UK banks are struggling to meet demand for mortgages

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British Banks News

UK banks and building societies are struggling to cope with a highly competitive mortgage market that threatens to drive down profits but benefits homeowners.

For much of last year, bankers feared that demand in the £ 1.6 trillion mortgage market would disappear after the temporary stamp leave was lifted. Instead, they face the opposite problem: demand has been so high that more and more lenders want a share.

All of the so-called Big Four banks – Lloyds, HSBC, Barclays, and NatWest – grew robustly during the first half of the year, although several executives praised HSBC, historically the smallest of the four in mortgage lending, for “coming back with revenge. »After slowing growth in the midst of a pandemic.

Histogram of the share of gross mortgage lending,%, showing that large banks are increasing their market share at the expense of small banks and construction companies.

Clifford Abrahams, chief financial officer of Virgin Money, the UK’s sixth-largest bank, said lenders were “fully engaged” in mortgage lending after fears over the economic outlook began to subside.

“Back in January, we were still just starting the second wave, banks were still worried about the economy, unemployment and what that might do to house prices. Now the introduction of the vaccine was successful, the housing market was very resilient, which surprised everyone. … … things can change pretty quickly. “

Average mortgage spreads – a measure of the relative profitability of mortgages – hit their highest level in seven years towards the end of 2020, but have been gradually declining since then, according to the Bank of England.

Linear plot of new residential mortgage spreads (bp) showing mortgage profitability declining from a recent peak

Virgin’s profit margins have been isolated as the recent rollout of a new checking account has lowered the cost of financing its loans, but Abrahams predicted that other lenders would come under increasing pressure.

“We think the mortgage business is still fine, but much less attractive than it was,” he said.

Lloyds Banking Group, the UK’s largest retail lender, increased its mortgage portfolio by £ 12.6 billion – 5 percent – in the first six months of the year, and issued more mortgages in June than in any month since the financial crisis.

However, William Chalmers, CFO, said this week that “there is no doubt that the market is becoming more competitive,” adding that the company will be “disciplined” in lending before the end of the year. Another Lloyds banker said this would mean ditching additional loans after increasing its share of gross lending in the first half of the year.

HSBC, Europe’s largest bank by assets, has traditionally been a small player in the UK mortgage market compared to its overall size. However, the new rules, forcing banks to “shield” their UK businesses from their international and investment banks, left him billions of pounds in customer deposits that could only be used in the UK.

Its share of annual gross mortgage lending increased from 5.6% in 2015 – a year after the fencing law was passed – to 10% in 2020, according to UK Finance.

Its share of total mortgage lending continues to lag behind the competition – 7 to 8 percent – compared to Lloyds’ nearly 20 percent – and executives are looking to grow further.

HSBC is to publish its second quarter results on Monday. Ringfencing has spurred a similar leap at Barclays, which rebounded quickly from a downturn between 2015 and 2018.

Mark Mullen, CEO of Atom Bank, a digital bank that has provided more than £ 3bn in mortgages since its launch in 2016, said that “we are monitoring the mortgage market very closely,” including the impact of HSBC influence. again”.

Atom and other midsize banks such as Metro Bank have begun lending slightly more risky “near-first-class quality” borrowers in recent months, reflecting both growing confidence in the economic outlook and the difficulty of competing with the largest banks for lower-risk loans.

The Nationwide Building Society, which has the second largest mortgage portfolio in the UK, has cut its lending to major borrowers, behind NatWest in annual new lending.

While competition is a challenge for bank executives, it is likely to be good news for consumers. According to the Bank of England, the average interest rate on two-year fixed-rate mortgages and 75% of the cost of the loan in June approached a record low, and several other banks intend to continue to strive to increase profits. market share along with HSBC.

A graph of the average interest rate on a mortgage with a fixed interest rate of 75% LTV over 2 years showing that mortgage rates are close to record lows

NatWest warned on Friday that profit margins had begun to decline towards the end of the second quarter, but senior management at the bank said the bank still has “upside potential” as its share of the mortgage market remains below its current account share.

Even with further declining spreads, it will take some time to return to the lows seen in 2018. According to Ralph Coates, chief financial officer at TSB, “the market may not be as strong as it was.” “But there is definitely a return.”

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