Moody's: Low interest rates partly offset risks from UK consumers' high over-indebtedness levels

Low interest rates mean that despite recent looser underwriting of unsecured debt, consumers in the United Kingdom (UK) will continue to be able to service their high debt levels in a base case scenario, according to Moody's Investors Service in a report published today. This scenario assumes stable, but weaker, GDP and no sharp rises in unemployment. UK households currently have an unsecured debt burden of around GBP192 billion, broadly similar to levels of around GBP208 billion in 2008.

Moody's report, entitled "Cross-Sector - United Kingdom: Current Low Interest Rates Mean That Consumers Can Cope with High Levels of Over-indebtedness," is available on www.moodys.com. The rating agency's report does not constitute a rating action.

"Our base case scenario is that monthly debt repayments as a percentage of disposable income remain stable up to 2020, with limited deterioration if rates on consumer borrowing rise to levels seen in 2012 and 2014, respectively," says Greg Davies an Assistant Vice President and Research Analyst at Moody's.

"The high level of competition in the UK consumer markets and the proportion of debts that are fixed rate also mean that average consumer finance rates do not necessarily or immediately move in line with the base rate; this serves to slow down the impact of base rate rises," adds Mr Davies.

In addition, Moody's says that regulatory initiatives and changes in risk-management frameworks mean that the larger UK domestic banks are better positioned than they were pre-crisis to deal with most potential deteriorations in the market environment.

While some negative trends among consumer debt are beginning to appear -- defaults on unsecured debt began to increase in 2016 and the last 12 months saw a record number of consumer-related county court judgements -- the low interest-rate environment will limit the impact on consumer affordability.

Furthermore, under Moody's base case scenario, consumer structured finance performance will be stable. Despite broadly similar indebtedness levels between now and pre-crisis, there is a stark contrast in arrears and delinquencies in the pools of debt that back the deals that Moody's rates. Currently, arrears and delinquencies are at very low levels, whereas in 2008-09 these levels were far higher. In addition, the deals themselves have structural protections such as eligibility criteria and performance triggers that reduce pool exposure to less creditworthy borrowers.

Moody's notes, however, clear downside risks to this picture stemming from Brexit. Should the UK revert to trading under WTO rules, significant disruptions to trade could lead to a sharper-than-expected slowdown in economic growth and unemployment to rise above Moody's base case scenario. If so, performance for UK asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) would be negatively affected.