FOCUS: UK Banks Could Fall Short On Lending Commitments

LONDON -- U.K. consumer lending hit a fresh low in June, the Bank of England reported Wednesday, underlining the challenge the government faces in ensuring that banks meet their lending promises.

The government has stepped up the pressure on banks in recent days, pressing them to ease credit access for small and medium-sized firms in particular.

However, analysts say a big part of the problem appears to be a lack of demand from credit-worthy borrowers. They say forcing banks to offer more and cheaper loans could backfire, potentially delaying their recovery and depressing bank share prices if bad loans keep rising.

With hefty stakes in two of the country's biggest banks - Lloyds Banking Group PLC (LYG) and Royal Bank of Scotland Group PLC (RBS) - the government has something of a dilemma. It needs lending to increase to help the U.K. recover in time for an election due by mid-2010, but it also has taxpayer money at risk if bad loans pile up.

"The government needs to balance out its needs. It wants to make sure the banks do lend, but at the same time also wants to protect its investments by keeping the banks profitable," said Irfan Younus, an analyst at NCB Stockbrokers.

On Wednesday, the BOE said net consumer lending grew just GBP414 million in June, the smallest increase since records began in 1993. Economists had expected a GBP900 million increase.

Net credit card lending rose by its smallest amount since December 2008, while mortgage lending lifted GBP343 million, close to May's record low. Mortgage approvals, however, rose for the fifth month running to 44,169.

The lending report came after Chancellor of the Exchequer Alistair Darling on Monday hauled in bank bosses to find out why smaller firms were still struggling to get access to affordable loans.

After the meeting, Darling demanded banks pass on lower interest rates and said the government would be combing through banks' books to examine their lending practices. Paul Myners, the treasury minister who handles financial services, will start that process within days.

While government pressures the banks, opposition parties blame ministers, saying they have sent mixed messages over whether healthier banks or higher lending is their priority.

"They have been talking about this problem...for months now while jobs and businesses continue to be lost. Alistair Darling has been asleep on the job and the public will take his synthetic anger with a pinch of salt," said Philip Hammond, the No. 2 person on the opposition Conservative party's treasury team.

Banks Say They Are Helping

The country's four major banks say they are doing their part to lift the economy and will give further details on loan volumes and margins when they report first-half results next week.

RBS, which agreed to boost corporate and consumer lending by GBP25 billion between March 2009 and March 2010 as part of a government bailout package, indicated there has been less demand for new borrowing, saying many consumers and companies are reducing their debts where possible.

But Alan Dickinson, head of RBS' U.K. corporate business, said the bank is "open for business," and "actively stepping in to provide substantial mortgage and business finance where overseas and other banks are reducing their commitments in the U.K."

Lloyds, also part-owned by the government, said it is working with businesses and retail customers "to help them manage during this time of unexpected financial turbulence." The bank has committed to lend an additional GBP14 billion by March 2010 in return for government support.

In all, Prime Minister Gordon Brown has said banks have committed to making an additional GBP70 billion in consumer and business loans available this year. That total includes voluntary announcements from the likes of HSBC Holdings PLC (HBC) and Barclays PLC (BCS). Both banks declined to comment Wednesday on the status of their commitments.

Beyond lending volume, the government wants loans to be cheaper, but banks argue their own cost of financing has increased in spite of interest rates that are at record lows. Wholesale funding is harder to get, and competition for customer deposits has intensified. The chances of customers defaulting on their borrowing is simply higher in a recession, too, leading to higher charges on loans.

The number of companies going bust in the U.K. has been steadily rising since the end of 2007, according to government statistics, and rose by more than half in the first quarter of 2009 compared with the same period of 2008. On Monday, credit analysts at Standard & Poor's Corp. said they expect U.K. banks' loan losses to peak next year, at 1.8% of customer loans. Before the financial crisis, losses were well below 1% of loan books.