Five lenders dominated the UK’s volatile mortgage market in the first half of 2008 as they filled the huge void left by Northern Rock. Abbey and Barclays gained the most, but one of the highest profile UK marketing campaigns of the year, HSBC’s Rate Matcher, only produced modest gains. William Cain reports.
Five of the UK’s top banks claimed more than 100 percent of the net mortgage lending market in the first half of 2008, taking higher volumes and margins despite turmoil in the financial markets.
The five – Abbey, Barclays, Royal Bank of Scotland (RBS), Lloyds TSB and HSBC – took a 100.6 percent market share of net mortgage lending according to RBI research. This was possible because other lenders, most obviously Northern Rock, had negative net lending figures. The Rock, nationalised earlier this year after mortgage market excesses led to its collapse, had net mortgage lending of -£14.3 billion (-$26.7 billion) as the government ran down the business and allowed mortgage repayments to exceed new loans. In the first half of 2007 the figure was £9.9 billion, representing 18.9 percent of net new mortgage lending in the country.
The five banks all saw substantial increases in their share of net mortgage lending. The ones which registered the best retail banking results were those which also pulled back from mortgage lending in the first half of 2007 when volumes were high, margins were being squeezed and risk levels were increasing.
Speaking to RBI after HSBC’s interim results presentation, chairman Stephen Green said it was an example of how capital strength had allowed banks to grow into a space where others had been constrained.
He said: “It is a good example of organically using capital strength to take advantage of some of the opportunities which have been created by the current environment.”
Abbey pushes ahead
Abbey, the UK subsidiary of Santander, was the stand-out performer, with strong mortgage growth and a 19.6 percent increase in pre-tax profits to £648 million. The bank said it had scaled back on riskier and lower margin mortgage lending in the first half of 2007 but was now taking the opportunity to gain more customers. Abbey’s success in the early part of 2008 came in part from the unwinding of some of the assets in its global banking and markets business which was used to partially fund the new mortgages.
Deposits also played a big role: around 60 percent of its retail assets were funded from deposits. The bank saw a net inflow of retail funds of £2.9 billion in the first half of 2008, an increase of 50 percent.
Barclays increased its net mortgage lending market share from 6 percent to 26 percent in the first half of the year, making it the biggest lender in the first half of 2008. The bank also increased gross mortgage advances from £10.5 billion in the first half of 2007 to £12.7 percent, the result of the strong mortgage retention strategy at Woolwich, Barclays’ mortgage brand, and improved customer acquisition.
HSBC posted the largest retail banking increase in the UK market, with a 203 percent year-on-year increase in its retail bank’s profit before tax. But its mortgage market performance was surprisingly subdued, with an increase from 3 to 6 percent disappointing in comparison to its rivals’ numbers. While the bank’s Rate Matcher mortgage loan gained a significant amount of media coverage, Ray Boulger, senior technical manager at independent mortgage adviser John Charcol said customer acquisition was hindered by long waiting times for customers. He said some had to wait up to three weeks for an appointment, and many decided to opt for alternative, less attractive deals rather than wait.
The notorious Together product
Northern Rock itself is still dealing with the hangover from the spectacular bust which left it in state hands, in particular its now notorious Together mortgage product.
The product offered loan-to-vale (LTV) ratios of up to 125 percent of the value of a home in theory, with a 95 percent mortgage as well as a 30 percent unsecured loan up to a maximum of £30,000. The average LTV on the product was around 105 percent on the bank’s 26,000 Together accounts. Together also offered lending at income multiples up to 5.9 times income. The number of these accounts over three months in arrears was 2.14 percent, almost double the residential mortgage loan loss impairment average of 1.21 percent, according to the UK’s Council of Mortgage Lenders.
Simon Jackson, managing director of UK broker Moneyquest, said: “It was a product of its time, which I suspect if the credit crunch had never come about would have been a gamble which might have paid off… But at the time everyone was doing it – even the likes of Abbey.”
Nationwide Building Society, the UK’s second-largest mortgage lender, said in its April full year results that it would scale back its home loans business. But Boulger said it had recently aggressively re-entered the market.
Overall, UK building societies made up 22.7 percent of net new lending in the first half of 2008, although the sector fell into negative territory in the months of May and June, with repayments outstripping new loans.