As regulatory pressure forces the big UK banks to clip their international wings and slug it out for a share of the UK retail market, they are increasingly vulnerable to reversals at home.
FTSE 100 stalwarts Barclays (LSE: BARC) (NYSE: BCS.US), Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and Royal Bank of Scotland Group (LSE: RBS) will have nowhere to run if UK growth slows.
Particularly if the consumer credit boom finally goes bust, as booms have a habit of doing.
Till Debt Do Us Part
The IMF has just warned that UK growth will slow to 2.3% next year, against 2.7% this year.
High levels of debt are holding us back, and the next government may have to impose tax hikes or benefit cuts to balance the books.
Consumers are feeling relatively flush today as inflation falls to zero, essentials such as food and fuel fall in price, and wages almost start growing again.
Record low mortgage rates have been a big help too, but may ultimately be a hindrance, as they encourage borrowers to load up on debt.
Unsecured borrowing increased by ÂŁ19.7bn last year, or 9%, according to PwC.
It said the average household owed “close to ÂŁ9,000” in 2014. That will rise to ÂŁ10,000 by the end of next year.
People can cheerfully load up on debt when interest rates are as low, but as the US Federal Reserve ponders its first rate hike, there is mounting concern that borrowing costs will rise faster than markets currently expect.
One Week From Disaster
If rates do rise, consumers will quickly run into trouble.
One in six Britons consider themselves to have a debt problem, the equivalent of eight million people across the UK, according to the Debt Advisory Centre.
Figures from HSBC show that 8.5 million would run out of money within a week if they lost their job.
Nearly one in three couldn’t pay their mortgage. And all this at a time when interest rates have never been lower.
Loan Losers
Although consumers started paying down their debts in the wake of the financial crisis, they have quickly returned to their bad habits.
All looks hunky-dory now, with the loan loss ratio for UK banks at just 0.14% at the end of last year, according to Standard & Poor’s, against 0.69% in 2013.
Faster growth, low interest rates and higher property prices are keeping the show on the road.
But the ratio for consumer credit is much higher at 2.05%, and with consumer lending expected to accelerate this year, S&P says banks face higher credit losses.
If interest rates stay for low forever, the banks may muddle through. But with oil creeping above $61 a barrel, M3 money supply rising at an annualised 8.2% in the US, European QE making its presence felt and the Fed potentially tightening from the summer, investors could be in for a shock.