Awash in a sea of easy credit

Kudos to Jayne-Anne Gadhia, the Virgin Money boss. She confessed on Desert Island Discs at the weekend that Donny Osmond was her teenage crush and that for a long time in her career she didn’t know what a securitised loan was. Whatever next — António Horta-Osório, his Showaddywaddy thing and a difficulty with capital ratios?

The risk that senior bankers may not quite know what they are doing is increasingly concerning the Bank of England. Its warning this week that they could get sucked into “a spiral of complacency” was timely. The danger is that they are extrapolating the very benign conditions of the recent past and falling prey to what Threadneedle Street calls “optimism risk”.

A particular problem is that the sheer abundance of credit on offer is disguising the potential problem. There is always another lender out there to tide over the borrower who would otherwise default — for now.

Arrears and defaults are at such low levels that they can only go in one direction. At the first sign of a serious increase in unemployment or any kind of rise in interest rates, they will. For unsecured debt like credit cards and personal loans, the deterioration could be very steep.

Banks can sound deludedly smug when they insist that they are a model of prudence and restraint, however much more credit they are squirting at their customers. Virgin is not entirely innocent here, expanding its credit card book faster than its peers, while always claiming to be a model of conservatism.

It says that it has tightened up its underwriting standards in the past year. Growth in its credit card book is 8 per cent lower than it would otherwise have been, Ms Gadhia says. Even so, the growth in balances over the past year was still a breakneck 33 per cent.

Investors yesterday were more concerned about her housing market warnings. But borrowers will keep up payments on their homes at any cost. The credit card book is a bigger potential worry.

There are other red flags. Virgin is offering 41 months’ free credit on balance transfers, hardly the behaviour of a lender heeding Threadneedle Street’s instruction not to relax Ts and Cs.

This bank reporting season is a perfect time for senior bankers, as they wheel out their breathtakingly low default numbers, to ask themselves whether they have fallen victim to optimism bias.

Meanwhile, the Bank of England, if it really believes that a danger point has come, needs to do more than talk. It now has the tools to intervene, after all. Moral suasion alone, the idea that a waggle of the governor’s eyebrow is enough to alter behaviour, hasn’t worked since Mark Carney was in short trousers.

Banks aren’t going to meaningfully change course when the rewards of a credit splurge are immediate — thanks to hopeless accounting rules and poorly structured bonus schemes — while the losses come along only years later.

Clever chemistry 
Who knew? Vertical facial wrinkles are different from horizontal ones and require different treatments. Croda International, the ever-innovative specialist chemicals company, has seized on the potential that exists between nostrils and upper lip to come up with a new formulation of its anti-ageing ingredients.

Whether its devising the active ingredient for skin rejuvenation creams and hair-curling shampoos or the delivery systems for leukaemia drugs and eyedrops, Croda’s chemists have been busy. Customers like Glaxosmithkline and Johnson & Johnson are more concerned about quality and reliability of supply than pushing too hard on price. That shows in Croda’s plump margins.

The FTSE 100 company has cracked the problem of bringing ideas from the university lab to the shop counter and at the moment is collaborating on 300 different projects with academics.

The track record on innovation continues to pay off, in spite of slight disappointment yesterday in the second-quarter figures. Investors smart enough to have alighted on the company in 2000 have multiplied their money 17 times.

Croda is unfazed by Brexit. Chief executive Steve Foots says it won’t make much difference. The global customers will still want his innovative patent-protected products. Only the other day, Croda chose Hull for a £27 million factory expansion investment, favouring it over China.

The country needs more Crodas.

Fashion statement 
Jimmy Choo’s strut on to the London share market catwalk has been fleeting but not too shabby for investors. It floated at 140p in 2014 and is selling out to Michael Kors at 230p, comfortably beating the All Share index over that period. The £896 million exit price values Choo at 36 times adjusted profits, two and a half times sales — or a hefty £6 million per shop.

It’s also a 37 per cent premium to Choo’s price before the auction was announced in April. In the flighty world of fashion, that sounds more than reasonable. In recent years, the company was badly scuffed by worries about China’s appetite for luxury goods. It’s now back on an even keel, though growing faster in men’s shoes than women’s and in plimsolls (at a nifty £395 per pair) than in high heels.

The eponymous Mr Choo must curse that he sold his 50 per cent stake in 2001 for a mere £10 million. Nice to see that the family hasn’t entirely missed out, however. His niece Sandra Choi is the creative director and picks up £2.3 million for her shares.

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