European Credit Market Will Worsen: Survey

FICO, a leading provider of analytics and decision management technology, and Efma have announced the results of the third European Credit Risk Survey.

The survey, which queried credit risk management professionals in September on their outlook for the next six months, reverses the optimism from the last survey in spring 2011, with risk managers now predicting higher delinquencies across mortgages, auto loans and other credit products.

The survey shows:

  • Four times as many credit risk managers expect a worsening of delinquencies for small business loans, current accounts and credit cards than expect delinquencies to improve. For mortgages and auto loans, three times the number of respondents predict deterioration in delinquencies as predict improvement.
  • Credit risk managers have improved their processes to address the conditions of the last three years. Yet more than 40 percent of respondents say that Eurozone economic problems and unemployment will have more than a modest impact on their portfolios.
  • The credit gap for consumers and small businesses persists and is worst where delinquency predictions are worst.
  • Consumers are not focused on using credit. Instead, 84 percent of respondents agree or strongly agree that consumers are trying to save more, and 71 percent agree or strongly agree that borrowers are more reluctant to seek or use credit.

“These results are fully in line with the economic drama playing out across Europe,” said Mike Gordon, vice president and general manager for FICO in Europe, the Middle East and Africa.

“Mounting economic problems and uncertainty about the adequacy of public and private sector responses are contributing to a darkening picture of credit performance over the next few months. We think lenders that focus on strengthening relationships with good customers will fare best here.”

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A majority (77 percent) of respondents say that they have made changes to their risk management processes to deal with the economic downturn since 2008.

They also say that their approach to risk management is more disciplined than three years ago (83 percent) and that they can adapt policies rapidly (79 percent). A full 97 percent say that their credit decisions are made with a strong understanding of borrower debt capacity.

However, more than 40 percent of respondents say that the impacts of unemployment on their portfolio will be more than modest, and the same number say that Eurozone conditions will impact their portfolio performance.

Credit risk managers across Europe expect a credit gap for both small business and consumer lenders over the next six months, as demand outpaces supply, particularly for small businesses.

Half of respondents expect both the volume of small business applications and the amount of credit requested to increase. However, only 36 percent of respondents expect credit granted to small businesses to increase, and 28 percent expect it to decrease.

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For consumer lending, 42 percent of respondents expect the volume of applications to increase, yet only 28 percent expect credit granted to consumers to increase, while 27 percent expect credit granted to consumers to decrease.

Across Europe, credit risk managers expect consumers to be more focused on saving (84 percent), and more reluctant to use consumer credit (71 percent). This suggests that demand for credit is weak, though still forecast to be stronger than supply.

And 76 percent of respondents say that consumers are likely to be more loyal to the bank at which their current account resides. However, 46 percent of credit risk managers indicated that consumers are now more likely to mistrust the bank.

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According to FICO, participants included credit-granting institutions ranging from local banks to global institutions. More than 70 representatives from 26 European countries and 61 companies responded to this survey. The results were announced Thursday, Nov. 3.

Efma, a not-for-profit association formed in 1971 by bankers and insurers, specialises in retail financial marketing and distribution. Today, it says, more than 3,000 brands in 130 countries are Efma members, including over 80% of Europe’s largest retail financial institutions.

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Rakesh Raman