UK Banks Focusing on Increasing Collections and Credit Quality

As U.S. banks deal with headaches over bad consumer loans, specifically subprime mortgages, a number of United Kingdom-based consumer lenders have been finding success in clearing bad loans off their books by tightening credit standards and beefing-up collection efforts.

The Wall Street Journal reports today that huge consumer lenders in the UK, such as Barclays and Lloyds TSB Group, have been agonizing over poor credit quality for as long, if not longer, than their American counterparts. Interest rates in the UK were at historic lows in the first part of the decade, spurring a run on credit similar to the one experienced in the U.S. Delinquencies and charge-offs had also been rampant across all consumer loan types, but heaviest in the credit card and subprime home loan categories.

But a concerted effort by credit managers at UK banks seems to be paying off. Barclays, Lloyds, and Royal Bank of Scotland all reported lower delinquencies and increased credit quality in the first half of 2007, in contrast to the same period a year ago when all three reported an increase in delinquencies and charge-offs.

Part of the success can be attributed to ramped-up efforts in collection departments. Barclays reported it would take a charge of $3 billion in 2006 for bad loans. And this was coming off of a year with record charge-offs in 2005. To combat the issue, Barclays launched an effort to bolster its collection efforts.

Beginning in 2005, Barclays invested money into three specific aspects of its collections operation: hiring more people, increasing the level of training, and investing in new collection technology, a spokesman for Barclays told insideARM.com. Barclays concentrated on expanding capacity at its two collection facilities in Liverpool and Manchester rather than opening other offices.

An executive with Lloyds tells the Journal that its write offs of bad loans will be “flat” in the first half of 2007 compared to a write off of $1.6 billion in the first six months of 2006. Lloyds’ bad loans in the first quarter were lower than fourth quarter 2006, the executive says.

The UK banks are expected to report more complete first-half results at the end of July and early August.

UK banks are keeping an eye on developments in the U.S. to see if the problems domestic banks are having with credit quality will jump the pond and impact them. TowerGroup released a research report Monday outlining just such concerns.

"The current state of the U.S. mortgage market is an early warning sign that UK lenders should fine tune their own in-market strategies as well as carefully evaluate before expanding into the United States," said Craig Focardi, research director of the Consumer Lending practice at TowerGroup and author of the research.