Barclays 2012 Annual Report Download - page 111

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(ii) Increase in unemployment due to weaker economies in a number
of countries in which the Group operates
During 2012 the unemployment rate in the Eurozone increased to
11.7% (December 2011: 10.7%) and remains particularly high in Spain
at 26.1% (December 2011: 23.2%), although rates have declined in the
US to 7.8% (December 2011: 8.5%) and the UK to 7.8% (December
2011: 8.3%) as businesses created jobs despite weak economies.
As customers’ ability to service their debt is particularly sensitive to
their employment status, any increase in unemployment rates could
lead to an increase in delinquency and default rates, particularly in
credit cards and unsecured loan portfolios, which may, in turn, lead to a
requirement to increase the Group’s impairment allowances in the retail
sector. Any increase in impairment or higher charge-off to recovery and
write-offs could have a material adverse effect on the Group’s results,
financial condition and capital position.
(iii) Impact of rising inflation and potential interest rate rises on
consumer debt affordability and corporate profitability
Rising inflation resulting from central bank monetary policies or other
factors, coupled with the potential for rising interest rates in response,
could have significant adverse effects on both economic growth
prospects and the ability of consumers and the corporate sector to
service existing debt levels. Consumer debt affordability is sensitive
to interest rates and so any rise, or series of increases, may lead to
a significant rise in the Group’s impairment charges, particularly in
unsecured products, such as credit cards and personal loans, and
adversely impact the Group’s performance in a similar way to higher
employment levels described above.
(iv) Possibility of further falls in residential property prices in the UK,
South Africa and Western Europe
With a £115bn UK home loan portfolio (50% of the Group’s total loans
and advances to the retail sector), Barclays has a large exposure to
adverse developments in the UK property sector. The credit quality
of this portfolio, however, remains good with 76% of loans having a
Loan-to-Value (LTV) of equal to or less than 75%. While arrears have
remained steady and impairment modest in this property book the
housing sector remains weak, despite continuing low interest rates.
This weakness may contribute to further impairment in the near term
resulting from a deterioration in house prices due to reduced
affordability as a result of, for example, higher interest rates or
increased unemployment.
Specifically, the UK interest only portfolio of £53bn remains more
susceptible to weak property prices as these loans mature and
customers are required to repay the entire principal outstanding
at a time when the loan to value may be high. For further details
on the Group’s exposure to interest only home loans and the
quality of the portfolio, refer to page 135.
The UK Commercial Real Estate sector also remains at risk from
deterioration in the housing sector which may affect customer
confidence levels causing further adverse movements in real estate.
This may result in higher levels of default rates in the corporate sector
leading to higher impairment charges and write-offs by the Group.
The Spanish and Portuguese economies, in particular their housing and
property sectors, remain under significant stress with falling property
prices having led to higher LTV ratios and contributing to higher
impairment charges.
If these trends in Spain and Portugal continue or worsen and/or if
these developments occur in other European countries such as Italy in
which we have particular exposure to residential mortgages outside the
UK, we may incur significant impairment charges in the future, which
may materially adversely affect the Group’s results of operations and
financial condition.
Throughout 2012 the South African housing sector has been depressed
reflecting a weak economy and uncertain outlook. There is concern
that unsecured personal debt levels are becoming very high. If the
economic environment worsens and becomes subject to further stress
this could adversely affect the Group’s performance in the home loan,
unsecured loan, auto and credit card portfolios. In Absa Business
Markets, the corporate property book remains sensitive to property
prices, with reductions potentially leading to increased impairment
charges.
For further information see Retail Credit Risk and Wholesale Credit Risk
(pages 129-141).
(v) US ‘Fiscal Cliff’ and debt ceiling negotiations
Following the temporary agreement reached at the turn of 2012/13
concerning the expiry of tax cuts in the US federal budget as part of the
‘Fiscal Cliff’ legislative negotiations, considerable uncertainty remains
with regards to a longer term agreement, in particular with respect to
potential adjustments to US federal government spending, for which
the Fiscal Cliff legislative negotiations are ongoing. Failure to reach a
more lasting agreement may lead to a new recession in the US, which
may have a significant adverse effect on the global economy and lead
to negative pressures on the Group’s profitability. Such a failure could
also negatively impact upon market confidence, potentially leading to
a reduction in investor appetite and liquidity in the US bond and loan
markets, which would also impact upon the Group’s profitability.
The Eurozone crisis
The Group’s performance may be materially adversely affected by the
actual or perceived increase in the risk of default on the sovereign debt
of certain European countries, the stresses currently being exerted on
the financial system within the Eurozone, and the risk that one or more
countries may exit the Euro.
(i) Impact of potentially deteriorating sovereign credit quality,
particularly debt servicing and refinancing capability
Concerns in the market about credit risk (including that of sovereign
states) and the Eurozone crisis remain high. The large sovereign debts
and/or fiscal deficits of a number of European countries and the
sustainability of austerity programmes they have introduced have
raised concerns regarding the financial condition of some sovereign
states as well as financial institutions, insurers and other corporates
that are: i) located in these countries; ii) have direct or indirect exposure
to these countries (both to sovereign and private sector debt) and/or
iii) whose banks, counterparties, custodians, customers, service
providers, sources of funding and/or suppliers have direct or indirect
exposure to these countries.
The default, or a further decline in the credit rating, of one or more
sovereigns or financial institutions could cause severe stress in the
financial system generally and could adversely affect the markets in
which the Group operates, its businesses and the financial condition
and prospects of the Group and that of its counterparties, customers,
suppliers or creditors, directly or indirectly, in ways which it is difficult
to predict.
For further information see Eurozone Exposure disclosures on
pages 143-154.
barclays.com/annualreport Barclays PLC Annual Report 2012 I 109