Prudential PLC stated that it expects Internet banking unit Egg to be in the red in the second half of 2006 for roughly the same GBP39 million ($73.2 million) loss registered in the first six months.

The unit is smarting from an industry-wide deterioration in consumer behavior over the third quarter. "Consumers borrowed less and bad debts rose," Morgan Stanley analysts said.

CEO Mark Tucker laid part of the blame on the 20% increase in customers seeking insolvency protection through individual voluntary arrangements (IVAs) (ASR, 10/16/06). According to Prudential, within the Egg personal loan portfolio, the number of customers seeking help from debt management companies rose by 40% on the prior quarter. In July, Prudential had instead anticipated that the unit would move out of the red.

IVAs allow borrowers to come to an agreement with creditors, through the use of a specialized insolvency advisor, on the repayment of a loan at less than the full amount over a certain period. The arrangement also lets borrowers who are unable to repay loans avoid bankruptcy. According to Deutsche Bank analysts, IVAs have climbed sharply in recent months, with around 40,000 reported so far this year. This is compared to just 5,000 IVAs reported in 2002.

Ian Kerr, the former HBOS retail head, is due to take over as Egg's chief executive this month. According to Morgan Stanley, Egg currently has a total of 3.3 billion ($4.15 billion) in credit card ABS outstanding under the PILLAR program. The class B notes were downgraded by Fitch Ratings one notch to BBB-' last week, the first ever negative rating action on a European credit card ABS. Egg has taken a number of actions in response to its deteriorating performance, including increasing the APR on credit cards by 1% in September and introducing risk-based pricing across the portfolio.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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