Trends in Lending. January 2010

Transcription

1 Trends in Lending January 1

2 BANK OF ENGLAND Trends in Lending January 1 This publication presents the Bank of England s assessment of the latest trends in lending to the UK economy. It draws mainly on long-established official data sources, such as the existing monetary and financial statistics collected by the Bank. These data are supplemented by the results of a new data set, established by the Bank in late 8, to provide more timely data covering aspects of lending to the UK corporate and household sectors. (1) The Bank collects these data on behalf of the Lending Panel, (2) which was established by the Chancellor in November 8 to monitor lending to the UK economy and to promote best practice across the industry in dealing with borrowers facing financial difficulties. The data set referred to as Lending Panel data covers the major UK lenders: (3) Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of Scotland. Together they accounted for around 6% of the stock of lending to businesses, % of the stock of consumer credit, and 7% of the stock of mortgage lending at the end of 8. These data have provided a useful input to discussions between the major UK lenders and Bank staff, giving staff a better understanding of the business developments driving the figures and this intelligence is reflected in the report. The report also draws on intelligence gathered by the Bank s regional Agents and from market contacts, as well as the results of other surveys. The focus of the report is on lending, but broader credit market developments, such as those relating to trade credit or capital market issuance, may be discussed where relevant. The report covers official data up to November 9, supplemented by Lending Panel data and intelligence gathered up to end-december 9. Unless stated otherwise, the data reported cover lending in both sterling and foreign currency, expressed in sterling terms. Lending Panel data are provided to the Bank on a best endeavours basis. This, together with their relative timeliness, means that they may not be as accurate as established data sets. As a result, care is needed in interpreting the Lending Panel data presented in this report. (1) For a fuller background please refer to the first edition of Trends in Lending available at: (2) The Lending Panel comprises Government, lenders, consumer, debt advice and trade bodies, regulators and the Bank of England. See (3) Membership of the group of major UK lenders is based on the provision of credit to UK-resident companies and individuals, regardless of the country of ownership.

3 Contents Executive summary 3 1 Lending to UK businesses 4 Box Recent trends in domestic trade credit 7 2 Mortgage lending 9 3 Consumer credit 12 Glossary and other information 14

4 Executive summary 3 Executive summary The flow of net lending to UK businesses rose in November, though remained subdued. The effective rate on new lending increased in November, though in the Credit Conditions Survey lenders reported a reduction in spreads and fees during 9 Q4 overall the first such declines recorded in this survey since 7 Q2. Some business contacts reported a marginal improvement in the availability of credit during the second half of 9, with conditions reported to have eased more for larger companies than their smaller counterparts. The major UK lenders reported that loan demand continued to be weak. The flow of net mortgage lending rose in November, though remained well below the average flow in 8. Gross lending for house purchase increased in December, according to data from the major UK lenders, which was said partly to reflect some homebuyers bringing forward purchases before the end of stamp duty relief. Mortgage approvals by the major UK lenders slowed in December, having risen in previous months. Mortgage credit availability was reported by lenders to have improved in 9 Q4, particularly for borrowers with loan to value ratios above 7%, and secured lending spreads were expected to narrow in 1 Q1. Demand for mortgages for house purchase was reported to have risen further. The total flow of net consumer credit and the twelve-month growth rate of the stock of lending remained negative in November. Spreads between effective interest rates on consumer credit and Bank Rate and Libor remained significantly wider than a year earlier. Availability of consumer credit was reported by lenders to have tightened further. And although consumers expectations for unemployment have fallen, consumer credit demand was expected to remain subdued.

5 4 Trends in Lending January 1 1 Lending to UK businesses The flow of net lending to UK businesses rose in November, though remained subdued. The effective rate on new lending increased in November, though in the Credit Conditions Survey lenders reported a reduction in spreads and fees during 9 Q4 overall the first such declines recorded in this survey since 7 Q2. Some business contacts reported a marginal improvement in the availability of credit during the second half of 9, with conditions reported to have eased more for larger companies than their smaller counterparts. The major UK lenders reported that loan demand continued to be weak. Table 1.A Lending to UK businesses (a) Averages Q1 Q2 July Aug. Sep. Oct. Nov. Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Lending by UK monetary financial institutions to PNFCs. Data cover lending in both sterling and foreign currency, expressed in sterling terms. Seasonally adjusted. Chart 1.1 Net funds raised by UK businesses (a) Loans Bonds Equity Total Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct billions (a) Funds raised by PNFCs from UK monetary financial institutions and capital markets. Data cover funds raised in both sterling and foreign currency, expressed in sterling terms. Loans are seasonally adjusted. Bond and equity issuance are non seasonally adjusted. Commercial paper is included within bonds Recent lending data Official data covering lending by all UK-resident banks and building societies indicated a flow of net lending to businesses of.1 billion in November, the first positive figure since January 9 (Table 1.A). However, the twelve-month growth rate of the stock of loans remained at its lowest since the monthly series began in 1999, and data from the major UK lenders indicated that net lending weakened in December. Total net funds raised by UK businesses from bank lending and capital markets rose in November and were positive for the first time in five months (Chart 1.1). Earlier editions of Trends in Lending have noted that some UK businesses have used funds raised on capital markets to repay bank debt. Lending Panel data provide information on gross lending to UK businesses, and repayments by them, in 9. Gross lending by the major UK lenders has remained little changed since Spring 9 (Chart 1.2). Repayments to these lenders have fallen through 9, but have remained higher than gross lending, consistent with some businesses using alternative sources of finance such as capital market issuance, rather than new bank lending, to restructure their debt. Indeed, according to the Bank s regional Agents, many contacts had reported that they were paying down bank debt. In some contrast to the picture for businesses overall, repayments of borrowing by small and medium-sized enterprises (SMEs) have risen gradually during 9, according to data collected for the Department for Business, Innovation and Skills (BIS) (Chart 1.3). Consistent with this trend, the annual growth rate of the stock of lending to SMEs has fallen, though at -.4% in November, it remains stronger than for lending to businesses overall. Corporate loan pricing The total cost of bank finance to a company can be decomposed into the fees charged by the bank to provide

6 Section 1 Lending to UK businesses Chart 1.2 Gross lending and repayments (a) 9 Q1 9 Q2 Gross lending 9 Q3 9 Q4 Gross repayments billions (a) Lending Panel data for the flow of gross lending and repayments by UK PNFCs. Data cover lending and repayments in both sterling and foreign currency, expressed in sterling terms. Non seasonally adjusted. Chart 1.3 Gross lending and repayments by SMEs (a) Gross lending (b) Repayments (c) millions per working day Jan. Apr. July Oct. Jan. Apr. July Oct. 8 9 Sources: BIS and Bank calculations. (a) Per working day, monthly average. Data are from Monthly BIS Survey and cover lending by four major UK lenders to UK enterprises with bank account turnover up to 2 million. Data cover lending and repayments in both sterling and foreign currency, expressed in sterling terms. Non seasonally adjusted. (b) Amount of new term loans extended to SMEs. (c) Repayments of term loans by SMEs. Chart 1.4 Indicators of bank funding costs (a) Indicative yield on senior bank debt (b) One-year bond Five-year bond (c) Three-year bond (c) Three-month Libor Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct Sources: Bank of England and J.P. Morgan Per cent 8 (a) Sterling only. (b) This yield is from a J.P. Morgan index of sterling senior bank debt that is not exclusively composed of UK bank debt. (c) The three-year and five-year bond rates are weighted averages of rates from banks and building societies within the Bank of England s normal quoted rate sample with products meeting the specific criteria (see facilities, the spread over a given reference rate (typically three-month Libor or Bank Rate) at which loans are offered, and the prevailing level of that reference rate in the financial markets. Previous Bank of England Credit Conditions Surveys have pointed to increases in spreads over reference rates on new facilities since the start of the financial crisis. Through 9, that has been increasingly reflected in the Bank s measure of the effective interest rate on new or refinanced corporate lending. That measure has risen from 2.% in August to 2.4% in November, while three-month Libor has edged lower over the same period. Elevated spreads on lending to businesses are likely partly to reflect both heightened credit risk and a repricing of risk. Major UK lenders have also pointed to the high cost to banks of raising longer-term funding, relative to reference rates, as a key factor contributing to higher spreads. Having eased during the middle of 9, a number of the major UK lenders reported that longer-term funding costs had been flat over the past quarter a pattern also seen in secondary market yields on sterling senior bank debt (Chart 1.4). Rates on longer-term retail deposits such as three and five-year fixed-rate bonds fell in December, though continued to be high relative to short-term reference rates and were expected by the major UK lenders to remain so. In the 9 Q4 Credit Conditions Survey, a net balance of lenders reported that spreads over reference rates on new lending to medium and large businesses had narrowed over the past three months (Chart 1.). A slight reduction in fees and commissions was also reported. These were the first improvements in price terms to be reported since 7 Q2. Consistent with these results for large businesses, a majority of the respondents in the Deloitte CFO Survey for 9 Q4 reported a slight improvement in the cost of credit, though indicated that credit remained costly (Chart 1.6). For smaller businesses, the Credit Conditions Survey indicated that spreads on lending were little changed (Chart 1.7). Contacts of the Bank s regional Agents reported that fees remain significantly higher than pre-crisis levels. Looking forward, respondents to the Credit Conditions Survey expected the trends reported in 9 Q4 to continue into 1 Q1. Further reductions in spreads and fees and commissions were expected on lending to medium and large-sized companies, but loan pricing for small businesses was expected to remain broadly unchanged. Supply and demand The amount of lending and its price depend on the interaction of demand and supply factors. Disentangling the separate influences of changes in the supply of and demand for credit is difficult, though survey data can help.

7 6 Trends in Lending January 1 Chart 1. Credit Conditions Survey: spreads over Libor on lending to corporates (a)(b) Cheaper credit Medium-sized PNFCs Dearer credit Net percentage balances Large PNFCs Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q (a) Net percentages are calculated by weighting together the responses of those lenders who answered the questions. The blue bars show the responses over the previous three months. The red diamonds show the expectations over the next three months. Expectations balances have been moved forward a quarter so that they can be compared with the actual outturns in the following quarter. (b) A positive balance indicates that spreads over reference rates have become narrower, such that all else being equal, it is cheaper for corporates to borrow. Chart 1.6 Deloitte CFO Survey: cost and availability of credit (a)(b) Costly Cheap Cost of credit Net percentage balances 1 Availability of credit Available Hard to get Q3 Q1 Q3 Q1 Q3 Q3 Q1 Q3 Q1 Q Source: Deloitte CFO Survey 9 Q4. (a) Net percentages for the cost of credit are calculated as the percentage of respondents reporting that bank credit is costly less the percentage reporting that it is cheap. Net percentages for the availability of credit are calculated as the percentage of respondents reporting that credit is available less the percentage of respondents reporting that it is hard to get. (b) A positive balance indicates that a net balance of respondents report that credit is costly or that it is available. Chart 1.7 Credit Conditions Survey: credit conditions across firm sizes reported in the 9 Q4 survey (a)(b) Small businesses Medium PNFCs Large PNFCs Net percentage balances 4 Availability Demand Spreads (a) Net percentages are calculated by weighting together the responses of those lenders who answered the question. The bars in the chart show the net percentage balance reported over the three months to early December. The diamonds show the associated expectations for the next three months. (b) In the first panel, a positive balance indicates that more credit is available. In the second panel, a positive balance indicates an increase in demand. In the third panel, a positive balance indicates that spreads over reference rates have become narrower, such that all else being equal, it is cheaper for corporates to borrow According to the Credit Conditions Survey, lenders reported that credit availability to the corporate sector increased in 9 Q4. Credit availability was reported to have risen most for large firms, consistent with lenders responding to the availability to these firms of alternative sources of finance such as those provided by the capital markets. In contrast, lenders reported that credit availability for small firms was broadly unchanged (Chart 1.7). Contacts of the Bank s regional Agents reported a marginal improvement in the availability of credit during the second half of 9, although their experiences varied markedly according to their sector and size. For example, reports of improved access to finance were more prevalent among larger companies, particularly those with lower levels of gearing. And the Deloitte CFO Survey showed that credit availability had improved in 9 Q4, though a net balance of respondents continued to view credit as hard to obtain (Chart 1.6). Looking forward, a net balance of lenders in the Credit Conditions Survey expected to increase credit availability across all firm sizes in 1 Q1, albeit to a lesser extent for small businesses. Having reported a weakening in demand from both medium and large-sized firms between mid-8 and mid-9, lenders reported that demand for new credit facilities from small and medium-sized firms had remained broadly unchanged over the three months to December, while demand from large firms had fallen unexpectedly (Chart 1.7). The continued weakness of loan demand may partly reflect its relatively high reported cost. In recent discussions, the major UK lenders reported that demand for working capital finance had remained subdued through the year end, with firms focused on generating cash by improving working capital management and holding back on capital expenditure. This is consistent with reports from the Bank s regional Agents, who indicated that many firms had continued to focus on preserving cash flow and paying down debt. These factors were cited by some major UK lenders as contributing to a rise in corporate deposits in recent months. Demand for invoice finance, in particular, was reported by most of the major UK lenders to have remained subdued in recent months, which they attributed to weak business activity. A box on pages 78 discusses recent trends in the financing of domestic trade credit in more detail. Looking forward, according to the Credit Conditions Survey, lenders expected credit demand from businesses to increase somewhat in 1 Q1 across all firm sizes (Chart 1.7). However, in recent discussions the major UK lenders expected demand to remain subdued in coming months. Some lenders anticipated that loan demand for mergers and acquisitions and working capital finance requirements would pick up gradually as the macroeconomy recovered, and ahead of capital expenditure.

8 Section 1 Lending to UK businesses 7 Recent trends in domestic trade credit Trade credit, (1) which occurs when a company buys goods or services from a supplier with an agreement to pay later, is an important source of short-term financing for many businesses. By allowing businesses to delay payment for their supplies, trade credit can help companies in managing their cash flow and working capital, and potentially provides a substitute for bank credit. Trade credit is not without risk however. Extension of trade credit affects a supplier s cash-flow position and involves some risk that debtors may delay or default on payment. In order to manage these risks, businesses can make use of a number of financial products, such as factoring or invoice discounting (2) (collectively referred to here as invoice finance) and trade credit insurance. Invoice finance which when supplied by banks is a form of bank lending enables companies to obtain funds now against payments owed to them, either by borrowing against outstanding bills (invoice discounting) or by selling invoices to a third party for subsequent collection of their debts (factoring). Factoring also involves the finance provider taking responsibility for collecting the debts and, partly for this reason, is generally reported to be used more by smaller firms. In addition to employing invoice finance, companies can also purchase trade credit insurance against the specific risk of non-payment. During recessions companies are more likely to face cash-flow constraints and the probability of non-payment rises, which can affect the terms of trade credit. For example, some companies may respond by asking debtors to pay for goods more quickly and/or by lengthening the period over which they settle their own debts. However, not all companies will respond that way. For instance, larger companies with greater access to capital markets or bank lending may relax trade credit terms to smaller suppliers in order to support their supply chain. In discussions with the Bank, some major UK lenders have noted cases where large corporate customers have looked to ensure continuity in supply through setting up supply chain finance facilities where the lender provides funds to the customers suppliers against bills as yet unpaid by the bank customer, who generally has a higher credit rating. Such facilities also provide a means by which the customer can provide assistance with the cash flow of suppliers without shortening their payment times. Data suggest that the time taken for UK companies to settle bills used in invoice finance fell over the first nine months of 9, having risen over the preceding year (Chart A). That is particularly the case for those invoices used in factoring, which may be more representative of the time taken for smaller firms to be paid. Data from Experian suggest that the average number of days for which overdue invoices were beyond term fell in the latter part of 9, (3) reaching in November its lowest level since March 8. However, many contacts of the Bank s regional Agents have reported that cash-flow conditions remain tight. Chart A Number of debtor days (a) Factoring firms Discounting firms Number of days Source: Asset Based Finance Association. Payment times are likely to influence the demand for invoice finance, along with other factors such as businesses turnover and perceptions of counterparty risk. In recent discussions, most of the major UK lenders have reported that demand for invoice financing has been weak during 9, which they attributed primarily to a fall in businesses trading volumes. However, the value of bills on which such finance is raised has fallen by more than the value of economic activity in the first three quarters of 9 (Chart B), suggesting that weak invoice financing could also reflect a fall in the supply of invoice finance. Earlier in 9, contacts of the Bank s regional Agents reported that the availability of these products, particularly (a) Debtor days is a measure of the time for payment. Latest data are for September 9. Chart B Invoice finance (a) Nominal GDP Invoice finance Percentage changes on a year earlier Sources: Asset Based Finance Association and ONS. (a) Relates to domestic invoice finance only. Invoice finance refers to funds secured on sales invoices, through factoring or invoice discounting. Invoice finance data are based on clients sales figures and are non seasonally adjusted. Latest data are for September

9 8 Trends in Lending January 1 from non-bank factoring and invoice discounting firms, had declined. Similarly, according to the SME Business Barometer survey conducted by the Department for Business, Innovation and Skills (BIS) in September 9, a net balance of 18% of SMEs that used factoring services claimed it was harder to obtain factoring finance compared with six months earlier, while a net balance of nearly % found it more expensive. As for invoice finance, the availability of trade credit insurance is reported to have declined. A balance of 7% of respondents to the July 9 CBI Access to Finance survey reported a reduction in the availability of insurance over the previous three months. And in the September BIS SME Business Barometer, 16% of respondents that held policies or had done so over the past year reported problems in insurance availability during the previous six months. The most common problems reported were withdrawal of cover, reduced limits and increasing premiums. Contacts of the Bank s Agents have also reported increased difficulties in accessing insurance over the past year. Many of these contacts had responded by taking counterparty risk onto their own balance sheets. In the most recent discussions, the major UK lenders reported little change in the demand or supply of invoice finance in recent months. Some lenders also said that they generally do not require their clients to obtain trade credit insurance before extending finance related to domestic trade credit. (1) See Trade credit box in the February 9 Bank of England Inflation Report for an earlier assessment of trade credit. (2) For more details see Hewitt, A (3), Asset finance, Bank of England Quarterly Bulletin, Summer, pages 716. (3) See Biggest businesses lead the way in improved payment performance, 23 December 9. Available at

10 Section 2 Mortgage lending 9 2 Mortgage lending The flow of net mortgage lending rose in November, though remained well below the average flow in 8. Gross lending for house purchase increased in December, according to data from the major UK lenders, which was said partly to reflect some homebuyers bringing forward purchases before the end of stamp duty relief. Mortgage approvals by the major UK lenders slowed in December, having risen in previous months. Mortgage credit availability was reported by lenders to have improved in 9 Q4, particularly for borrowers with loan to value ratios above 7%, and secured lending spreads were expected to narrow in 1 Q1. Demand for mortgages for house purchase was reported to have risen further. Table 2.A Secured lending to individuals (a) Averages Q1 Q2 July Aug. Sep. Oct. Nov. Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Sterling lending by UK monetary financial institutions and other lenders to UK individuals. Seasonally adjusted. Chart 2.1 Mortgage lending by the major UK lenders (a) Remortgaging Other House purchase Net lending Gross lending Net lending Lending Panel data Jan. Apr. July Oct. Jan. Apr. July Oct. 8 9 billions 2 (a) The split in 8 is estimated using gross lending data and the split of loan approval values between house purchase, remortgaging and other advances. The split using Lending Panel data in 9 is reported, rather than estimated, data. Data cover lending in both sterling and foreign currency, expressed in sterling terms. Seasonally adjusted. 1 1 Recent lending data The flow of net sterling mortgage lending by all UK-resident mortgage lenders rose in November to 1. billion (Table 2.A), the largest flow since February 9, though still well below the average flow in 8. The three-month annualised growth rate of lending edged up further. However, net lending by the major UK lenders slowed in December (Chart 2.1), as repayments increased by more than gross lending. Lending Panel data provide a split of gross lending between house purchase and the refinancing of existing mortgages (remortgaging). Gross mortgage lending for house purchase has risen through 9 and increased further in December (Chart 2.1). A number of the major UK lenders attributed part of the December rise to some homebuyers seeking to complete house purchases before the removal of stamp duty relief on 1 January 1. Remortgaging activity, however, has remained very subdued. Low levels of remortgaging activity will have contributed to the sharp decline in mortgage repayments since the start of the financial crisis (Chart 2.2), as fewer mortgages are redeemed. There has been no significant change in other lump sum type repayments or regular repayments since 8, despite lower interest payments. The major UK lenders reported that overpayment of mortgages has not been widespread, partly because reduced payments had been used to finance spending and in some cases used to repay more expensive unsecured debts or held as precautionary saving. Continuing recent trends, approvals for remortgaging remained weak in November, while approvals for house purchase edged up further. According to data from the major UK lenders, there was a small fall in approvals for house purchase in December (Chart 2.3).

11 1 Trends in Lending January 1 Chart 2.2 Mortgage repayments (a) Regular repayments Total Repayments on redemption (a) Sterling repayments only. Seasonally adjusted. Other lump sum billions 3 Chart 2.3 Approvals for mortgages for house purchase (a) Major UK lenders (b) Major UK lenders (Lending Panel data) (b) Total (c) Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct Thousands 14 (a) Seasonally adjusted. (b) Gross approvals data. (c) UK monetary financial institutions and other lenders. These data are net of cancellations and hence the total can fall below the gross approvals data shown for the major UK lenders. Chart 2.4 Effective rates on new mortgage lending (a) Floating mortgage rate Overall mortgage rate Fixed mortgage rate Per cent 8 (a) Sterling only. The Bank s effective rate interest rates series comprise data from 29 UK monetary financial institutions Mortgage pricing Effective interest rates on new fixed-rate mortgages and floating-rate mortgages edged higher in November (Chart 2.4), though the overall rate on new mortgages fell as borrowers increasingly opted for floating-rate mortgages, which over the past year have carried a lower rate than fixed-rate mortgages. In contrast, quoted (advertised) mortgage rates have been broadly stable in recent months and for some fixed-rate mortgage products have fallen. Having indicated a widening of secured lending spreads over recent quarters, respondents to the Credit Conditions Survey reported that spreads on total new secured lending were broadly unchanged in 9 Q4 (Chart 2.). Within the total, spreads on buy-to-let lending were reported to have narrowed slightly, while prime lending spreads had increased a little. Looking forward, lenders expected some narrowing of spreads over the next three months. And lenders expected to reduce fees, following an increase in 9 Q4. In recent discussions, the major UK lenders reported that increased competition was resulting in downward pressure on the pricing of some mortgage products. Supply and demand As with corporate lending, it is difficult to identify precisely the separate influences on overall mortgage lending in the supply of and demand for mortgages. On the supply side, in the Credit Conditions Survey, a net balance of lenders reported that there had been some increase in the availability of new secured credit to households in 9 Q4 (Chart 2.). This was attributed in part to improved prospects for house prices and the economy. The Bank s regional Agents continued to receive reports of a marginal improvement in mortgage availability, though many estate agent contacts still regarded access to finance as a drag on activity, particularly for first-time buyers. The reported increase in credit availability in the 9 Q4 Credit Conditions Survey was greater for borrowers with loan to value (LTV) ratios above 7%. Alongside this, a net balance of lenders reported an increase in their maximum LTV ratios for the first time in over two years (Chart 2.). Some major UK lenders confirmed that they had introduced some new mortgage products in recent months at slightly higher LTV ratios than previously, partly reflecting the improved prospects for house prices and lower-than-expected unemployment. This is consistent with recent data from Moneyfacts which show that the number of products available at LTV ratios of 7% or more has increased further in 9 Q4, though remained below levels in 8. Looking forward, a net balance of lenders in the Credit Conditions Survey anticipated a further increase in credit availability in 1 Q1. Even so, a number of the major UK lenders remained cautious about prospects for the economy, and the potential path of default rates, during 1.

12 Section 2 Mortgage lending 11 Chart 2. Credit Conditions Survey: measures of secured credit availability (a) Net percentage balances Overall credit Total spreads (c) Maximum LTV (c) 4 availability (b) Q2 Q4 Q2 Q4 Q2Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q Demand for secured lending for house purchase was also reported to have increased in the 9 Q4 Credit Conditions Survey the third consecutive survey in which demand had risen against lenders expectations of a reduction. In December, the Royal Institution of Chartered Surveyors new buyer enquiries index eased for the sixth consecutive month, though remained at a level consistent with rising demand for house purchase (Chart 2.6). In recent discussions, lenders expected broadly stable demand for borrowing for house purchase in coming months. (a) See footnote (a) of Chart 1.. (b) A positive balance indicates that more secured credit is available. (c) A positive balance indicates that spreads have become narrower, such that all else being equal it is cheaper for households to borrow, or that maximum LTV ratios have increased. Chart 2.6 Housing market activity (a) Percentage changes three months on previous three months 6 4 Flow of mortgage lending for house purchase (c) (left-hand scale) Net percentage balance 7 RICS new buyer enquiries (b) (right-hand scale) Mortgage approvals for house purchase (c) (left-hand scale) Sources: Bank of England and Royal Institution of Chartered Surveyors (RICS). (a) New buyer enquiries have been moved forward by four months, and approvals moved forward by one month, relative to the flow of mortgage lending for house purchase. That reflects the typical sequence of housing market transactions, with new buyer enquiries followed by mortgage approvals and then mortgage lending, if the transactions are completed. For more information on these typical lags see Thwaites, G and Wood, R (3), The measurement of house prices, Bank of England Quarterly Bulletin, Spring, pages Seasonally adjusted. (b) Net percentage balance of respondents saying that enquiries had increased over the previous month, less those saying enquiries had decreased. (c) In gross terms. Data are for the major UK lenders and in 9 Lending Panel data are used. For an explanation of how mortgage lending for house purchase is estimated prior to 9, see footnote (a) of Chart 2.1.

13 12 Trends in Lending January 1 3 Consumer credit The total flow of net consumer credit and the twelve-month growth rate of the stock of lending remained negative in November. Spreads between effective interest rates on consumer credit and Bank Rate and Libor remained significantly wider than a year earlier. Availability of consumer credit was reported by lenders to have tightened further. And although consumers expectations for unemployment have fallen, consumer credit demand was expected to remain subdued. Table 3.A Consumer credit (a) Averages Q1 Q2 July Aug. Sep. Oct. Nov. Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Unsecured sterling lending by UK monetary financial institutions and other lenders to UK individuals. Seasonally adjusted. Chart 3.1 Effective interest rates on consumer credit (a) Credit cards (interest bearing only) Credit cards (all) New personal loans (b) Three-month Libor Overdrafts Bank Rate Per cent (a) The Bank s effective interest rates series comprise data from 29 UK monetary financial institutions. The rate for personal loans is for new business. For the other series the rates shown are for the stock of lending, as comparable data for new lending are not available. (b) Only available from January Recent lending data Total net consumer credit flows and the twelve-month growth rate in the stock of lending remained negative in November (Table 3.A). Within the total and consistent with the pattern seen in previous months net credit card lending flows were positive, albeit at low levels, while unsecured net lending was negative. The major UK lenders reported that total net consumer credit flows remained weak in December. Consumer credit pricing Over recent months, the effective interest rate on credit cards has edged higher, while that for personal loans has decreased (Chart 3.1). As a result, spreads between effective interest rates and Bank Rate and Libor have continued to widen for credit cards, while remaining broadly stable for personal loans. Looking through these recent movements, spreads on consumer credit remain significantly wider than a year ago, which the major UK lenders reported largely reflects heightened credit risk. Supply and demand A net balance of lenders in the 9 Q4 Credit Conditions Survey reported a continued reduction in the availability of unsecured credit to households, partly reflecting a reduction in their appetite for market share and for risk. Non-price terms for unsecured credit, including credit scoring criteria and credit card limits, were reported by lenders to have been tightened. However, lenders also reported that default rates on unsecured credit had fallen, contrary to their expectations of an increase (Chart 3.2). And while losses given default were reported to have continued to rise over the past quarter, they had done so by less than expected. In recent discussions with the Bank, some major UK lenders partly attributed falls in default rates to an earlier tightening of lending standards and lower-than-expected unemployment. However, they expected these measures of distress to remain elevated in 1, as unemployment was expected to continue rising albeit at a slower rate. As such, consumer credit availability was expected to remain relatively tight.

14 Section 3 Consumer credit 13 Chart 3.2 Credit Conditions Survey: default rates and loss given default rates on unsecured lending to households (a)(b) Default rate Net percentage balances 6 Loss given default rate In recent discussions with the Bank, the major UK lenders reported that overall demand for unsecured credit remained subdued, consistent with the results of the Credit Conditions Survey. One reason for that may be households desire to reduce their levels of unsecured debt. A survey by the Association of British Insurers found that during 9 Q4, 42% of respondents said they were paying off their non-mortgage debt faster than previously. This could help explain the continued recent weakening in consumer credit growth, notwithstanding some improvement in consumers expectations for unemployment a pattern that was also seen during the early 199s (Chart 3.3). Looking ahead, the major UK lenders expected consumer credit demand to remain subdued in the coming months. 3 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q (a) See footnote (a) of Chart 1.. (b) A positive balance indicates an increase in default rates or loss given default rates. Chart 3.3 Consumer credit and unemployment expectations Balance (inverted scale) Percentage change on a year earlier Consumer credit (b) (right-hand scale) Unemployment expectations (a) (left-hand scale) Sources: Bank of England and GfK NOP on behalf of the European Commission. (a) Survey measure of unemployment expectations. Available at European Union, 1. The question asks how households expect unemployment to change over the next twelve months. Monthly series converted to quarterly. The scale has been inverted. (b) Unsecured sterling net lending by UK monetary financial institutions and other lenders to UK individuals. Quarterly series used, available from 1987.

15 14 Trends in Lending January 1 Abbreviations BIS Department for Business, Innovation and Skills. CBI Confederation of British Industry. CFO chief financial officer. Libor London interbank offered rate (see below). LTV loan to value ratio (see below). ONS Office for National Statistics. PNFCs private non-financial corporations (see below). RICS Royal Institution of Chartered Surveyors. SMEs small and medium-sized enterprises. Glossary Bank Rate The official rate paid on commercial bank reserves by the Bank of England. Businesses Private non-financial corporations. Consumer credit Borrowing by UK individuals to finance expenditure on goods and/or services. Consumer credit is split into two components: credit card lending and other lending (mainly overdrafts and other loans/advances). Effective interest The weighted average of calculated rates interest rates on various types of deposit and loan accounts. The calculated annual rate is derived from the deposit or loan interest flow during the period, divided by the average stock of deposit or loan during the period. Facility An agreement in which a lender sets out the conditions on which it is prepared to commit to advance a specified amount to a borrower within a defined period. Gross lending The total value of new loans advanced by an institution in a given period. Loan approvals Lenders firm offers to advance credit. Loan to value ratio Ratio of outstanding loan amount to (LTV) the market value of the asset against which the loan is secured (normally residential or commercial property). London interbank The rate of interest at which banks offered rate (Libor) borrow funds from each other, in marketable size, in the London interbank market. Major UK lenders Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of Scotland. Monetary financial A statistical grouping comprising banks institutions and building societies. Mortgage lending Lending to households, secured against the value of their dwellings. Net lending Private non-financial corporations Reference rate Remortgaging The difference between gross lending and gross repayments of debt in a given period. All corporations whose primary activity is non-financial, and that are not controlled by central or local government. The rate on which loans to businesses are set, with an agreed margin over the reference rate (typically these will be Bank Rate or Libor). A process whereby borrowers repay their current mortgage in favour of a new one secured on the same property. A remortgage would represent the financing of an existing property by a different mortgage lender. Symbols and conventions Except where otherwise stated the source of data in charts is the Bank of England. On the horizontal axes of graphs, larger ticks denote the first observation within the relevant period, eg data for the first quarter of the year. Bank of England 1 ISSN: (online)