Goldman predicts big rise in defaults

Goldman Sachs is urging its clients to sell British banks, as it predicted a 40 per cent surge in personal insolvencies over the next two years.

The investment bank's research follows last week's figures from the Insolvency Service which revealed insolvencies had reached a record in the third quarter thanks to overspending on credit cards and unsecured personal loans.

Analyst James Chappell warned that 85 per cent of British banks' domestic retail revenue growth had been swallowed up by increasing bankruptcies and Individual Voluntary Arrangements, under which debtors pay off a percentage of their borrowings over five years. He said that there was "no end in sight" to the rising tide of bad debt.

"We expect bankruptcies to rise by 40 per cent over the next two years. We also expect IVAs to rise at least as fast," he said. Mr Chappell warned that there would be a lag before banks picked up any benefits from rising savings and investments to offset the bad debts.

Retail banks such as HBOS, Lloyds TSB, Alliance & Leicester and Bradford & Bingley were all given the "sell" recommendation.

Banks have become increasingly alarmed at the rise of IVAs, which have been aggressively advertised by debt management companies, such as Accuma which last week reported surging profits while Debt Free Direct issued a buoyant trading statement.

Mr Chappell predicted that forthcoming changes to the IVA rules, intended to simplify the process, would further fuel take up.

The voluntary sector has voiced concerns that debt companies are recommending IVAs when other solutions would work better. But charities have also criticised banks for "irresponsible" lending.