In a report published on the key European consumer lending markets, Fitch Ratings said that the sector has become a strategic growth area for banks and specialist lenders.

Commenting on the report, Michael Steinbarth, a Director in Fitch's Financial Institutions group, added that "Unsecured lending typically generates healthy operating returns. Although margins are coming under pressure due to intensifying competition, there is still potential for consumer credit providers to further penetrate consumer lending markets and grow their loan books. However, there are only a few truly pan-European players". While noting that unsecured lending is associated with high credit risk, Steinbarth stressed that "the vast majority of large consumer credit institutions in developed Europe have sophisticated tools in place to manage the risks. Provided that banks recoup their standard cost of risk and as long as this parameter is accurately predicted, higher loan impairment charges are part of the banks' and specialist lenders' business models."

Fitch's report on consumer lending markets focuses on the UK, Germany, France, Spain and Italy. Together, these five markets accounted for around 86% of the combined consumer lending volume in the EU-15 in 2005.

Economic market drivers for consumer finance are one of the factors assessed, with the report highlighting particular legal issues arising from the European Commission's sector inquiry into retail banking. While all countries profiled in the report saw loan growth between 2000 and 2006, individual patterns emerged. The UK, France, Spain and Italy experienced broadly respectable growth. Consumer lending volume in Germany - the second largest such market in the EU - has moderately contracted since 2004, reflecting ongoing domestic uncertainty about employment prospects and the economic environment. The recent recovery should boost consumer confidence, but it remains to be seen to what extent the improvement will translate into greater demand for consumer lending.

Fitch notes that despite a deterioration of consumer finance asset quality in some of these five countries, reflecting the increase in financial burden due to interest rate rises, the overall rating impact for banks expanding in this sector is positive to neutral given the diversification of the banks' revenues and relatively sound capitalisation. This is particularly relevant in the UK, where banks have experienced a deterioration of the underlying asset quality due to customers' attitude to default.

Growth prospects for the remaining countries look more favourable, particularly in Italy and Spain, as both have started their growth from a low base. Italy in particular benefits from a comparatively low gearing of its private households. Additional drivers for growth should be further product innovation, as lenders concentrate on credit cards and personal loans. While Spain has experienced strong growth in residential mortgage lending, there appears to have also been a change in consumer attitudes: Spanish consumers have demonstrated a greater willingness to finance their household spending through debt. This is also a trend experienced in France: despite an only gradual increase in consumers' purchasing power, stagnating salaries and strongly rising petrol prices, household consumption remains dynamic. French consumers are ever more ready to take on debt at the expense of savings in order to maintain their standard of living. In the UK, the unsecured lending market, in particular credit cards, is currently going through a "cooling off" period after several hikes in interest rates. Fitch considers the fall in unsecured lending in the UK to be a cyclical phenomenon, as consumers have started to display a more conservative appetite towards unsecured debt due to a combination of interest rate rises and higher inflation in items of non-discretionary spend that together are squeezing the household budget.