Barclays on Thursday indicated that pressure on over-indebted consumers had started to hit the banking sector after bad debt losses at its credit card business rose “significantly” in the first quarter.
The UK’s third-largest bank said more consumers failed to pay off their credit card balances in the first quarter of the year.
Barclays warned at the end of last year that impairment losses would rise but on Thursday admitted that the increase had been greater than expected.
It said headline profits in the UK business would be lower than last year, with weaker income in its UK mortgage business and retail savings offsetting growth in current accounts.
Consumers have been under growing financial pressure following five interest rate rises. The housing market has slowed, consumer debt has exceeded £1,000bn ($1,800bn) and individual insolvencies are running 44 per cent above their previous peak in the early 1990s.
However, until Thursday there was little evidence that the pressure on consumers was leading to higher bad debts at UK banks.
“This is a significant moment,” said Peter Toeman, banks analyst at Morgan Stanley. “It is not unexpected, as it reflects the rise in bankruptcies and the degree of stress on UK consumers. Investors are now worried about other banks, which have been growing volumes more aggressively.”
Another analyst said: “The market reaction to this does seem a little overdone - but if a major UK lender is now saying people are starting to not pay back their debts, that may influence Bank of England thinking.”
Naguib Kheraj, Barclays finance director, told analysts he was “comfortable but not complacent” about the economic outlook as unemployment was likely to stay low and interest rates looked set to fall.
“The retail market shows signs of strain on consumers in the UK. In our case this is evident in credit cards and unsecured loans,” said Mr Kheraj. He blamed a number of factors including higher levels of consumer debt as well as higher utility and council tax bills, which had made some consumers feel the strain. “None of these changes [is] dramatic but with a higher levels of indebtedness there is more sensitivity to small changes in household cashflow.”
Barclays said UK business banking and Barclays Capital, the debt-focused investment bank, continued to deliver strong profit growth. Bob Diamond, the chief executive of Barclays Capital, is set to join the bank board.