The Bank of England has a credit card problem

This morning has brought a development in two areas which are of high interest to us. So let us crack on with this from the Financial Times.

The Bank of England has issued a warning about the sort of risky lending practices particularly important to Virgin Money, at a critical time in the bank’s negotiations over a £1.6bn takeover by rival CYBG.

When one reads about risky lending it is hard not to think about the surge in unsecured consumer lending in the UK over the past couple of years or so.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March ( Bank of England)

That rate of growth was described a couple of months ago as “weak” by Sir Dave Ramsden. Apparently such analysis qualifies you to be a Deputy Governor these days and even gets you a Knighthood. Also if 8% is weak I wonder what he thinks of inflation at 2/3%?

However the thought that the Bank of England is worried about the consumer fades somewhat as we note that yet again the “precious” seems to be the priority.

In a letter sent to bank chiefs last week seen by the FT, the Prudential Regulation Authority, BoE’s supervisor of the largest banks and insurers, said “a small number of firms” were vulnerable to sudden losses if customers on zero per cent interest credit card offers then leave earlier or borrow less than expected.

How might losses happen?

Melanie Beaman, PRA director for UK deposit takers, wrote that banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.

The word effective makes me nervous so what does it mean?

EIR allows lenders that offer products with temporary interest-free periods to book in advance some of the revenues they expect to receive once the introductory period ends.

That sounds rather like Enron doesn’t it? I also recall a computer leasing firm in the UK that went bust after operating a scheme where future revenues were booked as present ones and costs were like that poor battered can. Anyway there is a rather good reply to this on the FT website.

I am expecting to win the lottery. Can l  bank the anticipated income now please?  ( TRIMONTIUM)

There is more.

Optimistic assumptions about factors such as customer retention rates and future borrowing levels allow banks to report higher incomes, but increase the risk of valuation errors that could lead to a reversal and weaken their balance sheets, according to the PRA.

Are these the same balance sheets that they keep telling us are not only “resilient” but increasingly so? We seem to be entering into a phase where updating my financial lexicon for these times will be a busy task again. Perhaps “Optimistic” will go in there too?

Moving on one bank in particular seems to have been singed out.

Almost 20 per cent of Virgin Money’s annual net interest income in 2017 came from the EIR method. Industry executives said any perceived threat to capital levels could strengthen CYBG’s (Clydesdale &Yorkshire) hand in negotiations. Virgin Money declined to comment on the PRA’s letter or the merger discussions. CYBG and the PRA also declined to comment.

This is a little awkward as intervening during a takeover/merger raises the spectre of “dirty tricks” and to coin a phrase it would have been “Fa-fa-fa-fa-fa-fa-fa-fa-fa-far better” if they have been more speedy.

FPC

We do not mention this often but let me note this from a speech from Anil Kashyap, Member of the Financial Policy Committee. Do not be embarrassed if you thought “who?” as so did I.

The statute setting up the FPC also makes the committee responsible for taking steps (here I am
paraphrasing) to reduce the risks associated with unsustainable build-ups of debt for households and
businesses. This means that the FPC is obliged to monitor credit developments and if necessary be
prepared to advocate for policies that may lead some borrowers and lenders to change the terms of a deal
that they were otherwise willing to consummate.

Worthy stuff except of course if we move to the MPC and go back to the summer of 2016. This was Chief Economist Andy Haldane in both June and July as he gave essentially the same speech twice.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature
rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption.

Seeing as monetary policy easings in the UK had invariably led to rises in unsecured borrowing you might think the FPC would have been on the case. However Andy was something of a zealot.

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a
collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale
of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be
delivered promptly as well as muscularly.

Not only had Andy completely misread the economic situation the credit taps were turned open. He and the Bank of England would prefer us to forget that they planned even more for November 2016 ( Bank Rate to 0.1% for example) which even they ended up dropping like it was a hot potato.

My point though is that the cause of this below was the Bank of England itself. So if the FPC wanted to stop it then it merely needed to walk to the next committee room.

Consumer credit had been growing particularly rapidly. It had reached an annual growth
rate of 10.9% in November 2016 – the fastest rate of expansion since 2005 – before easing back
somewhat in subsequent months. ( FPC Minutes March 2017)

As some like Governor Carney are on both committees they could have warned themselves about their own behaviour. Instead they act like Alan Pardew when he was manager of Newcastle United.

“I actually thought we contained him (Gareth Bale) quite well.”

He only scored twice…..

Credit Card Interest-Rates

Whilst the Bank of England is concerned about 0% credit card rates albeit for the banks not us. There is also the fact that despite all its interest-rate cuts,QE and credit easing the interest-rate charged on them has risen in the credit crunch era.

Effective rates on the stock of interest-charging credit cards decreased 22bps to 18.26% in April 2018.

I remember when I first looked back in the credit crunch day and it was ~17%.

Comment

You may be wondering after reading the sentence above whether policy has in fact been eased? I say yes on two counts. Firstly it seems to be an area where there is as far as we can tell pretty much inexhaustible demand so the quantity easing of the Bank of England has been a big factor eventually driving volumes back up. Next is a twofold factor on interest-rates which as many of you have commented over the years a lot of credit card borrowing is at 0%. It may well be a loss leader to suck borrowers in but it is the state of play. Next we can only assume that credit card interest-rates would be even higher otherwise although of course we do not know that.

What we do know is that unsecured lending of which credit card lending is a major factor has surged in th last couple of years or so. Accordingly it was a mistake to give the Bank of England control over both the accelerator and the brake.

Me on Core Finance TV

 

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Dear Bank of England how is 8.8% consumer credit growth “weak” please?

This morning has brought better news for the UK economy from the manufacturing sector as this from the SMMT ( Society of Motor Manufacturers and Traders) highlights.

UK car manufacturing rises 5.2% in April, with 127,952 vehicles rolling off British production lines.

However this is in comparison to last April which was a particularly poor month so we need to look for context of which we get a little here.

Growth, however, was also buoyed by production ramp up at several plants to deliver a number of key new and updated models.

Let us hope so as whilst the 3.9% fall in production in the year so far is better than the -6.3% in March the numbers remain weaker. We export 80% of the cars we make and production there is 2.2% lower in 2018 so far but whilst the home market is a mere 20% production for it has fallen by 10.3%.

This links us in to today’s subject of monetary trends in the UK because domestic car demand is so dependent on finance these days with around £44 billion lent last year and involved in 88% of purchases according to the Finance and Leasing Association. So Bank of England Governor Mark Carney will have noted today’s data as we mull whether he is more interested in the implications for consumer credit and the finance industry or car manufacturing?

House Prices

This from the Nationwide Building Society will have gone straight to the top of Mark Carney’s Bloomberg screen.

“UK annual house price growth slowed modestly in May to
2.4%, from 2.6% in April. House prices fell by 0.2% over the
month, after taking account of seasonal factors.”

So pretty much what we have come to expect as most private-sector measures have house price growth around 2%. The official numbers are higher which sadly means they being a more recent construction are more likely to be in error. However the next bit might have Mark Carney spluttering his coffee onto his screen.

Overall, we continue to expect
house prices to rise by around 1% over the course of 2018.

Oh and this provides some perspective on us not building houses.

“Data from the Ministry of Housing, Communities and Local Government shows that, over the last 20 years, the total housing stock in England has increased from 20.6 million to 24 million dwellings, a rise of 16%

Families have got smaller but we are left wondering about how much the population has grown?

Just for context the index fell from 424.1 in April to 423.4 in May. If you want a real bit of number crunching then the 1952 index set at 100 is now at 11201.6 and whilst methodology changes have been made the numbers speak for themselves.

Money Supply

There was another weakening in the broad money data in April.

Broad money increased by £0.5 billion in April . Within this, the flow of households’ M4 was -£3.1 billion , the lowest monthly flow for at least 20 years. The flow of private non-financial corporations’ (PNFCs’) M4 was £5.5 billion.

 

The net flow of sterling credit was -£5.3 billion in April (Table A). Within this, the flow for households increased to £4.3 billion 

So the growth impulse is weak and the number for households is eye-catching so let us stick with that for a moment. One area which signalled something is total mortgage lending which fell by £1.6 billion to £1373.3 billion in spite of net lending being £3.9 billion.

Moving wider let us look at the trend which shows that broad money lending growth ( M4L) has so far in 2018 grown at an annual rate of 4.5%,3.8%,3.7% and now 3.2%. So we remain in a situation where it is fading as we are reminded of the rule of thumb that it represents economic growth plus inflation. It is always hard to figure out when it will apply and it is hopeful that inflation has been fading but nonetheless it implies continuing weak economic growth.

Consumer Credit

There was a return to what might be called normal service this month as Governor Carney reaches for a celebratory Martini.

Net lending for consumer credit was £1.8 billion in April, up from £0.4 billion in March . Within this, net lending on credit cards was £0.6 billion and net lending for other loans and advances was £1.3 billion.

If we look at the breakdown we see that credit card growth and the rest of consumer credit are now growing at similar percentage rates. This gives us a clue that car finance has indeed dipped in response to the issues we looked at above as the “other” category had been growing consistently more quickly in the past three years and peaked around 12% in the autumn of 2016 in response to the Bank Rate cut and Sledgehammer QE of August 2016. But we do not get any sort of break down.

This brings us to the annual rate of growth.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March

Now this is over treble wage growth and a larger multiple of economic growth as it seems to be a bit over 1% and of course is far higher than real wages which are in a broad sweep flat. This reminds me of something from the Bank of England that I challenged at the time.

Bank Of England's Ramsden Says Weak Consumer Credit Data Was Another Factor That Made Me Fear UK Consumption Growth Could Slow Further, Need To Wait And See

— LiveSquawk (@LiveSquawk) May 22, 2018

This is something that I challenged at the time as frankly there have been few stronger series of anything n the UK than consumer credit growth. A policymaker should be able to distinguish between one weaker month in numbers that can be erratic from what is as we noted above at least a three-year trend of up, up and away.

This brings me to a deeper issue which is the take over of so many bodies which are claimed to be independent by HM Treasury. Sir David Ramsden CBE was there for decades rising to Director General and this means that all of the Deputy Governors involved in monetary policy have been in the past at HM Treasury. This is sadly true of the Office of National Statistics which has an HM Treasury “minder” in the shape of Nicholas Vaughan who in my opinion has been the main driving the use of rental equivalence in the CPIH inflation measure.

Comment

We find ourselves noting that 2018 has seen a weakening of the monetary impulse to the UK economy. Some of this will be from the return to a 0.5% Bank Rate last November and the end of the flow of liquidity from the Term Funding Scheme in February. But it is also true that this seems to be a wider move as we note fading in the Euro area monetary data too. Meanwhile it is boom time for consumer credit which of course means the lending we have is very unbalanced and as I feared at the time the banks through a big curve ball to the Bank of England’s credit surveys beginning last August. This sort of data gets ignored by many but actually often provides a useful leading indicator for the economy.

Meanwhile there is some good news to welcome but as we do let us note that somehow or other the “precious” seems to have been missed out again. From the BBC.

“Rent-to-own” shops that sell appliances and furniture for small weekly payments will face a price cap similar to limits on payday loans.

However, the financial regulator will not rush to impose the same restrictions on bank overdrafts.

Me on Core Finance TV

 

The Bank of England faces quite a dilemma

At the moment the minds of the Bank of England must be getting more befuddled than usual as jet lag adds to the usual problems. Once they get back from Australia ( Haldane and Broadbent) and Canada ( Governor Carney) no doubt they will set aside time to read Governor Carney’s latest speech on climate change. That is assuming the forward guidance of their various pilots is working much better than theirs as otherwise a few more flights will be required to get home. So let us open with some relatively rare good news for them. From the BBC.

Reaction Engines Limited (REL), the UK company developing a revolutionary aerospace engine, has announced investments from both Boeing and Rolls-Royce.

REL, based at Culham in Oxfordshire, is working on a propulsion system that is part jet engine, part rocket engine.

At the moment the sums are small but it is a reminder that space technology has been a success story for the UK economy over the past couple of years. It has been getting more and more mentions in the official statistics.

Ben Broadbent

Deputy Governor Broadbent has given a speech at the Reserve Bank of Australia this morning. Tucked away in it is something of a gem even for our absent-minded professor.

I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 2011.

The last thing any sensible person would do is equate former Bank of England Deputy Governor Paul Tucker with accountability. Many of you will remember the saga but for those that do not here is the Guardian from back then.

Paul Tucker, the former deputy governor of the Bank of England, is among several figures from the world of finance to receive a knighthood in the New Year honours list, despite claims that he was involved in the Libor interest-rate fixing scandal.

What has concerned our bureaucrat is what concerns bureaucrats the most everywhere which is a challenged to the bureaucratic empire.

Some have argued that, because there are significant interactions between the two, monetary and macroprudential policy should be housed not just in the same institution, but in the same policymaking committee
within the central bank. The distinct MPC and FPC should become a single “FMPC”.

Okay why not ?

The risk is that a single committee would pay
too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently
allocated in the main to the monetary policymaker – and too little to financial stability.

Yet he seems to forget this later as he remembers his boss is on both committees so we get this.

Even if the two hands are separate, it is important that the one should know what the other
is doing, and in that respect it helps that some people sit on both committees.

Indeed they do some things together.

Many economic
issues are relevant for both and, in the Bank of England, the MPC and FPC regularly receive joint briefings
on such matters.

Poor old Ben then trips over his own feet with this as an increasing number think that what he fears is the current state of play.

I think there would be risks in asking the central bank to meet a wide range of objectives with no distinctive accounting for the use of its various tools.

The housing market

Those at the Bank of England who have trumpeted wealth effects from higher house prices will be troubled by this from Estate Agents Today.

Prices are flat nationally but there are major regional variations with London seeing the sharpest fall in prices, according to the surveyors.

Respondents in the South East of England, East Anglia and the North East of England also reported prices to be falling, but to a lesser extent than in London.

Prices increased elsewhere in the UK in the last three months.

Will they now be so keen to try to push mortgage interest-rates higher and thus drive away the claimed wealth effects? Whereas at the moment the situation according to the credit conditions survey of the Bank of England reminds us that its previous policies are still having an effect.

A narrowing of spreads reflects an increase in the level of
competition in the mortgage market. In recent discussions, the major UK lenders noted that competition remains very strong.

Can anybody please tell me where the £127 billion of funding given to the banks by the Term Funding Scheme may have gone? It does not seem to have gone here.

The perceived availability of credit to small businesses decreased slightly in 2018 Q1, according to respondents to the Federation of Small Businesses’ (FSB) Voice of Small Business Index.

Also if we return to the argument provided by Ben Broadbent that a separate FPC is vital I wonder what he and they think of where the biggest impact of their TFS has been.

 competition remains very strong
and since November has increased in the higher LTV market,………..Consistent with this, the difference
between quoted rates on two-year fixed rate 90% and 75%
LTV mortgages has narrowed from 90 basis points in August to 69 basis points in March. ( LTV = Loan To Value).

As I understand it this is officially called vigilance these days.

Consumer Credit

Another example of “vigilance” can be provided here from today’s survey. You may recall that the Bank of England has taken something of a journey on this subject after Governor Carney told us this in February 2017.

This is not a debt-fuelled consumer expansion
that we’re dealing with.

Now the survey tells us this.

There has been a modest tightening in the availability of
consumer credit over the past year.

This is a reining back from the promises of a reduction that we saw in the survey for the third and fourth quarters of last year which they are no doubt hoping we have forgotten. Of course we see a sign of the Term Funding Scheme at play yet again.

Lending spreads have tightened in recent months as interest rates remained broadly unchanged following the rise in Bank Rate.

This provides two problems for the Bank of England. Firstly it has boosted consumer credit with its “Sledgehammer” policies and now we will have to face the consequences. Next is a confirmation of the earliest theme of this blog which is that Bank Rate has very little and sometimes nothing to do with the interest-rates charged in this area. In effect therefore it is somewhat impotent.

 

Comment

Yet again our absent-minded professor has been somewhat forgetful. For example his own move from being an “external” member to an internal one at the Bank of England was clearly beneficial for him but was bad for the idea of external members bringing fresh ideas and dare I say it independence to the Bank. Now that Rubicon has been crossed they too may now be hoping for promotion and monetary gain and hence influenced in the same way their appointment was an attempt to avoid.

Also the empire building of the current Governor who has overseen inflation in the number of Deputy Governors such as Ben is clearly something that cannot be challenged within the Bank. For example I am no great fan of macro prudential policy as when it was used in the past it failed and I notice the fanfare in favour has gone much quieter as reality has replaced hype.

Moving to the interest-rate issue that presently seems to be the topic du jour every day the Bank of England is facing something of a crisis as its forward guidance has put it between a rock and a hard place. The rock is the increases seen and expected in US interest-rates and the hard place is the trajectory of the UK economy.

Nigeria

The honesty is admirable but it is hard not to smile as you read why Nigeria released its inflation data an hour early today. The Hat Tip is to @LiveSquawk

It will be shortly. I published one hour earlier by accident. Forgot Watch still on London time so I released 8am instead of 9am as published . Probably need a break/holiday. My apologies

 

 

What happens if consumer spending is debt fuelled but slows anyway?

Today brings us to a sector of the UK economy that has been running rather red-hot which is the unsecured credit data. The BBC caught up with this on Monday albeit from data which is incomplete.

Debt on UK credit cards is growing at the fastest rate since before the financial crisis, figures show.

The more regular use of these cards for smaller, contactless purchases explains in part the greater debt being built up over short periods.

However, figures from UK Finance show that the annual growth rate in outstanding credit card debt of 8.3% in February was the highest for 12 years.

Some of you will already be smelling a rat as you recall that it has been over 10% in response to the Bank of England opening the credit taps with its “Sledgehammer” in August 2016. It is interesting to see though that on this series we are finally getting the same message. Oh and if you are wondering who UK Finance are they are the new name for the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield.

If we look further into the data there was potentially good news for the economy which does fit with news elsewhere.

“Bank lending to businesses saw modest year-on-year growth in February, driven by investment within the manufacturing sector”

Today’s Data

The data from the Bank of England could have been released with KC and the Sunshine Band in the background.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song

Or to put it another way.

The annual growth rate for consumer credit ticked up slightly to 9.4% (Table J), although net lending remains broadly in line with its previous six-month average.

The monthly number rose from £1.3 billion in January to £1.6 billion in February and the total is now £209.6 billion. If we break that down the fastest growing component is credit cards which if we annualise the quarterly growth rate have risen by 11.3% and now 11.2% in 2018 so far meaning the total is now £70.6 billion. But for that we would be worried by the larger other loans and advances ( personal loans and overdrafts ) which total some £138.6 billion and on the same criteria have grown at 8.2% and 8.5%. Individual months can be erratic but this sector has been a case of the trend is your friend for a couple of years or so now.

Never believe anything until it is officially denied

One of my favourite phrases because it works so well. Brought to you this time by the Bank of England credit conditions survey and the emphasis is mine.

The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017 (Chart 1). Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

So they reduced it in the third quarter if you recall as well cut it back in the 4th and then gave it a “significant decrease” to er 9.4% in February. This is heading into comical Ali territory now.

Back in February 2017 Governor Mark Carney told us this at the Inflation Report press conference.

From an MPC perspective, just to put those numbers into
context, on the most expansive definition, the increase in
consumer borrowing would contribute up to a tenth of the
increase in consumption. So it’s something, but it’s not
everything. This is not a debt-fuelled consumer expansion
that we’re dealing with.

Of course he may still have been rattled by the opening question.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

This is not a debt-fuelled consumer expansion

I would like to stick with the statement by the Governor and bring in this from the Office of National Statistics earlier.

The accumulation of debt (measured by the amount of short-term and long-term loans households took out) in 2017 outstripped the amount of total financial assets they accumulated in the same period. This was the first time this happened since records began in 1987.

Also is anybody thinking of the Sledgehammer QE of August 2016 and of course the promises back then of further “muscular” action in November 2016?

Up until Quarter 3 2016, the households sector was a net lender. In the five quarters since, households have been net borrowers at an average of £3.3 billion per quarter. As a result, 2017 was the first year in which households were net borrowers – meaning that they had to borrow in order to fund their spending and investment activities.

Perhaps this is what the Governor meant at Mansion House last year.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations ( his especially).

Business Lending

This was supposed to be the main target of the Funding for Lending Scheme as it was fired up in the summer of 2012. The priority was smaller businesses so how is that going?

Net lending to SMEs has increased following a rather weak January

It rose by £700 million after falling by £700 million then. This means that the annual growth rate has risen from 0% to 0.1% and reminds us yet again of the true meaning of the word counterfactual.

Comment

So the beat goes on for UK unsecured credit although it seems to have taken UK Finance quite some time to catch up. The national accounts breakdown also tells us that there has been something of a shift although it includes secured debt and has issues with accuracy. On that subject if we stay with GDP here is an example of something from the research centre of the UK ONS.

Our initial results suggest that imputation of pension
accruals raises both the Gini coefficient and the geometric mean of equivalised household income materially, while the effects of imputing investment income are more marked on the Gini coefficient than on the geometric mean of household income.

So if we have imputed rent, pensions and investment income why not stop counting anything and simply input the lot and tell us that tractor production is rising. You may not be surprised to read that one of the authors is Martin Weale who is building a consistent track record.

Moving back to unsecured debt I note that the Bank of England ( of course Dr. Weale’s former employer )  is of course vigilant. But in spite of all this vigilance even growth at these levels does not seem to be helping the retail sector much as we observe a steady stream of receiverships and closures. On the more hopeful side falling inflation will help improve the real wages situation this year and mean that we may get some more of this.

UK gross domestic product (GDP) increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the second estimate of GDP published on 22 February 2018.

Happy Easter to you all.

The more we are told UK household debt is not a problem the more worried we should be

We have reached a stage where the UK establishment is paying more and more attention to household debt issues. This reminds me of the explanation of the bureaucratic response to such issues explained by Yes Prime Minister. All we have to do is switch from foreign to economic policy. From imdb.com.

Sir Humphrey Appleby: Then we follow the four-stage strategy.

Bernard Woolley: What’s that?

Sir Richard Wharton: Standard Foreign Office response in a time of crisis.

Sir Richard Wharton: In stage one we say nothing is going to happen.

Sir Humphrey Appleby: Stage two, we say something may be about to happen, but we should do nothing about it.

Sir Richard Wharton: In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.

Sir Humphrey Appleby: Stage four, we say maybe there was something we could have done, but it’s too late now.

The other part of the strategy or game is to make it appear that you are on the case which these days in monetary or economic policy is summed up by the use of the word vigilant which seems set to become a metaphor for anything but in the way that Forward Guidance has become.

The Financial Conduct Authority

The Director of Supervision at the FCA Jonathan Davidson told us this yesterday,

The consumer credit sector is by far and away our largest sector in terms of number of firms with almost 40,000 firms registered with the FCA. And as a sector you have been growing – according to the Bank of England, consumer credit grew 9.3% over the last year.

Regular readers will of course be aware of this and we have looked at the issues below too.

After all, none of us can forget the context in which we are operating. Total credit lending to individuals is currently very close to its September 2008 peak. The circumstances are different now than 10 years ago, but there are still worrying numbers of householders who may still be in too deep. For example, 1 in 5 mortgages today are interest only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. And they won’t mature until about 2032.

Indeed the circumstances are different as for example real wages are lower but I am not entirely sure that is what he means! The reminder about the scale of interest-only mortgages does make me think that an establishment solution for that would be to push house prices higher, oh hang on! If we look around we see that such a policy has worked in the south-east and other areas but would be struggling for example in Northern Ireland. As to affordability I guess Mr, Davdson would point us to this from the Office for National Statistics.

The median equivalised household disposable income in the UK was £27,300 in the financial year ending (FYE) 2017. After taking account of inflation and changes in household structures over time, the median disposable income has increased by £600 (or 2.3%) since FYE 2016 and is £1,600 higher than the pre-economic downturn level observed in FYE 2008.

Of course the aggregate numbers can hide trouble.

The Bank of England’s Financial Stability Report last year noted that consumer credit has grown rapidly and that, relative to incomes, household debt is high. And there are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads.

If we go back to the press conference back then Governor Carney told us this.

So there are pockets of risk, consumer credit is a pocket of risk, it’s been growing quite rapidly.

That made him sound a little like the “pocketses” of Gollum in the Lord of the Rings, Unfortunately this was not followed up as the press corps was only really interested in Brexit but here are the numbers from the report.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion). It is equal to 134% of household incomes , high by historical standards but below its 2008 peak of 147%. Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008 peak.

Fascinating isn’t it that they continue the campaign to exclude student debt from the numbers. Maybe it is because it is growing so fast or maybe like me they feel most of it will never be repaid. But in my view you cannot ignore it because it is having effects and implications right now. Also there is the false implication that just because the numbers are not quite as bad as 2008 we can sing along with Free.

All right now, baby, it’s a-all right now.
All right now, baby, it’s a-all right now

Interest-Only Mortgages

Oh and if these are an issue then  genuinely vigilant regulators might be on the case here.

However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market………However more recently, there are signs that lenders are starting to expand interest-only lending again, which rose to £5.4bn in Q3 2017, a 45% increase on the previous year. ( Bank Underground).

Everything is fine

Back in January research from the Bank of England via Bank Underground told us everything is fine.

Insight 1: Credit growth has not been driven by subprime borrowers

Insight 2: People without mortgages have mainly driven credit growth

Insight 3: Consumers remain indebted for longer than product-level data implies

I have to confess I am always somewhere between cautious and dubious about such detailed analysis I have seen it go wrong and more often than not spectacularly wrong so often. After all the “liar loans” pre credit crunch would have officially looked good. Also the authors seem keen to cover all the bases.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

Motor Finance

Mr.Davidson offered some reassuring words on this subject.

The growth of PCP contracts in the motor finance market is a good example of an innovation that has had a significant impact………

So financing of car ownership has become more affordable, allowing more consumers to have more expensive cars. Indeed, the number of point-of-sale consumer motor finance agreements for new and used cars has nearly doubled from around 1.2m in 2008 to around 2.3m in 2017.

This type of innovation, and business model diversity, paints a really attractive picture of your industry.

Is it a miracle? Well please now re-read the quote using the definition of innovation from my financial lexicon for these times which was taught us by the Irish banks which is claimed triumph followed by disaster. I guess such thoughts will be reinforced by this bit.

It is important to me that we continue this innovation in the sector,

Also although he does not say it I am for some reason reminded of Royal Bank of Scotland by this.

A key observation and concern for us is that there are some business models for which customers who can’t afford to repay the principal are profitable, sometimes very profitable

Comment

There is much to consider here and let me give you a clear theme. Individual speeches are welcome and well done to Mr.Davidson but a succession of them means that the establishment is not  preparing us for moonlight and music and love and romance but rather

There may be trouble ahead……..

There may be teardrops to shed

Whilst they will be mulling this line.

Before the fiddlers have fled,

If we consider the overall position the reverse argument to mine is that collectively the debt is affordable and in theory and up in the clouds with the Ivory Towers it is. But when we return to earth reality is invariably far less convenient as this from Mr,Davidson’s speech suggests.

We are also seeing younger people borrowing a lot more relative to their incomes than my, baby boomer, generation. Why is this? It’s because of:More student borrowing. Our financial lives survey showed that 30% of 25-34 year olds have a Student Loan Company loan. The higher cost of getting onto the housing ladder. Shifting patterns of savings, borrowing and consumption. You don’t need to wait, you can have it now.

 

Among 25-34 year olds, 19% have no savings whatsoever, and a further 30% have less than a £1000 saved to use on a rainy day. Indeed, 36% had been overdrawn in the last 12 months.

At the same time, the number of self-employed people in the UK has risen by more than 1.5m since the turn of the century (a 45% increase), and more than 900 thousand people currently are on zero-hours contracts. The gig economy is growing strongly.

When bubbles blow up or pockets develop holes in them it is invariably something relatively small that is the trigger. The consequences however are usually widespread.

The Bank of England has a credit problem

This morning has opened with news that the winter chill affecting the UK has blown down Threadneedle Street and into the office of Governor Mark Carney at the Bank of England.

House prices fell by 0.3% over the month, after
taking account of seasonal factors…..“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months.”

That was from the Nationwide Building Society – as ever care is needed as it is only Nationwide customers – and it backed it up by saying that the outlook was also not so good.

Similarly, mortgage approvals declined to their weakest
level for three years in December, at just 61,000. Activity
around the year-end can often be volatile, but the weak
reading comes off the back of subdued activity in October
and November (approvals were around 65,000 per month
compared to an average of 67,000 over the previous 12
months). Surveyors report that new buyer enquiries have
remained soft in recent months

So at this point Governor Carney will be miserably observing weaker business for the “precious” and a monthly house price fall. If he is cold prospects may not be so good. From the Guardian.

National Grid has issued a warning that the UK will not have enough gas to meet demand on Thursday, as temperatures plummeted and imports were hit by outages.

Good to see that there has been plenty of forward planning on this front.

The crunch is also the UK’s first major energy security test since the country’s biggest gas storage facility was closed by Centrica last year. The Rough site in the North Sea had accounted for 70% of the UK’s gas storage.

Forward guidance anyone?

Three cheers from Governor Carney

However there was something of a warm fire in the Governor’s office today as he observed this from his own data.

Mortgage approvals increased in January for both house purchase and remortgaging, to 67,478 and
49,242 respectively.

The plan that started back in the summer of 2012 with the Funding for Lending Scheme continues.

Annual growth in secured lending was unchanged at 3.3% in January , with net lending at £3.4 billion.

In essence the plan was a type of credit easing where feeding cheap cash to the banks was designed to boost the UK economy via turning net mortgage lending from negative to positive. It took around a year to work but as mortgage rates fell ( initially by around 1% and later by more) net mortgage lending turned positive and has remained so. The Governor’s office will feel ever warmer as he observes this from the Nationwide.

net property wealth is the second largest store of household wealth after private pension wealth and amounted to c.£4.6 trillion over the July 2014 to June 2016 period – equivalent to around two and a half times UK output in 2016.

Any Bank of England economist looking for career advancement only has to write about these wealth effects feeding into the economy. Should he or she want solitude then all they have to do is point out the madness in using marginal prices especially at lower volumes to value a stock of housing. Then before you can cry “Oh Canada” they will be dispatched to a dark damp dungeon where the Bank of England cake trolley never arrives.

Overheating

After the speech from Chair Powell on Tuesday this has become something of a theme and there is a clear example of it in the UK unsecured credit data.

The annual growth rate for consumer credit has slowed over the past year to 9.3%, driven by other
loans and advances.

This is where we get a lesson in number crunching from the Bank of England as this is represented as slowing whereas say wage growth is always on its way to a surge. In reality consumer credit has been on something of a tear and the monthly growth of around £1.4 billion has been fairly consistent whereas wage growth has so far gone nowhere. Or to put it another way the economy is growing at around 2% so there has been a 7/8% excess for quite some time now. One area which was driving this seems now to be a fading force.

The UK new car market declined in the first month of the year, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,615 cars were driven off forecourts in January, a -6.3% fall compared with the same month in 2017.

This fading has been reflected in the UK Finance and Leasing Association figures.

 New business in December 2017 fell 2% by value and 5% by volume compared with the same month in 2016.

Yet unsecured lending has continued on its not so merry path and has now risen to £207.5 billion.

Business Lending

This was the main aim of the Bank of England especially for the smaller business sector, at least that is what we were told. Indeed  the scheme was modified we were told to improve that success. How is that going?

Lending to non-financial businesses fell by £1.6 billion in January . Loans to small-and-medium
sized enterprises fell by £0.7 billion, the largest decline since December 2014.

If we look for some perspective we see that three of the last four months have seen credit contractions and the six month average is -£100 million. So the Bank of England arrow if I may put this in Abenomics terms missed the smaller businesses target completely but scored a bullseye in consumer credit which is still growing at 9.3% per annum. The latter is of course in spite of us being told that conditions were much tighter in the latter part of 2017.

Comment

Those who have followed the UK economy over the years and indeed decades will know that today’s data follows a familiar theme. An easing of monetary policy such as the credit easing of the FLS and now the Term Funding Scheme ( £115.4 billion) followed by the Bank Rate cut and Sledgehammer QE of August 2016 would be expected to have the following results. A rise in mortgage lending and then later a rise in unsecured lending it has been ever thus. This is because it is easy to do for the banks and it is an area in which they excel whereas business lending is both more complex and harder to do. Track records do matter as I recall my late father telling me (he had a plastering business) that when he really needed finance the banks took it away whereas at other times it was plentiful. Please remember that when we are told small businesses “do not want to borrow” it may be because they have much longer memories than the banks.

Oh and in case the Bank of England tries to tell us unsecured credit growth can be cut by a Bank Rate rise or two please remember that credit card debt costs around 18% per annum according to its data.

If we switch to the real economy then there is another area where the Bank of England is lost in a land of confusion. This is the impact of the post EU leave vote fall in the UK Pound £ which according to the PMI business survey this morning seems to have helped UK manufacturers.

the continued rise in export orders s and an uplift in new orders from the domestic market provided evidence that the
foundations for continued growth were still buoyant………New orders
showed the largest monthly gain since November
and are outpacing the rate of growth in output to
one of the greatest extents in more than a decade.

It is possible that we are seeing import substitution as well as export growth. It makes you wonder how well they would be doing if the banks supported them with more and better finance doesn’t it?

Me on Core Finance TV

http://www.corelondon.tv/feds-powell-needs-just-get/

 

 

 

 

 

 

 

 

 

 

 

What is happening to US consumer credit and car loans?

If we take a look at the US economy then we see on the surface something which looks as it is going well. For example the state of play in terms of economic growth is solid according to the official data.

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2017 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.

Looking ahead the outlook is bright as well.

The New York Fed Staff Nowcast stands at 3.9% for 2017:Q4 and 3.1% for 2018:Q1.

That would be a change as the turn of the year has tended to under perform in recent times. Also if we use the income measure for GDP the performance is lower. But if we continue with the data we see that both the unemployment rate ( 4.1% in December) and the underemployment rate ( 8.1% in December) have fallen considerably albeit that the latter nudged higher in December.

Less positive is the rate of wage growth where ( private-sector non farm) hourly earnings are currently growing at 2.5%. This is no doubt related to this issue.

In the 2007-2016 period, annual labor productivity decelerated to 1.2 percent at an annual average rate, as compared to the 2.7 rate in the 2000-2007 period.

So a familiar pattern we have observed in many places although the US is better off than more than a few as it has real wage growth albeit not a lot especially considering the unemployment rate and at least has some productivity growth.

Interest-rates are rising

Whilst wages have not risen much in response to a better economic situation interest-rates are beginning to. The official Federal Reserve rate is now 1.25% to 1.5% and is set to rise further this year. If we move to how such things impact on people then the 30 year (fixed) mortgage rate is now 4.06%. It has had a complicated picture not made any easier by the current government shutdown but in broad terms the downtrend which took it as low as 3.34% is over.

How much debt is there?

As of the end of the third quarter of 2017 the total mortgage debt was 14.75 trillion dollars. This is not a peak which was 14.8 trillion in the spring/summer of 2008 but if we project the recent growth rate we will be above that now. Of course the economy is now much larger than it was then.

If we move to consumer credit then we see the following. It was 3.81 trillion dollars at the end of November and that was up 376 billion dollars on a year before.

In November, consumer credit increased at a seasonally adjusted annual rate of 8-3/4 percent. Revolving credit increased at an annual rate of 13-1/4 percent, while nonrevolving credit increased at an annual rate of 7-1/4 percent.

So quite a surge but care is needed as the numbers are erratic and October gave a much weaker reading. So we wait for the December data. If we look into the detail we see that student loans were 1.48 trillion dollars as of September and the troubled car loans sector was 1.1 trillion dollars. For perspective the former were were 1.05 trillion in 2012 and the latter 809 billion.

In terms of interest-rates new car loans are 5.4% from finance companies and 4.8% from the banks for around a 5 year term. Credit cars debt is a bit over 13% and personal loans are 10.6%.

Credit cards

The Financial Times is reporting possible signs of trouble.

The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion……Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.

It suggests that the rise in lending that has been seen is on its way to causing Taylor Swift to sing “trouble,trouble,trouble”

Yet borrower delinquencies are outpacing rising balances. While still less than half crisis-era levels, the consultancy forecasts soured credit card loans will reach almost 4.5 per cent of receivables this year, up from 2.92 per cent in 2015.

The St.Louis Federal Reserve or FRED is much more sanguine as it has the delinquency rate at 2.53% at the end of the third quarter of 2017. So up on the 2.29% of a year before but a fair way short of what the FT is reporting.

Maybe though there have been some ch-ch-changes.

“The driving factor behind the losses is that banks are putting weaker credits on the books,” said Brian Riley, a former credit card executive and now a director at Mercator.

Car Loans

According to CNBC lenders are being more conservative in the automobile arena.

The percentage of subprime auto loans saw a big decline in the third quarter despite growing concerns that auto dealers and banks are writing too many loans to borrowers with checkered credit histories, according to new data.

In fact, Experian says the percentage of loans written for those with subprime and deep subprime credit ratings fell to its lowest point since 2012.

In terms of things going wrong then we did not learn much more.

In the third quarter, there was a slight decrease in the percentage of loans 30 days overdue and slight increase in those that were 60 days delinquent.

Although a development like this is rarely a good sign.

Meanwhile, Experian says the average term for a new vehicle auto loan hit an all-time high of 69 months, thanks in part to a slight increase in the percentage of loans schedule to be repaid over 85 to 94 months.

“We’re starting to see some spillover to loans longer than 85 months,” said Zabritski.

This morning’s Automotive News puts it like this.

Smoke expects higher interest rates and tighter credit this year will drive many consumers to buy a used vehicle instead of a new one. Most of those buying used cars will be millennials, who are often saddled with student loans and remain credit challenged, he said.

It is no fun being a millennial is it? Although I suppose much better than being one in the last century as we have so far avoided a world war.

This piece of detail provides some food or thought.

Last year, the U.S. Federal Reserve raised interest rates three times for a total of 75 basis points, and data show that auto-loan lenders have been tightening credit for six straight quarters, but auto loans for “superprime borrowers” increased by just 20 basis points, Smoke said.

Are lenders afraid of raising sub-prime borrowing rates? Not according to The Associated Press.

Subprime buyers got substantially better rates even a year ago. The average subprime rate of 5.91% last year has jumped to 16.84% today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495.

Comment

There is a fair bit to consider here as we mull how normal this is for the mature phase of an economic expansion? Also how abnormal these times have been in terms of whether the benefits of the economic growth have filtered down much to Joe Sixpack? After all wage growth could/should be much better and the unemployment figures obscure the much lower labour participation rate. We will be finding out should interest-rates continue their climb as we mull the significance of this.

Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007, according to data from S&P Global Ratings. ( Financial Times).

One thing we can be sure of is that we will be told that everything is indeed fine until it can no longer possibly be denied at which point it will be nobody’s ( in authority) fault.

Jimmy Armfield

Not only a giant in the world of football in England but in my opinion the best radio summariser by a country mile. RIP Jimmy and thank you.