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Banks must not penalise customers for bad-debt write offs

3rd March 2008 Print
Personal finance website Fool.co.uk is calling on banks not to punish customers for the sub-prime write-offs.

The UK’s seven quoted banks have collectively written off £18 billion for an assortment of poor business decisions made over the last year. The write-offs are some £4 billion more than a year ago.

UK banks have been forced to write off a range of debts that include potential problem loans, impaired lending and hedge ineffectiveness. HSBC reported the largest write-off by a British bank this year. Its £8,690 million of write-offs account for almost half the amount (48%) that Britain’s banks have set aside. It is more than three times the amount written off by Barclays.

Bradford & Bingley and Alliance & Leicester vied for top spot in terms of the largest increase in bad debts in percentage terms. Alliance & Leicester posted a 141% increase in write-offs compared to Bradford & Bingley’s 158% jump in provisions.

Royal Bank of Scotland wrote off the least in percentage terms. It reported a 13% increase in bad debt provisions to £2,128 million. Lloyds TSB said bad debt provisions were 15% higher at £1,796 million, and HBOS reported a 14% rise in bad-debt provisions to £2,072 million.

Despite the massive write-offs, UK banks still posted a collective rise in annual pre-tax profits. Royal Bank of Scotland and HSBC top the table with 8% increases in profits.

Their results are in stark contrast to Alliance & Leicester and Bradford & Bingley, which said profits plunged 30% and 49% respectively. Their write-offs have jumped 4 and 5 times to 197p and 63p per pound of profit respectively. By comparison, RBS wrote off 21p per pound of profit, little changed from last year.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “Write-offs are a necessary part of running a business. After all, the absence of bad debts can often indicate overly cautious management, which is unlikely to help businesses grow.

“However, the eye-watering write-offs by British banks suggest that they have taken on unacceptable risk. This is not only detrimental to shareholders, who generally accept the relationship between risk and reward, but also harmful to customers, who may not.

“Banks need to remember that sensible customers have not contributed to their bad debts and these customers should not be made to pay for the banks’ own mistakes.

“There is now a danger that banks will allow the pendulum of risk to swing from excessive risk-taking to extreme risk-aversion. But what goes around comes around, and penalising prudent customers in the short term will damage goodwill in the long term.”