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British banks and building societies are struggling to cope with a highly competitive mortgage market that threatens to make a profit but benefits homeowners.
For most of the past year, bankers have feared that demand in the £ 1.6 tonne bond market would disappear following the withdrawal of a temporary stamp duty holiday. Instead, they face the opposite: demand has proven so strong 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 during the first half of the year, although several executives singled out HSBC, historically the smallest of the four in mortgage lending, because they were ‘back with’ a revenge “after a slowdown at the height of the pandemic.
Clifford Abrahams, chief financial officer of Virgin Money, the sixth-largest bank in the UK, said lenders “had all come together” after mortgage lending after fears about the economic outlook began to ease.
‘In January we still got the second wave, banks were still worried about the economy, unemployment and what it would do to do house prices. Now the rollout of the vaccine is a success, the housing market was very strong, which surprised everyone. . . these things can turn around pretty quickly. ”
Average mortgage spreads – a measure of the relative profitability of mortgage lending – reached their highest level in seven years by the end of 2020, according to Bank of England data, but have since declined steadily.
Virgin’s profit margins were isolated because the recent rollout of a new current account reduced the cost of financing its loans, but Abrahams predicted that other borrowers would come under increasing pressure.
“We still consider the mortgage industry good, but much less attractive than it used to be,” he said.
Lloyds Banking Group, the UK’s largest retailer, increased its £ 12.6bn – 5 per cent – mortgage book in the first six months of the year and completed more mortgage lending in June than in any month since the financial crisis.
However, CFO William Chalmers said this week that “there is no doubt that the market will become more competitive”, adding that the company would be ‘disciplined’ in lending for the rest of the year. Another Lloyds banker said it would mean more loans being turned down after increasing its share of gross lending in the first half of the year.
HSBC, the largest bank in Europe by assets, has traditionally been a small player in the UK mortgage market relative to overall size. New rules forcing banks to “ringfence” their UK businesses out of their international and investment banking have left billions of pounds in deposits that could only be used in the UK.
Its share of annual gross mortgage lending increased from 5.6 per cent in 2015 – the year after legislation was introduced – to 10 per cent in 2020, according to data from UK Finance.
Its share of total mortgage lending is still at 7 to 8 percent – up from almost 20 percent at Lloyds – and executives are urging further growth.
HSBC will announce its second-quarter results on Monday. Ringfencing encouraged similar pressure at Barclays, which quickly regained shares after slipping between 2015 and 2018.
Mark Mullen, CEO of Atom Bank, a digital bank that has completed more than £ 3bn in mortgage lending since its launch in 2016, said: “We are monitoring the mortgage market very closely”, including the impact of ‘HSBC’s its weight throw away ‘again’.
Atom and other medium-sized banks, such as Metro Bank, have begun lending to slightly more risky lenders in recent months, reflecting the growing confidence in the economic outlook and the difficulty of competing with the largest banks for loans with a lower risk.
Nationwide Building Society, which has the second largest mortgage book in the UK, scaled back its loans to mainstream borrowers, which NatWest has deteriorated in terms of annual new loans.
While the competition presents a challenge for bank managers, it is likely to be good news for consumers. The average interest rate charged for a two-year fixed-rate mortgage with a loan value of 75 percent was close to an everyday low in June, according to Bank of England data, and several other banks plan to continue going to win market share with HSBC.
NatWest warned on Friday that profit margins began to decline towards the end of the second quarter, but a senior executive at the bank said it still had ‘capacity’ to grow as its share of the bond market remained lower than its share of the current accounts.
Even with a further decline in spreads, it will take a while to return to the lows seen in 2018. “But there must definitely be a return.”