UK banking updates
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Britain’s banks and building societies are grappling with a highly competitive mortgage market that threatens to depress profits but which benefits homeowners.
For much of the past year, bankers feared that £ 1.6 trillion worth of mortgage market demand would disappear after a temporary stamp duty vacation was lifted. Instead, they face the opposite problem: demand has proven so robust that more and more lenders want a piece of it.
All of the so-called Big Four banks – Lloyds, HSBC, Barclays, and NatWest – grew aggressively in the first half of the year, though several HSBC executives, historically the smallest of the four mortgage loans, considered “back with a vengeance” after slowing down at the height of the pandemic .
Clifford Abrahams, chief financial officer at Virgin Money, the UK’s sixth largest bank, said lenders “all piled into mortgage loans” after fears about the economic outlook subsided.
“In January we had the second wave that had just struck, banks were still worried about the economy, unemployment and the impact on house prices. Now the introduction of the vaccine has been a success, the housing market has been very robust, which has surprised everyone. . . these things can turn around pretty quickly. “
Average mortgage spreads – a measure of the relative profitability of mortgage loans – reached their highest level in seven years towards the end of 2020, according to the Bank of England, but have gradually declined since then.
Virgin’s profit margins were weakened as the recent launch of a new checking account reduced the cost of funding its loans, but Abrahams predicted that other lenders would come under increasing pressure.
“We see the mortgage business still fine, but a lot less attractive than it was,” he said.
Lloyds Banking Group, the UK’s largest personal lender, added £ 12.6 billion – 5 percent – to its mortgage book in the first six months of the year and took out more mortgage loans in June than in any month since the financial crisis.
However, William Chalmers, chief financial officer, said this week that “the market is undoubtedly becoming more competitive,” adding that the company will be “disciplined” in lending for the remainder of the year. Another Lloyds banker said that would mean turning down more loans after increasing his 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 relative to its overall size. However, new rules forcing banks to separate their UK businesses from their international and investment banking arms left 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 percent in 2015 – the year after the purpose limitation law was passed – to 10 percent in 2020, according to data from UK Finance.
Its share of total mortgage loans is still 7 to 8 percent behind its competitors – compared to nearly 20 percent at Lloyds – and executives are pushing for further growth.
HSBC will announce its second quarter results on Monday. Ringfencing sparked a similar push at Barclays, which quickly regained market share after slipping between 2015 and 2018.
Mark Mullen, CEO of Atom Bank, a digital bank that has had more than 3 billion mortgage loans since its launch in 2016 “.
Atom and other midsize banks like Metro Bank have begun lending to somewhat riskier “near prime” borrowers in recent months, reflecting both growing confidence in the economic outlook and the difficulty with the largest banks to compete on lower risk loans.
The Nationwide Building Society, which has the UK’s second largest mortgage book, has scaled back its lending to mainstream borrowers and is falling behind NatWest in terms of annual new lending.
While competition is challenging for bank managers, it should be good news for consumers. The average interest rate on a two-year fixed-rate mortgage with a mortgage lending value of 75 percent hit an almost all-time low in June, according to the Bank of England, and several other banks aim to continue gaining market share alongside HSBC.
NatWest warned Friday that profit margins began to decline towards the end of the second quarter, but an executive at the bank said it still has “growth capacity” as its share of the mortgage market is still smaller than its share of checking accounts.
Even if spreads continued to decline, it would take some time to hit the 2018 lows again. The market “may not be as strong as it used to be,” said Ralph Coates, CFO of TSB. “But there are certainly returns.”