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Lenders take profit hit in mortgage price war

The so-called mortgage price war has slashed lenders’ profits in the first half of the year, with some banks and building societies seeing their income drop by up to 10 per cent.

Sustained pressure on mortgage pricing — due to a competitive mortgage space which has seen lenders cut rates in a ‘race to the bottom’ — has affected lenders across the board and caused profits to plummet at some smaller firms, according to their latest half-yearly results.

Leeds Building Society reported a total income of £101m for the six months to June — a decrease of 10.4 per cent year-on-year — and saw its profits reduce by almost £10m (an 18 per cent drop year-on-year), putting the results down partly to sustained pressure on mortgage pricing.

Meanwhile, Coventry Building Society reported the “depth of competition in mortgages” — alongside economic and political uncertainty — had resulted in “strong price competition” when its results showed its total income of £189.8m had dropped by 10.5 per cent compared with June 2018.

The society’s net interest margin — the difference between the profits made from investments (mortgages) and the interest paid out to savers — narrowed by 14 basis points compared with the year before due to “continuing competition in the mortgage market” and the “absence of notable growth in the housing market”.

The situation was similar with Nottingham Building Society, which reported “increasing competition in the face of muted demand for mortgages” meant new mortgage rates continued to fall despite their “already record low levels”.

Nottingham stated it had moderated its lending plans in the face of these falling rates as it was “not sustainable to grow” at the same rate it had done. It reported a decrease in net interest income of £1.8m year-on-year — down 7 per cent.

The challenging market conditions saw Tesco Bank pull the plug on its mortgage lending arm, and its chief executive said the market had left it with “limited profitable growth opportunities”.

Yorkshire Building Society’s net interest margin of 1.06 per cent was down from 1.13 per cent in 2018, while Skipton Building Society saw its margin drop 12 basis points when compared with the year before.

Skipton stated its decline in margins was reflective of “intense competition in the mortgage market” and said the ongoing pressures meant it anticipated lower profits for 2019 than the year before.

Meanwhile Yorkshire said: “We continue to see margins under pressure across the mortgage market, driven in part by the competitive actions of the newly created ring-fenced banks.”

New Bank of England rules, applicable from January 1 this year, created a firewall between the banks’ investment banking operations and their lending arms to ensure they were still able to lend and consumer money was safe even if a shock hit the banking sector.

With the ring-fence in place, funds which formerly could have been used to back riskier investments are now trapped in the retail environment and being diverted to the mortgage market, which has amplified the price war.

Although the mortgage price war has not affected these larger retail banks to the same extent as building societies and challenger lenders, most still reported the competitive market had impacted their profits and margins.

For example, Barclays reported a total income of £3.57bn, an increase from last year, but said this had been “offset by mortgage margin compression”, while Lloyds’ said its net interest margin had narrowed by five basis points since H118 due to “continued mortgage competition”.

A “fall in income due to the highly competitive mortgage market” impacted Santander’s profitability as its net interest margin dropped 11 basis points and its profit before tax was down 36 per cent year-on-year to £575m.

Santander reported this was also down to pressure from the mortgage back book as more customers opted to come off the standard variable rate.

Data from Moneyfacts showed the average rate of a two-year fixed — 2.49 per cent — is more than 1 percentage point lower than the average in August 2014 (3.54 per cent).

Longer term fixes have dropped even more substantially. In August 2014, the average five-year fixed sat at 4.22 per cent, compared with 2.84 per cent in today’s market.

The Bank of England has warned lenders it is “watching them like a hawk” amid the price war, cautious that lenders do not opt for riskier lending to make up for lost margins.

By Imogen Tew

Source: FT Adviser

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Bank of England says it is watching mortgage price war ‘like a hawk’

Regulators are watching a price war in mortgages “like a hawk” and may need to impose stricter minimum capital requirements on lenders, Bank of England Deputy Governor Sam Woods said on Friday.

The price war over the past two years may be good news for consumers wanting to buy their first home, but it was less good for a bank or building society concentrated in mortgages, Woods told the Building Societies Association.

High loan-to-value ratios and higher loan-to-income home loans can be well captured by the BoE’s capital requirements.

“But we should be watching them like a hawk,” Woods said.

Falling capital levels have been seen at lenders who use their own computer models to work out the riskiness of loans on their books and therefore how much capital to hold.

“The amount of capital being set aside to cover mortgages has been falling,” Woods said.

The BoE’s supervisors were making strenuous efforts to check on how models are being used.

“Still, I think we should approach this trend with a very sceptical eye and need to consider whether there is a case to impose more floors in firms’ models, particularly given the current stretch in some measures of house price valuation,” Woods said

(Graphic – BOE high loan to value chart, tmsnrt.rs/2X3xkZl)

RING FENCE FACTOR

Woods’ warning comes after the Bank forced Metro Bank to correct how much capital it was setting aside to cover mortgages after under-reporting the risk from its loan book.

Metro raised 375 million pounds to bolster its capital buffers earlier this month.

Tesco Bank said this week it was quitting home lending due to tough competition, and Nationwide Building Society its measure of underlying profitability fell in the year to April 4.

Credit ratings agency Fitch has said that rules requiring big banks to “ring fence” their retail arms with capital have led to increased competition as lenders seek to boost revenues.

Europe’s biggest bank HSBC has renewed its focus on home loans to boost revenue in its ring-fenced arm.

Asked if ring-fencing was to blame for the price war, Woods said: “Everyone involved agrees to some extent that that has been a factor in the intensification of pressure in the mortgage market.”

“We don’t think it’s the dominant factor. We think that the effect so far is manageable,” Woods said, adding that his staff were seeking to measure the impact of ring-fencing.

The regulatory system is also unable to properly capture risks from margin loans, or loans are granted using shares held by the borrower as collateral, Woods said.

Banks in London lost more than a billion euros in a single deal in 2017, Woods said.

Britain’s departure from the European Union could give Britain more leeway to adapt rules that are currently written in Brussels.

“My view is that a simpler system of regulation for smaller firms would be a good thing,” Woods said.

Reporting by Huw Jones

Source: UK Reuters