Bankers expect credit problems to worsen


Bankers are predicting a gloomy future for Europe's lenders, with defaults across mortgages, car loans and other credit products expected to increase in the near future.


The third European Credit Risk Survey, published by analytics provider FICO and not-for-profit association Efma, gives a glimpse of bankers' expectations for the next six months. Here, takes a look at the findings and the short-term prospects for credit risk managers and lenders.

Missed payments expected to rise
Credit lenders are expecting the number of people defaulting on mortgages, overdrafts and credit cards to rise in the coming months, according to the FICO/Efma survey.

Researchers questioned more than 70 representatives and 61 lenders from 26 countries across Europe in order to shed light on their outlook for the next six months. They found that, despite widespread optimism earlier this year, most credit risk managers now expect missed repayments on credit products to increase as a result of economic weakness and high unemployment.

According to the research, four times as many credit risk managers expect delinquencies for small business loans, current accounts and credit cards to worsen than think they will improve. Just 12 to 14% of respondents said they expected default rates on credit products to drop during the next six months.

"These results are fully in line with the economic drama playing out across Europe," commented Mike Gordon, vice-president and general manager for FICO in Europe, the Middle East and Africa. "Mounting economic problems and uncertainty about the adequacy of public and private sector responses are contributing to a darkening picture of credit performance over the next few months."

Lenders improving risk management
The survey revealed that managers have improved their risk management processes since the start of the economic downturn. More than four-fifths of respondents (83%) said they now take a more disciplined approach to risk management than they did three years ago, while 97% said they obtain a strong understanding of borrowers' capacity to take on new debt before making credit decisions.

"The economic difficulties in the eurozone will still have an impact on risk, consumer behaviour and loan performance. To address this, lenders are seeking deeper insight into borrower behaviours, using new data sources and new analytic tools and techniques," said Mr Gordon.

Consumers 'more reluctant to rely on credit'
Researchers also found that 84% of respondents think consumers are doing their best to save money and 71% believe borrowers have become less inclined to seek or use credit. Less than half of survey participants (42%) said the volume of applications for consumer credit was likely to increase in the near future and just 28% said the amount of credit granted to consumers would rise.

Mr Gordon said that banks would need to take steps to restore consumers' trust and build loyalty.

"We think lenders that focus on strengthening relationships with good customers will fare best here," noted Mr Gordon. "Clearly, with reduced demand for credit, banks will need to understand each consumer much better in order to make attractive offers. And expanding relationships with existing customers may be the best path for revenue growth."

See related: Video: Is the UK debt problem under control?; Study: Worst consequences of recession 'still to come'

Published: 7 November 2011