UK banks: when the cards are down

Tired of the waves of statistics as the UK election approaches? Here is one number that neatly encapsulates the country's economic recovery: 0.14 per cent. That is the percentage of losses on banks' UK loan books last year, down from 0.69 per cent in 2013, and about a fifth of the average loan loss ratio of the six main UK banks for the past quarter century, on Standard & Poor's data.

The ultra-low reading is the result of accelerating UK economic growth, low interest rates, higher property prices, banks' sale of dodgy property loans, lending deemed problematic mid-crisis that came right, and fewer bad loans generally. True, S&P's cheery picture is skewed by Royal Bank of Scotland, which took a very low £101m loan impairment charge in the UK last year after writing down a whopping £3.6bn in 2013. But the lower charge still suggests improving property lending.

Given that UK banks have recently been their own worst enemies - paying fat penalties for Libor benchmark interest rate and foreign exchange rate rigging, sanctions busting and other misconduct - the low loan loss reading is a rare positive. Can it stay so low?

Not at this level - and that is why investors will watch for any significant increases. The rating agency predicts higher overall loan losses of 0.28 per cent of book this year. But that is still less than half the average clip of the past 25 years. The concern is the banks' (mostly unsecured) consumer lending, traditionally a big source of write-offs.

While the loan-loss ratio on retail mortgages and corporate lending fell to just 4 basis points last year, the ratio on consumer credit, though down almost 90bp, was still a much higher 2.05 per cent of lending. Consumer credit was up 6.6 per cent last year; S&P expects it to rise by 8 per cent this year, driving up credit losses. Consumer stress could return if taxes rise post-election, or interest rates begin to climb.

That is why the loan-loss ratio, while a lagging economic indicator, is still a vital warning sign for investors of looming problems at a bank.

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