UK Personal Lending 2009

Table of Contents

OVERVIEW

• Catalyst
• Summary

THE UK CONSUMER CREDIT MARKET IN 2008 AND FUTURE OUTLOOK

• The consumer credit market deteriorated over 2008
  • The consumer credit market performed poorly in 2008, but although lending was weakened considerably, balances outstanding began to fall
  • Savings and investments declined in 2008 as consumers dip into their balances to pay off debt

• The credit crunch and recession continue to impede the functioning of the consumer credit market
  • Base rate cuts during 2008 have failed to help Britain climb out of recession
  • Lenders have become more conservative in order to cope with the economic downturn
  • Despite attempts to cut their spending, many consumers need to keep borrowing

• Most credit products saw modest falls in gross lending during 2008
  • Consumers continue to fund short-term borrowing needs with their credit cards
  • Unsecured personal loans declined dramatically over 2008
  • Gross advances on overdrafts have stayed relatively stable over 2008
  • The last quarter of 2008 saw a sharp decline in point of sale retail finance
  • Point of sale motor finance fell dramatically in the second half of 2008

• Personal loans have strengthened their market share over the past five years
• The reduction in consumer credit slowed in the first quarter of 2009
  • The consumer credit market declined for the fifth consecutive period in Q1 2009
  • The rate of decline seen across unsecured personal loans and motor finance slowed in Q1 2009

• Despite drastic moves by the Bank of England, lenders and borrowers are shying away from credit products
• The Bank of England has moved towards a policy of quantitative easing
  • Lenders continue to pursue conservative strategies as the prevailing economic conditions remain difficult
  • Consumers are becoming more aware of the need to organize their finances

• Datamonitor expects conditions to remain tough during 2009 and 2010 before improving in 2011
  • Datamonitor' s forecasting model explained
  • Further falls in GDP and soaring unemployment show that the UK economy remains in turmoil
  • Under the Datamonitor scenario, all credit products will have a difficult 2009
  • Datamonitor has also considered two additional scenarios

• The government is introducing new measures to regulate the consumer credit market
  • The government is looking to prevent the unsolicited raising of credit card limits
  • The OFT is conducting a review on the fairness of competition in the consumer credit market
  • Consumers are turning to loan sharks in desperation as the credit crunch continues to bite

COMPETITIVE DYNAMICS IN THE UK PERSONAL LENDING MARKET

• Unsecured personal lending levels contracted in 2008 as the market remained tough
  • The unsecured personal lending market had five larger players and a fringe of smaller players in 2008
  • Lloyds Banking Group was the market leader in terms of balances outstanding

• Competitive pressures remain low as loan providers direct their focus internally
  • The number of unsecured personal lenders has declined further over the last year
  • Financial institutions are adopting a prudent approach to their lending policy
  • For the largest lenders in particular, cross-selling to existing customers is a favored practice, used in order to avoid taking on more risk
  • The average interest rate for a £5,000 loan has increased despite the plummeting base rates
  • Advertising expenditure has also dropped as a result of the credit crunch
  • Innovation in the UK personal lending market remains fairly minimal

• High levels of bad debt and the new PPI ruling are hurdles that lenders need to overcome
  • Bad debt levels remain high but are now at a manageable level
  • The ban on the selling of single premium PPI will lead to lenders finding other ways to recoup their outlay

• The current market conditions are impacting on the dynamics of other players in the market
  • Aggregators have been an important player in the market but they are losing their influence under current market conditions
  • The payday loan industry has taken advantage of the current market conditions

COLLECTIONS AND DEBT MANAGEMENT IN UK PERSONAL LENDING

• The personal loan market is bracing itself for rising impairments
  • Personal loan balances have grown partially due to higher default rates
  • Arrears and delinquency rates will continue to rise during the recession
  • Impairment provisions will continue to grow as banks adapt to the worsening economic climate
  • Growing unemployment will result in a larger non-standard population adversely affecting impairments

• Prevention of bad debts is better than the cure in the current climate
  • Most banks have similar methods for debt recovery and collection
  • Determining customer intentions is crucial for future loan portfolio performance
  • Stringent lending policies are often the best way to minimize potential defaults
  • Financial advice could be one way to prevent borrowers from falling into delinquency

• A delinquency needs to be identified and resolved as soon as possible
  • Quick identification of arrears and delinquency is the most important aspect of debt management
  • Customer segmentation is vitally important in order to maximize debt recovery
  • There are three main solutions for borrowers who fall into repayment difficulties
  • Third party debt collection agencies are used once all other options are exhausted

PERSONAL LENDING INNOVATIONS FROM ABROAD

• The UK personal loans market has been severely affected over the last 12 months
  • Difficult conditions persist in the consumer credit market
  • Restrictions are being introduced on the sale of Payment Protection Insurance
  • The majority of loans are now used for debt consolidation
  • Banks must respond to these conditions through innovation and differentiation

• Product design: some overseas banks offer loans secured against non-property assets
  • Banks in Asia offer debt secured against gold, equities and other assets
  • The Retail Banking team view

• Customer segmentation: providers are increasingly targeting specific segments such as students, lower income consumers and those seeking ‘green' loans
  • National Australia Bank offers lower income consumers access to low cost micro-loans
  • The Retail Banking team view
  • Danske Bank of Denmark offers low cost education loans to students with children
  • The Retail Banking team view
  • Several banks offer low-cost unsecured loans for environmental purposes
  • The Retail Banking team view

• Incentives: rewards can be used to encourage good behavior
  • In Malaysia, EON Bank offers cashback to reward prompt repayments
  • The Retail Banking team view

• Distribution: foreign banks make greater use of alternative channels for loan applications
  • Loan application via ATMs is commonplace in many other countries
  • The Retail Banking team view

• New technology: Twitter emerges as the next big communications medium for financial services companies
  • Banks in the US and Australia experiment with ways to exploit the new medium
  • The Retail Banking team view
  • Consumers overseas can request up-to-date loan information via mobile banking
  • The Retail Banking team view

• The Datamonitor view of the future of the UK unsecured loans market
  • Restrictions on the sale of PPI will lead to costlier loans
  • Loans will become more flexible in response to changing circumstances
  • Greater emphasis will be placed on online distribution

BRAND VALUES IN UK PERSONAL LENDING

• The downturn has placed an emphasis on reducing advertising expenditure
  • The credit crunch has severely affected the personal loan market
  • Global brand strengths have fallen significantly in light of the worsening financial situation
  • A combination of changing market dynamics and lower liquidity levels have forced personal loan advertising expenditure downwards
  • Lenders have been more affected in the secured market.

• Innovative customer targeting will reap significant rewards despite the bleak outlook
  • To drive brand values at minimal costs banks need to appeal to consumers' recessionary mindsets
  • Targeting and promoting self-service products will appeal to the Financial Intelligence Complexity
  • Effective advertising should focus on safety and functionality to lessen consumer worries
  • Services and products need to satisfy the Authenticity Megatrend
  • Adopting a more friendly advisory and assistance based approach to customers develops better customer relationships
  • A more personalized approach to product offerings is a win-win for banks

APPENDIX

• Supplementary data
  • UK Consumer Credit Market in 2008 and Future Outlook
  • Competitive Dynamics in the UK Personal Loan Market 2009
  • Collections and Debt Management in UK Personal Lending
  • Brand Values in UK Personal Lending

• Definitions
  • General definitions
  • Definitions of point of sale motor and retail finance products

• Methodology
• Forecasting methodology
  • Choice of economic variables
  • Model outputs
  • Bespoke scenario based forecasting

• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

TABLES

• Table: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q4 2006 - Q4 2008
• Table: Retail savings and investments in the UK, 2004 - 08, £m
• Table: Net inflows of retail savings and investments, 2004 - Q3 2008
• Table: UK consumer credit gross advances by product, Q4 2006 - Q4 2008 (£m)
• Table: Market share of consumer credit balances outstanding by product line, 2004 - 08
• Table: Quarterly total consumer credit gross advances and balances outstanding in the UK, Q1 2007 to Q1 2009
• Table: UK consumer credit gross advances by product, Q1 2007 to Q1 2009 (£m)
• Table: Datamonitor' s updated macroeconomic variables for 2008 - 13: Datamonitor scenario
• Table: Updated Datamonitor view consumer credit forecast by product line, 2008 - 13 (£ billion)
• Table: Datamonitor' s updated pessimistic consumer credit forecast by product line, 2008 - 13 (£ billion)
• Table: Datamonitor' s updated optimistic consumer credit forecast by product line, 2008 - 13 (£ billion)
• Table: Unsecured personal lenders in the UK, Moneyfacts June 2009
• Table: Loan impairment provisions for the main high street banks, 2005 - 07
• Table: The top 10 global brand values, 2008
• Table: The top 10 personal loan advertisers, 2007 - 08
• Table: UK consumer credit balances outstanding by product, Q1 2007 to Q1 2009 (£m)
• Table: Datamonitor' s updated macroeconomic variables for 2008 - 13: pessimistic scenario
• Table: Datamonitor' s updated macroeconomic variables for 2008 - 13: optimistic scenario
• Table: Advertising spend for major providers, 2007 - 08
• Table: Comparison of monthly interest rates on a £5,000 loan compared with the Bank of England base rate
• Table: Write-offs on consumer lending from UK banks and building societies
• Table: Average unsecured personal lending gross advances per person (over 18)
• Table: Extent to which consumers trust financial services companies
• Table: Loan provisions as a percentage of total lending, 2005 - 07
• Table: The non-standard population, 2004 - 08
• Table: UK non-standard population forecast under the Datamonitor view, 2008 - 13f
• Table: Total UK advertising expenditure by product line, 2004 - 08
• Table: Total UK advertising expenditure in 2008, H1 2008 - H2 2008

FIGURES

• Figure: Total consumer gross lending slumped over 2008 and the rate of growth in balances outstanding started to decline in Q4 2008
• Figure: Savings and investments in the UK fell in 2008
• Figure: UK investors have pruned back their holdings in bonds, shares and mutual funds
• Figure: There have been declines for most products, although overdrafts saw relatively flat year-on-year growth throughout 2008
• Figure: Unsecured personal loans have continued to increase their market share of balances over the past five years
• Figure: Both gross advances and balances outstanding continued to decline on a year-on-year basis
• Figure: All products experienced negative year-on-year growth in Q1 2009
• Figure: The rate of interest paid for a loan of £5,000 grew by 44% over two years
• Figure: The majority of respondents said they plan to save more in the future
• Figure: The newly formed Lloyds Banking Group had a market leading share of the gross advances in 2008
• Figure: Lloyds Banking Group has the largest share of balances outstanding
• Figure: Personal lending interest rates have increased significantly since June 2008 despite sharp cuts in the Bank of England' s base rate
• Figure: Across most banking groups, advertising expenditure shrank between 2007 and 2008
• Figure: A fall in the level of write-offs in other unsecured lending counteracted the increase in write-offs for credit cards and secured loans
• Figure: Despite strong performance in the credit card market, total unsecured lending dropped continuously between 2004 and 2008
• Figure: Moneysupermarket.com lists all loans providers, but it does not link to products where the provider has not paid a fee
• Figure: Online price comparison sites are more trusted than building societies and banks
• Figure: The Wonga website emphasizes the convenience of the product
• Figure: Unsecured personal loan advances have been falling while balances outstanding have grown, January 2007 - September 2008
• Figure: Only a few lenders increased their proportion of total loan provisions for impairments, 2005 - 07
• Figure: 2008 witnessed a massive growth in the number of non-standard individuals, 2004 - 08
• Figure: Under the Datamonitor view the non-standard population will increase significantly over the next five years, 2008 - 13f
• Figure: Every bank aims to resolve a bad debt as quickly and effectively as possible, 2009
• Figure: Lloyds TSB' s budget calculator aggregates all outgoings thus providing a realistic budget representation for any consumer, 2009
• Figure: ICICI Bank in India offers a ‘Loan Against Securities'
• Figure: Garanti Bank can grant loans through its ATMs
• Figure: Bank of America is using Twitter to deal with customer enquiries
• Figure: Total financial services advertising expenditure fell by 15.8% in 2008, 2004 - 08
• Figure: Total advertising dropped by 22.4% throughout the second half of 2008
• Figure: Recessionary consumers' behavior is affected by a number of basic drivers and inhibitors
• Figure: Bank of Scotland' s website provide a comprehensive source of information for borrowers, 2009
• Figure: Online price comparison sites and banks are the most trusted financial institutions, 2008
• Figure: First Direct' s ‘Enthuse' service explains products pure and simple, 2009
• Figure: Virgin Money' s homepage illustrates how the bank can help simplify financial services, 2009
• Figure: Point of sale product aggregations used within this briefing