International SimRisk Challenge 2009

The Portfolio overview

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Market :	UK
Sector:	Retail Bank
Credit Products:	100,000 Current Accounts 25,000 Personal Loans Accounts 20,000 Credit Card accounts All applications for Personal Loans and Credit Cards accounts s come from the existing base of Current Accounts customers
Credit Bureau:	Bureau Score available
General Rules	For new Card and Loan accounts, 67% of accepted customers must be offered an interest rate no higher than the “headline” interest rate. These rates are 6.9% per annum for Personal Loans and 9.9% per annum for Credit Cards. For customers who are in arrears, at least some form of Collections activity must be undertaken each month, even if the accounts are considered.

The portfolio is a realistic UK retail bank portfolio.

The final ceremony and results presentation is now available here.
Please note this document is password protected. Contact us for more details.

The Financial Services Authority announce new law regarding fee pricing strategy.

Portfolio	Fee	Maximum Value
Credit Cards	Purchasing to take Balance over Credit Limit	£20
	Going into Arrears	£20
Personal Loans	Going into Arrears	£15
Current Accounts	Purchasing to take Balance above Credit Limit	£15
	Monthly Interest Rate on Overdrawn Balances	1%
	Monthly Interest Rate on Balances above Overdraft Limit	2%

Click here to read the full announcement

The Context

This section aims to provide you with some more information about the context that may affect the portfolio:

Macroeconomic outlook l Trends in lending

Macroeconomic outlook.
UK - Through the worst?

‘The UK economy is in a severe downturn and our forecast is for the rest of 2009 to see further contraction, though less steep than in the last nine months. We expect GDP to shrink by close to 4% this year, the worst outturn since 1946. Recovery will begin in 2010, but will be patchy and mild.’

‘The central scenario is bleak, but even so there are serious downside risks. However, there some upside risks – notably that the fiscal and monetary boosts succeed in reviving growth both domestically and globally sooner than expected.’

A deep recession, but we may be halfway through the downswing

The UK economy has contracted by 4.5% so far in this recession, however the 1.9% decline in the first quarter of 2009 should prove the severest part of the cycle, with the pace of contraction set to ease markedly over the rest of this year. There has been a notable improvement in some indicators, which supports our baseline projection that the worst phase is over. Furthermore, subject to how the stock cycle plays out, a rise in activity in one of the forthcoming quarters is even possible (not yet our baseline view), but is unlikely to prove lasting as long as final demand is weak.
We remain cautious – the recession is not yet over. Rising unemployment and further house price declines will weigh on consumer spending, investment is set to remain subdued in the face of ongoing lending constraints and concerns over the economic outlook and exports markets remain lacklustre. Given this, real GDP is projected to continue to decline, albeit only modestly, in the second half of 2009. Only a mild upturn is expected in 2010.
However, the rest of 2009 will be tough, with real GDP contracting by almost 4% in the year as whole, the sharpest fall since 1946. Only a mild upturn is expected in 2010.
In 2011, the economic revival is expected to gather pace, but medium-term prospects are for annual average growth of 2%, well below the long-term average.
The Bank of England has cut rates to 0.5% in an attempt to limit the recession’s depth. There is little scope for further cuts and quantitative easing is now the main tool of monetary policy.

Key risks

The risks surrounding our baseline view have become more balanced in line with recent evidence showing an improvement in confidence and activity. The main upside risk to our forecast is the possibility that the economy may revive sooner, and more sharply, than projected as the stimulus measures provide an unexpectedly strong boost. The key downside risk is that recent upturn in key indicators fades abruptly, leading to a more protracted recession.
Household imbalances, less support from employment income and housing wealth, the need to restore viability to government finances and a troubled financial sector all threaten to limit UK medium-term growth prospects.

Source : Experian’s Global reports for the 2nd half of 2009

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Recent trends in UK consumer lending

Lending flows

Total net consumer credit flows appear to have stabilised at very low levels.

Chart 1- Unsecured lending to individuals
(Click to enlarge image)

Lending by monetary financial institutions and other lenders to UK individuals. Seasonally adjusted data. Source – Trends in lending August 2009 – Bank of England

The major UK lenders had yet to detect any significant signs of an increase in demand for consumer credit. And the proportion of applications accepted by the major UK lenders fell further in July.

Graph 2 - Net unsecured lending flows
(Click to enlarge image)

Lending by monetary financial institutions and other lenders to UK individuals. Seasonally adjusted data. Source – Trends in lending July 2009 – Bank of England

Write-offs on lending

Graph 1 - Write-offs on lending to UK businesses and individuals
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Lending by monetary financial institutions. Source – Trends in lending June 2009 – Bank of England

Lenders expect arrears and write-offs to increase if unemployment rises further.

Consumer credit pricing

Graph 3 - Effective interest rates on unsecured lending
(Click to enlarge image)

The Bank’s effective interest rates series comprise data from 29 monetary financial institutions. The rate for personal loans is for new business. For the other series the rates shown are for the stock of lending, as comparable data for new lending are not available.

In May, effective interest rates on overdrafts and personal loans have fallen by much less than Bank Rate, and rates on credit cards have remained broadly unchanged, in part reflecting heightened credit risk. Effective interest rates paid on consumer credit were little changed in June. There was a further widening in the spread over Libor on credit card lending in July, partly reflecting increases in actual and expected default rates

Source of data and comments on UK consumer lending : June-July and August 2009-Trends in lending – Bank of England