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2 Speed Europe

25 October 2017 by Ben Hayward

We have commented many times on the relevance of the various lending surveys issued by the Fed, the Bank of England and the ECB. The latter of which updated its Bank Lending Survey yesterday, and the data provides an interesting comparison between the UK and the EU.

Mark commented earlier this month on how non-credit card lending in the UK had underperformed, and how new production was of higher quality and lower in volume (https://twentyfouram.com/2017/10/12/credit-conditions-survey-2/). This tightening is to a certain extent a welcome development for ABS investors, given the focus the central bank had placed on this type of lending, but potentially a brake on the UK’s growth, given the importance of the consumer to our domestic economy.

The ECB’s Q2 2017 report forecast that the standards for all credit (corporate, mortgages and unsecured consumer) were expected to ease in Q3; however the actual results were more material than expected, mostly in mortgage lending, but also in unsecured consumer lending albeit in a more moderate manner.

The report shows a continued trend of easing for unsecured consumer credit, which has been in place for a number of years now. While in the past this has been driven by an improved cost of funding and competition, the latter is now the main driver along with an increased bank risk tolerance. This continues to drive margins down as terms and conditions of loans eased slightly, although comfortingly this trend has been significantly more apparent on loans of average credit quality, rather than “riskier” loans. It has also slightly suppressed the rejection rate for applications for these loans, with recent demand growing more quickly.

Unfortunately, unlike the Bank of England’s data, the ECB does not report performance data as part of the report, so we continue to look to the data provided for each ABS loan pool we invest in for guidance.

There is nothing to set alarm bells ringing here, nor in our loan pool data, however should credit standards continue to ease, along with a more material change in terms and conditions and further drops in the rejection rate, the ECB might start to consider adopting a path more closely akin to that of the Bank of England. The report’s outlook for Q4 implies a further material increase in the demand for consumer credit, but a smaller easing in credit standards. We will be watching to see if this is borne out.

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