LONDON—FICO (NYSE:FICO), the leading provider of analytics and decision management technology, and Efma today announced the results of the second European Credit Risk Survey. The survey, which queried credit risk management professionals on their outlook for the next six months, reveals changes in the relationship between banks and borrowers, and a growing optimism for credit performance that is muffled by continuing struggles in mortgage markets.
The survey, conducted by FICO and Efma in May with risk professionals in Europe, asked participants for their forecast over the next six months. Results of this survey show:
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Consumers’ relationships with their banks are changing. They are more concerned with service, more reluctant to borrow or use credit, and more interested in building their savings.
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Across Europe, risk manager responses reflect greater optimism with regard to delinquencies than in the prior survey overall, yet still project troubling trends for mortgages and current account overdrafts.
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Credit supply and demand appear to have become more balanced, suggesting both a reduction in credit demand by cautious consumers and an increase in credit supply spurred by stimulus programmes and increased lender optimism. Even in small business lending, the supply and demand for credit are more balanced thanks in large part to government stimulus programmes.
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A shift in borrower payment hierarchies has been observed, with more than 40 percent of respondents reporting that consumers will pay their credit card ahead of other obligations, including their mortgage.
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Risk managers from Germany are the most optimistic in their outlook for delinquencies and credit supply. While those in Spain and Portugal remain the most pessimistic, their outlook has improved since the previous survey, released in February.
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Banks are using or considering a wide range of strategies for improving profitability, the most universal being to target higher-income and lower-risk customers — a conservative strategy for rocky economic times yet a challenging one due to the competition for these customers.
Consumers put service first and borrow less
The credit risk managers surveyed spoke with one voice about some changes in the relationship between banks and borrowers. According to respondents, consumers across Europe are most concerned with service (79 percent see this as true for some or most customers), while for the UK to the number is similar at 77 percent. In addition, 79 percent of respondents say customers are more interested in building their savings, while 66 percent say customers are more reluctant to secure or use unsecured credit — the figures for the UK are higher, with 84 percent of respondents saying customers are more interested in building their savings, and 85 percent saying customers are more reluctant to borrow money or use unsecured credit.
Respondents were split on the issue of bank trust. Across Europe, slightly more than half of respondents (52 percent) said that customers are more likely to mistrust the bank, yet nearly as many (48 percent) felt that this was not true or that the opposite were true. In the UK, many more respondents (77 percent) cited greater mistrust, with just 23 percent saying this is not true.
“Bailouts of British banks have damaged consumer trust,” said Mike Gordon, vice president and managing director of FICO for Europe, the Middle East and Africa. “We are seeing a sustained effort by our clients to restore trust through customer charters and other means.”
The survey also asked whether credit risk managers have observed a changing payment hierarchy — in other words, are consumers more likely to pay their credit card ahead of other obligations, such as mortgage payments? More than 40 percent of respondents said this is the case, yet 58 percent felt that this was untrue or that the opposite were true.
“Clearly, consumers feel differently about their bank, about credit and about their debt obligations,” said Gordon. “Some of this shift reflects a change in economic circumstances that may be more short-term, but we believe that in some markets the credit crisis and recession, and the role that banks are perceived to have played in this, have caused long-lasting change in borrower attitudes.”
Delinquencies outlook is mixed, with mortgage recovery struggling
Survey results continue to show a pronounced degree of caution surrounding the dominant retail credit products and their delinquency rates when examined from a pan-European perspective. In particular, the outlook for mortgage delinquencies remains bleak.
The percentage of respondents who expect mortgage delinquencies to remain the same or rise jumped from 69 percent in February’s survey to 84 percent. Only 16 percent of respondents expect mortgage delinquencies to decrease somewhat. In the UK, 100 percent of respondents expect delinquencies to either worsen (47 percent) or remain at their current high levels (53 percent).
“Based on our survey’s results, it’s too early to call the bottom on mortgage performance,” said Mike Gordon. “While we don’t expect to see a trend for ‘strategic defaults’ in European markets — as we have in the U.S., where some homeowners are skipping mortgage payments by choice rather than necessity — distressed borrowers continue to struggle with mortgages that may no longer be affordable or attractive to them.”
Just over a third of respondents expect overdraft delinquencies to stay about the same, yet pessimism regarding overdrafts has moderated compared to the previous survey in February — 41 percent of respondents now expect to see delinquencies worsen, down from 48 percent. A similar improvement was seen in the forecast for small business loans. Respondents are more optimistic about the performance of auto loans than other forms of credit, and remain mixed on the performance of credit cards.
Credit may be easier to get, but small businesses still face a credit gap
On the whole, respondents from across Europe continue to expect a gap in credit supply when compared to credit demand, yet this is not without a strain of optimism.
Compared to the previous survey, more risk managers see the amount of credit issued rising. Nearly three in ten responders (29 percent) expect consumer credit approval rates to rise, while almost the same proportion (27 percent) expect small business approval rates to rise and 43 percent of respondents expect the aggregate amount of small business credit extended to rise.
Still, the demand for credit is rising faster than supply, particularly for small businesses. Some 60 percent of respondents expect increases in the amount of small business credit requested, while only 43 percent see an increase in the total amount extended. In the UK, 57 percent of respondents expect an increase in small business credit requested, while just 36 percent see an increase in the amount extended.
“While the credit gap for small businesses persists, the forecast is much smaller than five months ago, and both the demand and supply forecasts are higher,” said Gordon. “This suggests that government stimulus to encourage growth in small business activity coupled with government encouragement of lender programmes to fund small business borrowing are having an impact. The lenders we work with are striving to close the gap yet are mindful of the risks that face small businesses as challenging economic conditions linger.”
Banks will consider multiple strategies to increase profitability
Continuing consumer and small business delinquency, pressure on fees and margins by regulators, increased demand for capital reserves and other regulatory rulings have put significant pressure on retail lender profitability. The survey asked about several strategies for increasing profitability, most of which show mixed adoption.
The most ubiquitous move to restore profitability is to target safer customers, those with higher income or who represent lower risk. More than 9 in 10 respondents today target higher-income customers or are likely to do so in the future. Nearly as many respondents (77 percent) are targeting lower-risk customers or will do so.
Perhaps most surprisingly, 16 percent of respondents indicated that they are already offering new products into the marketplace to try to improve profitability, with 69 percent of respondents indicating that they are somewhat or very likely to do so going forward.
“Innovation is always the most positive outcome of an economic setback, as lenders stimulate the market with new credit products and features that reinvigorate consumer demand,” said Gordon. “What we found slightly disconcerting is that the UK seems to be lagging — no respondents reported that they are currently offering new credit products, though 83 percent said they were likely to do so in the future. We believe that in the UK, lender uncertainty caused by the current regulatory environment may be slowing innovation.”
“This survey shows where the European financial services industry may be heading, both in terms of loan performance and lender strategy,” said Patrick Desmarès, Secretary General of Efma. “We will continue to use this survey to gauge the market, and we and FICO will discuss the full results at our next Risk Managers Advisory Council.”
A detailed report, including specific results for the UK, the DACH region and the Iberian peninsula, is available online. Participants included credit-granting institutions ranging from local banks to global institutions. More than 100 representatives from 24 European countries and 91 companies responded to this second survey.
About FICO
FICO (NYSE:FICO), formerly known as Fair Isaac, delivers superior predictive analytics solutions that drive smarter decisions. The company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO’s innovative solutions include the industry-leading solutions for measuring credit risk, managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies, rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands. Learn more at www.fico.com. FICO: Make every decision count™.
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About Efma
Efma promotes innovation in retail finance in Europe by fostering debate and discussion among the main players involved in change. Formed in 1971, Efma comprises 2,960 different brands in financial services worldwide today, including 80% of the largest European banking groups.
Through regular events, publications, and its comprehensive website, the association provides retail financial service professionals with answers to their questions about the main issues at stake in their business: multiple distribution strategies, customer approach, CRM, product and service marketing and improving profitability.
Efma is above all a dynamic association, providing a great opportunity for discussion and exchanges without any commercial constraints. It provides its members with a wide range of exclusive services as well as discount rates on non-gratuitous activities. The loyalty of its members as well as their permanent financial support is the best proof of its efficiency. www.efma.com.
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