Consumer Credit Survey Issue21.pdf

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         DECEMBER 2006
         No. TWENTY-ONE

INTRODUCTION                                                                               5

REPORT TOPICS                                                                              7

THE MACROECONOMIC SCENARIO                                                                 13
     1.1 International Scenario                                                            13
     1.2 Italian Scenario                                                                  15
          1.2.1 Investments                                                                16
          1.2.2 Real Estate Market                                                         17
          1.2.3 Household Expenditure                                                      18
          1.2.4 Employment, Income and Inflation                                           19

ANALYSIS OF THE HOUSEHOLD CREDIT MARKET                                                    23
     2.1   Introduction                                                                    23
     2.2   Credit Demand and Borrowing Levels of Italian Households                        24
     2.1   Short-Term Trends in the Consumer Credit Market                                 26
           2.3.1 The Credit Card Market                                                    32
     2.2   Analysis of Credit Financed by General Banks According to Product Sector        33
     2.3   Analysis of Credit Financed by Specialist Financial Institutions
           According to Product Sector                                                     37
     2.6   Analysis of Household Borrowing Other than Consumer Credit                      44
           2.6.1 Breakdown by Type                                                         44
           2.6.2 The Mortgage Market                                                       45

RISK ANALYSIS BASED ON THE CRIF DATABASE                                                   51
     3.1   Introduction                                                                    51
     3.2   Consumer Credit Risk Trends as at June 2006                                     53
     3.3   Consumer Credit Risk Trends and the Main Economic/Financial Variables           56
     3.4   Consumer Credit Risk in General Banking, Financial Institutions
           and Specialist Banking Sectors                                                  58
           3.4.1 Risk Levels of Intermediaries Directly Related to the Automobile Sector   62
     3.5   Segment-by-Segment Consumer Credit Risk Analysis                                63
           3.5.1 Default Rates According to Loan Amount                                    63
           3.5.2 Loan Default and Write-Off Rates According to Contract Term
     3.6   Mortgage Risk Trends in the Banking Sector

EVOLUTION OF THE HOUSEHOLD CREDIT MARKET                                                   69
     4.1   Introduction                                                                    69
     4.2   Consumer Trends by Product Sector                                               70
     4.3   Forecast Trends in the Overall Credit Demand
           and Italian Household Borrowing Levels                                          75
     4.4   The Consumer Credit Market                                                      78
     4.5   The Mortgage Market                                                             82
     4.6   Credit Risk                                                                     84
    5.1   Introduction                                              87
    5.2   The Macroeconomic Scenario                                88
    5.3   Historical Trends in Household Borrowing                  90
          5.3.1 Consumer credit                                     92
          5.3.2 Other Types of Bank Lending to Households           93
    5.4   Forecast Trends in Household Borrowing                    95
          5.4.1 Consumer credit                                     96
          5.4.2 Household Mortgages                                 98
    5.5   Risk Analysis Based on the CRIF Database                  99
          5.5.1 Historical Consumer Credit Risk Trends              99
          5.5.2 Forecast Consumer Credit Risk Trends               101

PROFILE OF HOUSEHOLD BORROWERS                                     103
    6.1   Introduction                                             103
    6.2   Bank of Italy Household Budget Survey                    104
    6.3   Descriptive Analysis of the Sample                       106
          6.3.1 Cohort Analysis                                    108
    6.4   Analysis of the Characteristics of Household Borrowers   111
          6.4.1 Cohort Analysis                                    117
          6.4.2 The Financial Portfolio of Household Borrowers     121
    6.5   Conclusions                                              123

GLOSSARY AND METHODOLOGICAL APPENDIX                               127
The survey is divided into six chapters, each of which addresses different aspects of the
household credit market. Beginning with an overall examination of the household loans
market, and its various sectors, the survey pays particular attention to the consumer credit
business, analysing trends in this sector by product type and lender. The findings are based on
the information available as at 30 November 2006.

The first chapter describes the macroeconomic scenario, including the international scenario,
with a special focus on the drivers of the household credit demand.

The second chapter compares the pattern of development that has characterised the main
lenders on the market (general banks, financial institutions and specialist banks) with reference
>   overall performance of the household credit market;
>   specific performance of the consumer credit and mortgage sectors;
>   consumer credit trends according to loan type and purpose.
The third chapter deals with the topic of risk in the consumer credit and mortgage markets.
The analysis is carried out on the basis of overall market risk trends and lender categories,
through the analysis of static indexes, such as write-off, serious insolvency and slight
insolvency rates, and dynamic indexes, such as the default rates, processed on the basis of
the information in the CRIF database.

The fourth chapter illustrates the forecast scenario for domestic durable goods consumption
(by product sectors), consumer credit and other forms of bank lending to households (other
than consumer credit). A "consumption coverage index", broken down by product type, has also
been constructed for the financial institutions and specialist bank sector. The chapter ends with
an analysis forecast of bank lending risks, with a special focus on consumer credit financed by
general banks and by financial institutions and specialist banks.

The fifth chapter is dedicated to a geographical analysis based on macro-areas, the
macroeconomic scenario and forecasts relating to consumer credit, associated risk trends and
other forms of bank lending to households (mortgages and other loans).

The sixth chapter of this edition of the Survey features a monographic investigation, providing
an interpretation of Italian household borrowing between 1998-2004 by examining the data
that emerges from the survey on "The Budgets of Italian Households" conducted by the Bank
of Italy on a two-yearly basis. The analysis identifies the socioeconomic connotations, or rather
the profile of Italian household borrowers, describing the importance of this sector and providing
an interpretation of the relative financial portfolios.

With the aim of offering as complete a picture as possible of the different characteristics of
the consumer credit market in the individual regions, the final part of the survey includes a
series of regional data with a detailed analysis of the main parameters specifically
characterising the consumer credit and mortgage markets, and their trends over time.

>   the CRIF Credit Information System database on instalment credit, as well as CRIF’s
    expertise in processing data on credit risks and the performance of this market;

>   the information structure, business skills and forecasts of Prometeia, as regards the
    evolution of the external environment, and specific trends in the various sectors of
    household credit;

>   the contribution of ASSOFIN, Italian Association of Consumer and Real Estate Credit, which
    represents the most important financial institutions operating on the consumer and real
    estate credit market, and is thus the most accredited source of statistics pertaining to this
Economic activity increased at a faster pace than expected during 2006, as part of the
improving scenario that affected all European countries. Household consumption should be
up by 1.6%, demonstrating a net revival not just compared to 2005, but also compared to the
previous four years, determining an inversion in the downward consumer spending trend for the
first time since 2001.

During the first half of 2006, Italian households increased their borrowing yet further, with
borrowing up 12.4% at the end of June, slowing slightly compared to the same time last year,
when it was at 13.8%. The slight fall in credit growth is partly due to the increase in mortgage
securitisation and partly to the deceleration in residential property prices, which has been evident
for several months now.

Lending was up by different degrees in the various different sectors. Mortgage lending
recorded a trend of 16.5% compared to June 2005, demonstrating a gradual slowdown with
respect to the previous quarters, which took the incidence of the sector on overall household
borrowing to 51.6%. Growth in the consumer credit sector was even more dynamic, equal to
20.6%, accounting for 18.9% of all lending. Meanwhile, other credit recorded a further
slowdown, up by just 1.6%, primarily supported by the mortgage for home improvements and
the purchase of non-residential property sector, with its incidence on overall lending falling yet

The scenario confirms how the Italian household's decision to borrow is increasingly linked
to factors of a structural nature, connected to social, demographic and cultural factors, as
well as to the increased maturity of the household’s financial behaviour and the proactivity
and flexibility of the offer, in a scenario which sees a gradual decline in the economic trends
that contributed to the evolution of the household demand for loans including, first and
foremost, the reduction in interest rates and the high risk of financial investment
performances, which has encouraged people to invest in property.

In particular, the 20.6% growth in the net worth of the consumer credit sector led to an increase
in the incidence of this component on the GDP, climbing from 5.5% at the end of 2005 to 6.1%
at June 2006, corresponding to a total volume of over 85 billion euros. The faster growth
compared to other EU countries has led to gradual catching up with the rest of the euro zone,
although the ratio in place between the net worth and the GDP is still far lower than that
recorded in other European countries (Great Britain 17.2%; Germany 10.4%, France 8.3% and
Spain 8.5%).1

Once again, the specialist operators are driving the market. Net worth was up by 25.3% at
the end of June, linked to the growing demand for consumer credit from new consumers,
as well as the trend in the demand for larger loans and longer term loans, producing
increasingly consistent volumes of current credit. In terms of financial flows, the trend
demonstrates a more contained growth rate (14.9%), which is a sign of the growing maturity of
the market.

On the one hand, the financial behaviour of households and the growth in fixed savings, in
financial and real terms, has continued to drive the demand for consumer credit. This
phenomenon is seeing Italian households become particularly sophisticated when making
decisions, in consideration of both the active and passive side of their financial budget.

The ECB's inversion of the policy rate trend does not appear to have had a negative impact on
consumer credit trends, partly due to decline in the flexibility of the demand for interest rate
movements relative to mortgages. Moreover, the financial solutions offered by lenders have
diluted the effect of the increase in interest rates by means of more flexible products with
longer payment terms.

        ECRI Statistical package 2006.
The offer market has also become more competitive, as is evident as a result of the increase
and innovation of the offer from individual specialist firms and general banks, both in terms of
products and pricing, and in terms of a review of distribution models. Large Italian banking
groups are evolving towards a logic of greater integration between the group’s specialist firms
and the banking channel networks, which are more widespread and provide better coverage of
the country. Therefore, the current reorganisation and the increased dynamicity of the
specialist lender sector has led to a further increase in the net worth of consumer credit
provided by financial institutions and specialist banks, reaching 76.2% at June 2006, compared
to 75.5% recorded in December 2005.

In the first half of 2006, the reorganisation of consumer loans in favour of direct loans continued,
both amongst general banks and amongst financial institutions and specialist banks. However,
special-purpose credit did not see a reduction in the volumes brokered during the fist half of
2006, despite growth remaining below average for the sector.

In the household mortgage sector, the slight slowdown in growth during the first half of 2006
(+15.8% compared to +17% at the end of 2005) can be attributed to the credit management
policies adopted by banks as a whole, rather than to a real change to the extent of the demand
from households. In fact, the first half of 2006 saw the largest number of securitisation
operations to day, worth approximately 8.5 billion euros. An indication of the actual demand can
be gained by analysing the flows which are not affected by the distorting effect of securitisation
operations. This analysis confirms that, during the first half of 2006, the flow of home
purchase loans was up by 21.3% on the first half of 2005. The mortgage sector also saw
particular dynamism amongst specialist banks, recording growth of 54%, accompanied by a
good performance from general banks, up 14%.

The lively demand for mortgages was also boosted by a more proactive offer from lenders, which
facilitated household credit decisions, encouraging the demand to emerge amongst more
marginal segments. It is estimated that around 15% of households that purchase a house are
immigrant households, giving us an important measure of the importance of a potential
clientele pool in which banks are investing in terms of marketing and product innovation.

The rise in interest rates has also led to changing behaviour in this sector, which has
softened the impact. These changes include longer payment terms and an increase in fixed
rate lending. In June 2006, mortgages of 20 years or more accounted for more than half of all
mortgages provided, and the fixed rate quota, which accounted for approximately 20% of all
new mortgages at June 2006, was up by over 7 percentage points on December 2005.

The analysis of risk trends in the household credit market must take the long stagnation of the
Italian economy from 2001-2005, which is not always easy to interpret, into account. Household
credit was the financial component of the economy that recorded the most sustained growth
rates compared to the past, due to the aforementioned structural reasons, while the growth rate
of the GDP fell progressively until reaching nil growth in 2005, leading to stagnant consumption.

The dynamic rise in household credit, in both its forms – consumer credit and mortgages – was
accompanied, during the same period, by a gradual reduction in the risk of the retailer credit
market. The improved risk profile in this segment was confirmed by the brokers in general –
general banks, financial institutions and specialist banks - and by using static indicators, such
as traditional write-off and insolvency rates, and dynamic indicators such as the default rate. 2

The analysis of the market risk levels by means of the write-off and insolvency rates, provides
confirmation of the improvement in the quality of credit, already observed in 2005, for the first

        See the Glossary in the Appendix for the definitions.
half of 2006, with an overall risk level below the corresponding 2004 value.

However, by extending the analysis to the default rate, we can observe that the pronounced
improvement in the quality of the portfolio in 2000, which led to a one percentage point
reduction in this indicator, came to an end in the first half of 2006, inverting the trend. It is
certainly opportune to monitor this phenomenon, although it will be necessary to observe
the progress of the default rate over a longer period of time in order to draw conclusions
on the evolution of the level of market risk.

The evolution in household credit over the next few years could take place within a favourable
context, despite a progressive slowdown in growth.

In particular, growth in the net worth of lending financed by banks and specialist financial
institutions is expected to be 11.8% at the end of 2006, down 1% on the end of 2005. The
intensification of signs of a slowdown in the real estate market, especially in the second half of
2005, and the relative maturity of the prime customer segment, should lead to deceleration in
the mortgage sector, which will still continue to record sustained growth rates of around 14% at
the end of 2006. The consumer credit evolution will continue to be more intense than that
in the mortgage sector, recording an increase of approximately 19% overall.

For 2007-2008, forecasts suggest continued intense and dynamic growth in net household
lending, despite a progressive slowdown in growth rates. After three years characterised by
two-figure growth rates, the overall market should grow by 9.3% and 7.7% by the end of 2007
and 2008 respectively.

Throughout the forecast period, consumer credit will continue to be the most dynamic
sector, confirming the gradual reorganisation of loans provided to households into this
technical form, which is expected to reach almost 22% of the overall market by the end of

 The mortgage sector is set to maintain two-figure growth rates throughout 2007 in the light of
expectations of an expansion, especially in 2008. This pattern should once again boost the
incidence of this sector on total household lending in 2007, which should come to an end in
2008, settling at 53%.

The other credit sector should continue to experience a progressive drop in terms of its
quota compared to the overall aggregate, reaching 25% of the net worth of total loans at
the end of 2008, compared to approximately 31% recorded in 2005.

The growth in the demand for credit will continue to be sustained by factors linked to the
demand and the offer. In particular, the proactivity of the lenders, thanks to the stimulus given
by an ever increasing level of competition amongst competitors, has been translated into
product, process and channel innovations. The offer will continue to develop in order to create
long-term relationships, by means of policies designed to boost customer loyalty and enhance
the offer with additional products, in keeping with that which has taken place in countries where
the market is more mature than ours.

Over the coming years, the growth in the mortgage demand is likely to be linked to the
proactivity of market lenders. This characteristic should lead to an increase in the potential client
pool and should make it possible to reach segments that are currently relegated to a primarily
marginal sector. Moreover, product innovation could make up for the drop in the perceived
value-for-money of mortgages due to the increase in market rates, which could take place
over the next few years.

With specific reference to the consumer credit sector, the delay with which bank lenders have
addressed their offer policies, with respect to the rest of Europe, means that this market still
offers great potential in terms of demand, giving it good medium-term prospects for growth.
This monographic investigation is dedicated to the analysis of the characteristics of household
borrowers on the basis of the data contained in the Bank of Italy survey on "The Budgets of
Italian Households". It emerges that the number of households that claim to have obtained a
loan rose during the period in question, 1998-2004, accounting for over 23% of all households
in 2004. With respect to the overall sample, they are also characterised by a higher than
average level of income, greater financial wealth and a financial portfolio that is more oriented
towards medium-term and diversified investments, by a lower average age and by a higher
level of education.

The profile of households that declare to have obtained credit does not reveal any particularly
critical aspects from the point of view of debt sustainability, even in a context in which we have
observed an increase in financial burdens, especially given the income of the household
borrower nuclei.

The analysis also examined the cohorts by age group, highlighting how household borrowers
with the head of the family aged between 25 and 45 demonstrate a loan stock to income ratio
with values of between 80% and 100%. This can primarily be attributed to residential
investments that have intensified over recent years. Lenders on the household loan market
should bear this in mind and continue to develop products able to attract new groups of

In conclusion, it seems that the increase in the credit demand can be primarily attributed
to the evolution of the financial behaviour of Italian households towards a model in which
investment, consumption and savings decisions are made on the basis of the available
credit opportunities, which are seen as tools able to optimise current and future cash
flows in the most efficient manner.

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