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UK credit market not improving

24th October 2007
By BBR Staff Writer

The UK consumer credit market's poor performance, which began in 2005, continued through Q2 2007. Moreover, recent events in the US sub-prime mortgage market and the global credit crunch will impact upon the market in the short term as lenders raise their prices and reject more applicants. Indeed, the consumer credit market is expected to dip in 2007 before seeing a slow revival thereafter.

The UK consumer credit market experienced another tough quarter in Q2 2007

Q2 2007 saw a continuation of the UK consumer credit market's poor performance which began in 2005. High levels of consumer debt and a lack of consumer confidence have particularly hampered new business levels. Moreover, interest rates remain high as the base rate increased twice in 2006 and three times in 2007 (most recently in July, to 5.75%). Indeed, consumer credit advances totaled GBP50.5 billion in Q2 2007, 1.2% down on the previous quarter, and 3% down on Q2 2006. Meanwhile, balances outstanding rose by only 1% on Q2 2006 levels to GBP213.8 billion in Q2 2007, and barely at all from the previous quarter (0.4%), as consumers cut down on spending and repaid more of their debts.

Lending will be affected in the short term as a result of the global credit crunch

In September 2007, the UK witnessed its first 'run on a bank' in over 100 years, as thousands queued up at Northern Rock to withdraw their savings. Indeed, defaults on sub-prime mortgages in the US have affected a large number of lenders and investment banks in the UK, and the global credit crunch has made it more difficult for lenders to access finance on the money markets. As a result of the global credit crunch, as well as the prevailing issue of bad debt, both lenders and consumers will find the consumer credit market tougher.

In the short term, lending volumes are expected to be affected negatively. Lenders will raise their prices and implement stricter criteria, thus rejecting a greater number of applicants than before. The availability of credit will become more difficult for certain customer segments, among which are the credit-impaired and self-employed with few records of proof of income. On the other hand, in the mainstream lending market, the fight for customers with a good credit record will be as fierce as ever.

Datamonitor forecasts a difficult market ahead, particularly in 2007

Datamonitor envisages that the consumer credit market will dip in 2007 but will see a slow revival thereafter, from GBP207.4 billion in gross advances in 2006 to GBP229.8 billion in 2011. In particular, Datamonitor forecasts that new lending on credit cards and unsecured personal loans will decline in 2007, primarily because of their weak performance in the first half of the year, but return to growth thereafter.

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