Invesco Perpetual high income fund manager Neil Woodford was recently interviewed by MoneyMarketing. Known for his cautious outlook regarding the economy, he provided some interesting insight into the UK banking sector.
After hearing it, many consumers may willingly bypass banks to take payday loans and other short-term financing from alternative lenders.
Mr. Woodward believes that the banking landscape has forever changed. Though policymakers are trying to handle the ongoing crisis, their toolbox is limited. He does not see a quick fix for the debt problems of the Western world.
He even referred to the long-term refinancing program of the European Central bank as “the starting gun for deleveraging.” Banks, which are the main creditors, are troubled and he believes that some may become nationalized.
In the near future, banks will be forced to sell good loans, reduce lending, and cut back on short-term commercial finance, he said. The bad debts must be written off, resulting in further contraction of credit.
Banks like Lloyds will have difficulty recouping mortgage principal, as approximately half of the mortgages in the UK are interest-only. Lloyds alone has a £360 billion mortgage book, a staggering amount to leave hanging in the balance.
Based on this, it is no surprise that the fund managed by Mr. Woodford does not include any banks. These institutions do not have the strong balance sheets, cash generation, management, and business models that he seeks.
Consumers who follow his line of thinking may be looking at payday loans instead of approaching banks for financing.
No one can accurately predict how things will play out in the banking sector. However, payday and other short-term lenders are betting that the environment will remain shaky during the near term.
They are increasing their presence throughout the UK, capturing customers who are hesitant to approach or have been turned away by banks.