There could be worrying times ahead as there are indications that we could be heading for another financial crisis with the personal debt bubble about to burst.
Research by BullionByPost has found concerning similarities between the financial crisis that caused the banking crash ten years ago and what appears to be happening in the consumer credit market. Here’s why:
1. Credit Cards: Zero percent balance transfers now exceed 40 months!
Virgin Money and MBNA are offering zero percent on balance transfers for more than forty months. Both banks are lending to many people who are maxed out on credit cards looking for the longest balance transfer deal at zero percent.
Worryingly on 1st June, Lloyds Banking Group bought MBNA from Bank of America Merrill Lynch for £1.9bn. MBNA is sitting on an eye-watering £7.5 billion of credit card debt. According to their own figures, £923.8 million is at risk of not being repaid.
However, we think that is a very conservative estimate because:
- Many of these customers are currently defined as 'prime' by the lenders because they generally meet their payments. How many will still be 'prime if there are no zero percent deals to move to?
- In the first three months of this year, banks wrote off almost £400m of credit card debt. Using those figures, that equates to £1.6bn over a year.
- Today, every six minutes, one person is declared insolvent or bankrupt in the UK.
- Despite that, spending on credit cards is increasing. £16.8bn was spent on credit cards in April. An 11% increase compared to the same month last year.
- The sale by Bank of America echoes the subprime debt that was offloaded by American banks prior to the banking crisis that started 10 years ago.
2. Banks are recording profits that may not exist.
Virgin Money (formerly Northern Rock) is recording profits by issuing new zero percent balance transfer cards. They do this by lending money at 0% for 42 months to people who may never pay them back. This trick is done using the expected returns from these customers over the next 7 years. However, their assumptions are based on their data from the past 10 years of easy credit and fails to consider what will happen when credit tightens sharply.
This may explain the why their share price fell despite strong growth in claimed profits. Amazingly, these unrealised profits also count towards their capital ratios used to measure the strength of the bank.
Speaking to the website, www.thisismoney.co.uk, James Daley of campaign group Fairer Finance said:
“Zero percent deals are a ticking time bomb. They feed our addiction to short-term credit and I worry about lenders handing out credit to anyone who asks for it.
“I’m not sure that the regulators have done enough to ensure this money is being handed out to people who can afford it.”
Shocking similarities to the 2007 crash.
Virgin Money last week reported a 33 percent growth in credit cards and said its half-year pre-tax profit was up 26 percent. However, at the same time, its share price fell by more than 7 percent last Tuesday morning to stand at 283.3p.
Compare that to Northern Rock exactly ten years ago. In July 2007, before the financial crash, it also reported half year pre-tax profits were up 26 percent. Following that announcement, the share price started to plummet, and within five weeks the share price of Northern Rock had fallen by 23 percent. Within six months, the bank was bailed out by the government to stop it going bust.
Speaking about Virgin Money’s recent pre-tax half year profits, Chief Executive Jayne-Anne Gadhia remained upbeat (as many of the financial big wigs did before, and during, the banking crisis that started in 2007).
“The momentum of the business demonstrates the strength of our strategy and the focus we have on serving our customers…
“… we have maintained our stringent focus on the prime segment of the credit card market, and continue to deliver high-quality mortgage lending growth.”
Ten years ago, the Chief Executive of Northern Rock, Adam J Applegarth also said that “Credit quality remains robust” and that the medium-term outlook for the company was “very positive.” Two months later the bank was facing collapse.
Virgin Money’s Jayne-Anne Gadhia has released a book about her life in finance and there are some startling revelations within it. Gadhia oversaw the mortgage business at RBS for five years until 2006. The lender also nearly collapsed during the financial crash.
She admits she did not see the financial crash coming but speaking about the downfall of RBS said:
“It seemed as if the real bankers were cleverer than us and could find ways of doing business that we simply could not understand.” One must wonder who she thinks the ‘real’ bankers are. Despite knowing that PPI was a problem, Gadhia quotes a senior RBS executive as arguing that;
“we can't be the first bank to stop it. It will damage the share price”.
3. The level of car finance going through the roof.
For the first time, more than a million drivers bought cars on finance deals in the 12 months up until May. That is a record number according to industry figures. There are real worries that this could leave thousands of people with a debt they cannot repay. Here’s why:
- Watchdogs say they are concerned that reckless lending could be behind the increase in cars bought on finance.
- Drivers of diesel cars could face a negative equity time bomb because plans to improve air quality could cause those cars to fall in value.
- The Financial Conduct Authority is looking to see if firms are lending responsibly and taking in to account the fact that car prices could fall.
Could the leasing companies be at risk?
The government has already announced that it will ban the sale of petrol and diesel cars from 2040. That’s still 23 years away, but that could have a big impact on the resale value of the more polluting cars such as those running on diesel.
Before that, £225m has been made available to local authorities across the country to speed up plans to reduce pollution on more congested roads. That could include things like taxing diesel cars more, changing road layouts and even banning some cars from areas altogether. Initial plans will be submitted by councils next spring.
All of this could have repercussions for car leasing companies in the UK who provide vehicles at an affordable price based on the market value of a car after the lease period.
The biggest car leasing company in the UK is Lex Autolease, also owned by Lloyds Banking Group. The company was created in 2009 by the merger of HBOS owned Lex with Lloyds TSB Autolease. It has a fleet of 270,000 vehicles. One in every thirty new cars sold in the UK is through Lex Autolease.
The fear is that this is just another bubble that could burst, sending financial institutions spiraling into disarray. Again!