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Europeans’ Credit Problems Will Worsen, Say Bankers in FICO and Efma Survey

Despite improvements in risk management, weak economies and unemployment will take a higher toll, say majority of credit risk managers

FICO (NYSE:FICO), the leading provider of analytics and decision management technology, and Efma today announced the results of the third European Credit Risk Survey. The survey, which queried credit risk management professionals in September on their outlook for the next six months, reverses the optimism from the last survey in spring 2011, with risk managers now predicting higher delinquencies across mortgages, auto loans and other credit products.

The survey shows:
- Four times as many credit risk managers expect a worsening of delinquencies for small business loans, current accounts and credit cards than expect delinquencies to improve. For mortgages and auto loans, three times the number of respondents predict deterioration in delinquencies as predict improvement.
- Credit risk managers have improved their processes to address the conditions of the last three years. Yet more than 40 percent of respondents say that Eurozone economic problems and unemployment will have more than a modest impact on their portfolios.
- The credit gap for consumers and small businesses persists and is worst where delinquency predictions are worst.
- Consumers are not focused on using credit. Instead, 84 percent of respondents agree or strongly agree that consumers are trying to save more, and 71 percent agree or strongly agree that borrowers are more reluctant to seek or use credit.

Delinquencies expected to rise across the board
While there was an increase in optimism from the survey conducted in spring 2011, credit risk managers now expect that more consumers will have trouble making payments on a variety of loan types. Four times as many respondents predict increased delinquency on overdrafts as predict improvement, and the ratio is similar for small business loans and credit cards. For auto and mortgage, the ratio is better but is still 3:1 in favor of increased delinquencies. Only 12-14 percent of responses indicate an expectation for decreasing delinquency on any surveyed product.

“These results are fully in line with the economic drama playing out across Europe,” said Mike Gordon, vice president and general manager for FICO in Europe, the Middle East and Africa. “Mounting economic problems and uncertainty about the adequacy of public and private sector responses are contributing to a darkening picture of credit performance over the next few months. We think lenders that focus on strengthening relationships with good customers will fare best here.”

Despite risk management improvements, Eurozone worries prevail
A majority (77 percent) of respondents say that they have made changes to their risk management processes to deal with the economic downturn since 2008. They also say that their approach to risk management is more disciplined than three years ago (83 percent) and that they can adapt policies rapidly (79 percent). A full 97 percent say that their credit decisions are made with a strong understanding of borrower debt capacity.

However, more than 40 percent of respondents say that the impacts of unemployment on their portfolio will be more than modest, and the same number say that Eurozone conditions will impact their portfolio performance.

“European risk managers have advanced their discipline since economic conditions began worsening in 2008, which is something we at FICO have seen first-hand in working with banks across the region,” said Gordon. “However, the economic difficulties in the Eurozone will still have an impact on risk, consumer behavior and loan performance. To address this, lenders are seeking deeper insight into borrower behaviors, using new data sources and new analytic tools and techniques.”

Credit gap persists, especially for small businesses
Credit risk managers across Europe expect a credit gap for both small business and consumer lenders over the next six months, as demand outpaces supply, particularly for small businesses.

Half of respondents expect both the volume of small business applications and the amount of credit requested to increase. However, only 36 percent of respondents expect credit granted to small businesses to increase, and 28 percent expect it to decrease.

For consumer lending, 42 percent of respondents expect the volume of applications to increase, yet only 28 percent expect credit granted to consumers to increase, while 27 percent expect credit granted to consumers to decrease.

Bank loyalty and trust are strained
Across Europe, credit risk managers expect consumers to be more focused on saving (84 percent), and more reluctant to use consumer credit (71 percent). This suggests that demand for credit is weak, though still forecast to be stronger than supply, as noted above.

76 percent of respondents say that consumers are likely to be more loyal to the bank at which their current account resides. However, 46 percent of credit risk managers indicated that consumers are now more likely to mistrust the bank.

“A much stronger focus on service may be the best approach for restoring bank trust and building loyalty,” said Mike Gordon. “Clearly, with reduced demand for credit, banks will need to understand each consumer much better in order to make attractive offers. And expanding relationships with existing customers may be the best path for revenue growth, especially for the bank that holds the current account relationship.”

Respondents are split on their beliefs about consumer delinquency. About half, 45 percent, believe some or most consumers are less concerned with delinquency overall; 55 percent believe this is untrue or that the opposite is true. Similarly, respondents are split on the belief that more consumers are likely to pay credit card obligations ahead of other obligations, with 39 percent saying this is true (slightly less than in our previous survey), 13 percent saying the opposite is true and nearly half (48 percent) saying that this is untrue.

A strong majority of respondents (71 percent) say some or most consumers are more concerned with service; no respondents believe the opposite to be true.

Patrick Desmarès, secretary general of Efma, added: “As a barometer of banking sentiment, this survey shows the distress felt by lenders across the region in response to increasing pressure on European banks and consumer lenders to restore portfolio growth against a daunting backdrop of Eurozone concerns. The challenging conditions of the past three years have taught risk managers to be agile and adaptable, and it is my hope that the times ahead of us will prove to be a catalyst for innovation in this sector.”

A detailed report, including specific results for the UK, Germany/Austria/Switzerland and Spain/Portugal, is available online. Participants included credit-granting institutions ranging from local banks to global institutions. More than 70 representatives from 26 European countries and 61 companies responded to this survey.

About FICO
FICO (NYSE:FICO), formerly known as Fair Isaac, delivers superior predictive analytics solutions that drive smarter decisions. The company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO’s innovative solutions include the industry-leading solutions for measuring credit risk, managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies, rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands. Learn more FICO: Make every decision count™.
For FICO news and media resources, visit

About Efma
Efma, a not-for-profit association formed in 1971 by bankers and insurers, specialises in retail financial marketing and distribution. Today, more than 3,000 brands in 130 countries are Efma members, including over 80% of Europe’s largest retail financial institutions.
Efma offers the retail financial service community exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through work groups, online communities and international meetings.
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Lundi 7 Novembre 2011