Barclays plays down £20bn exposure to private credit industry | Barclays

Barclays insisted it had the “correct controls” in place to manage the £20bn exposure to the under-fire private lending sector, despite warnings from the International Monetary Fund (IMF) and the Bank of England.

The bank’s managing director, CS Venkatakrishnan, said the bank runs a “highly risk-controlled store” and is satisfied with the lending standards for the private credit sector.

This collapsed despite a £110 million loss against US sub-prime car lender Tricolor. Amidst fraud allegations last month.

Losses from the dual collapse of Tricolor and US auto parts company First Brands have raised fears in the private credit sector about potentially weak lending standards. This has raised concerns that potential negative impacts could destabilize traditional banks lending to the shadow banking sector.

The latest failures raise worrying echoes of the subprime mortgage crisis that started the global financial crash of 2008, Bank of England Governor Andrew Bailey said this week. The IMF warned last week that a downturn could have ripple effects on the financial system, given banks’ increasing exposure to the largely unregulated private credit sector.

“There are clearly connections between what non-bank financial institutions do and what banks do,” Venkatakrishnan said. However, he maintained that the IMF report pointed to possibilities and was ultimately “subjective”.

Asked whether he agreed with JP Morgan chief executive Jamie Dimon, who last week said there could be more “cockroaches” emerging from the private credit sector, the Barclays boss joked: “I’m not an entomologist.

“Whatever the mode of lending, you have to do it carefully and with proper checks,” Venkatakrishnan said. When it comes to private credit, he said Barclay “makes limited lending to private credit loan portfolios built by some of the largest, most experienced managers with strong track records.”

“We have control over them… [and] We think we run a very risk-controlled store when it comes to it, and that’s something we’ve been initiating for a very long time.”

Venkatakrishnan said Barclays had even turned down a potential contact with First Brands despite being approached “on multiple occasions”.

Venkatakrishnan said the Tricolor loss was no surprise. He said: “The surprise was fraud. Fraud is no longer an excuse; we take our credit risk management very seriously at every point in the cycle.” But he said lenders should always be prepared for “all consequences, including fraud.”

While Barclays announced a £20bn exposure to the private credit sector, Venkatakrishnan said this was “relatively small” compared to the £346bn of loans currently made to consumers and business clients across the bank.

His comments come after Barclays reported a 7% drop in pre-tax profits to £2.08bn in the three months to the end of September, from £2.2bn in the same period last year.

As well as the Tricolor loss, Barclays’ earnings have also been hit by the £235 million in damages paid out over the car loan kickback scandal. This makes it the latest high street bank to set aside extra cash in response to the Financial Conduct Authority’s proposed £11bn compensation scheme.

Barclays’ total compensation pot rises to £325 million. Company no longer provides auto financing but is dealing with the impact of loans remaining on its books

But that didn’t stop the bank from announcing new payouts to investors, namely a £500 million share buyback. The bank also plans to move to quarterly payments to shareholders rather than waiting for half-year and year-end earnings.

“I continue to be pleased with the continued momentum of Barclays’ financial performance over the last seven quarters,” Venkatakrishnan said, adding that it had raised its profitability guidance for the full year – under a measure known as return on tangible equity.