicting the UK economy.
With CPI falling to 1.5%, it’s not as though we can inflate our way out of debt.
This will ultimately hit the bottom line at the banks, as impairments start rising.
What will make the problem more acute is that the big banks, in particular Lloyds, are retreating from the global stage to focus increasingly on the UK.
So even if the economy does power on, the banking stock recovery will remain as bumpy as ever.
