Last checked at 
* Banks pledge to lend despite economic chills
* Auto, personal, start-up financing growth offsets mortgagedip
* Banks say risk appetites remain conservative, criteriatight
* Rate cut puts profits, returns under strain unlessrevenues grow
By Sinead Cruise and Andrew MacAskill
LONDON, Aug 16 (Reuters) - Banks in Britain are on the vergeof a price war to try to revive lending subdued by the Brexitvote and to combat pressures on profitability from ultra-lowinterest rates, which are likely to stay that way for longer.
HSBC, Lloyds Banking Group, Barclays, Royal Bank of Scotland and smaller rivals haveall rolled out new lending pushes since Britain voted to leavethe European Union to persuade customers to borrow even thoughthe threat of recession has increased.
In the run up to the June 23 referendum, banks had alreadynoted a drop in demand for commercial loans and mortgages, whichare traditionally their big revenue earners. In response, bankshave flagged plans to beef up unsecured lending activities suchas credit cards and financing for start-up businesses to keepprofitability and revenue expectations on track.
But a push en masse into higher-risk unsecured lending insuch uncertain economic times has led to warnings that somebanks may be putting their long-term financial health at risk.
"We normally see these types of strategies when growth ingeneral corporate lending is slower and unfortunately these tendto rely on generating growth by offering lower credit card ratesor lower unsecured rates," Symon Drake-Brockman, managingpartner of Pemberton Capital Advisors, told Reuters.
"That approach has at times proven to be very expensivebecause if there's a recessionary shock, a lot of those loans dodefault," the former global head of debt markets at RBS said.
Britain's economy started to shrink in the month followingthe Brexit vote, according to a forecast from the NationalInstitute of Economic and Social Research.
And British consumers already have a lot of debt, with totaloutstanding balances on credit cards up from 61 billion pounds ($78.7 billion) in December 2014 to 63 billion in December 2015,data from the UK Cards Association showed.
In July, Britain's Financial Conduct Authority said it wasconcerned about the "scale, extent and nature" of problem creditcard debt, after it found about 2 million people in default, afurther 2 million carrying persistent debt and another 1.6million repeatedly making minimum payments.
But despite this backdrop, banks are under pressure to lendboth from shareholders, who want higher profits, and from thegovernment, which wants banks to support the economy.
"Banks know successful loan applications mean moreinnovation, more new jobs and more plans for businesses toexpand," Eric Leenders, BBA Executive Director of Retail Bankingsaid. He said that SME finances had improved since 2013 - withfour-fifths now reporting a profit and 'worse than average risk'ratings down by 8 per cent.
INITIATIVES
Last month, HSBC launched a price-matching campaign on smallbusiness lending and corporate overdraft rates up to 25,000pounds. On the same day Barclays said it had opened around 2,000accounts for start-ups in the week to July 20, part of a pledgeto support small business customers "through thick and thin".
On its website, HSBC quotes annual interest rates excludingfees from 5.9 percent for small business loans, compared with aprevious rate of 7.9 percent, subject to borrower status.
RBS - provider of one-in-four small business loans - isoffering an indicative annual percentage rate of 7.99 percent ona five-year, 25,000 pound small business loan.
RBS saw a 10 percent drop in mortgage borrowing the monthafter the referendum, but net lending grew by 20 billion poundsin its first half, more than any other UK bank, as it committedto help borrowers cope with a dip in the economy post-Brexit.
Lloyds said its open mortgage book shrank by 1 percent inthe first half of 2016, reflecting actions to protect its netinterest margin in a highly competitive environment.
But its Consumer Finance business grew 7 percent to 33.7billion pounds, SME lending rose 3 percent to 30 billion; andauto financing grew by 14 percent to 10.9 billion as Britain'sbiggest mortgage lender stepped up lending elsewhere.
Senior bank executives contacted by Reuters said thatcompetition among banks had increased since Brexit but rejectedany suggestion that tight lending criteria were being stretchedin pursuit of profit.
RBS and Lloyds said all lending decisions were within strictrisk appetites. A spokeswoman for HSBC said the bank wascommitted to supporting and meeting the needs of its customersand its risk and affordability criteria were unchanged.
Speaking to analysts at Barclays' half-year results, ChiefExecutive Jes Staley said his bank's conservative risk profilewas evident in its "high credit quality and lower volatilityimpairments across its consumer and wholesale businessescompared to other UK banks".
Staley said Barclays' UK mortgage book had an averageloan-to-value ratio of 47 percent, well below the marketaverage, that 77 percent of its SME lending was secured and itsBarclaycard portfolio in the UK "was seasoned and diversified".
A second CEO, who declined to be named, said they wouldhappily give up new business if it put hard-won balance sheetsecurity at risk.
"The market is heating up and it is starting to look thatway because banks are looking for assets. Their liabilities arenot making any money so most are chasing growth on the otherside," the CEO said.
"If staying within our risk appetite means we get lessbusiness, we get less business."
EARNINGS TRAP
Not everyone is racing to shore up flagging mortgage lendingby chasing higher risk small business borrowers.
Challenger bank Virgin Money said last month it haddeferred plans to move into that sector, citing economicuncertainties triggered by Brexit.
Other commentators said they believed the industry wasfalling into a trap of chasing earnings to offset the impact ofthe Bank of England's cut in interest rates to 0.25 percentearlier this month.
This will put even more of a squeeze on the differencebetween what banks earn on lending money and what they need topay depositors.
In addition, the Bank of England's 100 billion pound plan tohelp banks to cope with wafer-thin lending margins couldencourage some to lend when they otherwise would not have done.
And while the banks look to expand small business lending tomake up for low mortgage demand, there are risks building up inthat market too.
Property services firm Knight Frank said homeowners withaccess to savings will find mortgage servicing costs affordablefor now but higher inflation due to the weak pound, orquantitative easing, could spark a rate reversal, which wouldaffect mortgage borrowers, especially the most leveraged.
Others in the finance industry said a rush to increaselending to small, untested businesses or consumers already ladenwith mortgage debt was hazardous, particularly aslower-for-longer interest rates created a culture of 'freemoney' that could backfire in leaner economic times.
"If rates remain at an all-time low despite possible furthereconomic stimulus in the Autumn statement, and unemploymentrises, property prices could continue to fall and that could bethe trigger for repossessions to rise," Nick Ogden, founder ofpayments firm WorldPay, said. ($1 = 0.7748 pounds) (Additional reporting by Esha Vaish; Editing by Jane Merriman)
