Barclays UK debt warning sets alarm bells ringing

A warning from Barclays, Britain's biggest credit card lender, that bad consumer debts were rising faster than expected raised fears for the whole UK banking sector yesterday, driving shares sharply lower.

The warning was the latest sign that the downturn in consumer spending and confidence is spreading.

While the rest of Barclays is doing well, with its investment banking division driving growth, Barclaycard's profits fell in the first quarter mainly because of bad debts.

Barclaycard accounts for nearly 20 per cent of group profits.

Credit card lending at Britain's third-largest bank has borne the brunt of the consumer slowdown and suffered the "most noticeable" increase in delinquencies - when repayments are missed.

Consumer loans and mortgages were also affected but to a lesser degree, the bank said in yesterday's trading update.

Barclays' finance chief, Naguib Kheraj, said: "As we have seen some strain in the UK consumer sector, we now expect impairment charges to be somewhat higher than we said in February."

The bank had predicted a "significant" increase in bad debts from £1.1bn ($2.8bn) last year to about £1.4bn this year, but is now indicating the figure will be higher.

The housing slowdown will "slow the rate of consumer borrowing in the UK," Mr Kheraj said.

The main driver of growth in the group remains Barclays Capital, the investment banking division, where "very strong profits growth" in the first quarter promises bumper bonuses for staff.

Bob Diamond, who heads the business and is rumoured to earn nearly £20m a year, was promoted to Barclays' main board yesterday.

Analysts said the comments on the UK retail business did not bode well for the traditional UK retail banks, notably Lloyds TSB, Northern Rock, Alliance & Leicester and Egg, which lack Barclays' investment banking and international operations to make up for the consumer slowdown.

Colin Morton, at Rensburg Fund Management, said: "It's not going to be easy for the banks over the next few months. Barclays have just confirmed what the official data has been showing. Things are getting tougher."

Across the industry, delinquent balances have risen over the past year to 4.9 per cent from 3.75 per cent of consumer debt, according to Barclays figures.

A spokeswoman said, "Delinquencies have been rising across credit cards in the UK and Barclays is actually one of the least impacted."

In his monthly report on UK retail banks, out yesterday, Jonathan Pierce at the broker Credit Suisse, also noted that delinquencies had increased again on unsecured credit.

He said: "During the past six months, we believe banks have done a remarkable job of pushing up pricing on mortgages and cards, partly helping to offset the volume slowdown."

Government and industry data have painted an increasingly gloomy picture for the consumer sector, with retail sales and house prices experiencing a slowdown, raising fears for the overall economy.

The British Bankers' Association recently reported the first fall in UK credit card lending since May 1994.

It was down £40m last month, adjusted for seasonal variations, though it is worth noting that credit card lending has been falling since January on a non-seasonally adjusted basis.

Barclays shares suffered their biggest fall in eight months after the announcement and closed down 22p to 528p.

The bank has sealed the £2.9bn acquisition of a majority stake in South Africa's biggest consumer bank, Absa.

- INDEPENDENT