Moody's: UK consumer debt boom leaves borrowers vulnerable to economic shocks

UK consumers are taking on more unsecured debt to maintain spending, making credit card pools riskier, says Moody's Investors Service in a special report published today. The rise in unsecured consumer debt is leaving borrowers increasingly vulnerable to economic shocks. 

"Consumer spending has surpassed pre-crisis levels, at a time when growth in unsecured consumer debt is outstripping wage growth," states Greg O'Reilly, an Assistant Vice President -- Analyst at Moody's.

"Low interest rates are hiding the risk to consumers, making consumer debt appear more affordable on the surface, but masking potentially negative long-term consequences," observes Mr. O'Reilly.

The new report: "Rising Consumer Debt Is Increasing Risk in UK Credit Card Pools," is available on www.moodys.com.

Moody's research shows unsecured lending to consumers has jumped to nearly 7% year-on-year since December 2012. This increase in growth is credit-negative for UK credit card pools because consumers will have less capacity to repay their card balances given declining savings and wages.

The growth in consumer lending has coincided with a period in which challenger banks' card balance growth rates have overtaken those of high street banks. Since high credit card growth rates imply higher average risk, Moody's considers challenger banks' recently originated credit card debt to be more at risk from an economic shock than those of the high street banks.

Despite growing indebtedness, the rating agency expects that delinquencies will stay stable this year in asset-backed securities (ABS) backed by credit card pools owing to market trends and the portfolios' strong credit quality. Delinquencies have remained stable at historically low levels, after declining between 2009 and 2014. Low unemployment and low interest rates are also keeping delinquencies down.

"The performance of Moody's rated credit card pools will remain stable because the credit quality of the securitised debt is stronger than the average UK credit card debt," notes Mr. O'Reilly.

UK credit card pools' strong performance also reflects issuers' improved underwriting standards since the crisis, which lowers the likelihood of a return to peak-delinquency levels in 2009. Since 2011, issuers have voluntarily agreed to adhere to a code of practice that requires a higher level of lending standards.