What sort of shape is the banking sector in?

A new report by rating agency Fitch (“UK Banks – Managing the Consumer Debt Burden”) suggests that although results for the banking sector in the second half of 2006 and into 2007 will be good, things will become increasingly difficult thereafter.

Further increases in personal bankruptcies and IVAs, together with a higher unemployment rate and interest rates will lead to those banks who have been aggressive lenders suffering higher losses on their loan books. They do point out however that banks’ profitability is so good at present that even a fairly sharp increase in consumer debt defaults would not cause them significant problems. Fitch estimates that UK interest rates would have to rise by a massive 3%, to 8%, before we saw the levels of consumer distress that we experienced in the early 1990s. However they also point out that UK banking sector credit ratings are already at a high level, and ratings upgrades are therefore unlikely. Our corporate bond funds are generally overweight in the financial sector – but we have continued to avoid those banks and building societies with aggressive consumer debt books.