Mortgage race could scramble UK banks’ nest-eggs

Saturday, 13 August 2016 A general view of a Nationwide building society branch in London, May 27, 2009. The customer-owned lender Nationwide reported a 50 percent drop in its full-year profits and warned on its outlook as impairments rise and competition for retail funds increases. REUTERS/Toby Melville (BRITAIN BUSINESS) - RTXOHKX Nationwide has flagged the mounting risks in the UK’s housing market. Britain’s biggest building society said on Aug. 12 that its net interest margin – the difference between the rates it charges on its lending and those it pays on its funding – had fallen from 1.61 percent in June 2015 down to 1.35 percent at the end of the second quarter. If persistently low rates cause that trend to continue, British banks could find their equity nest-eggs get scrambled. The risk to banks from easy monetary policy is fairly simple. Cheap interest rates are supposed to gee up businesses to borrow and invest, but they can equally mean consumers borrow ever greater amounts to acquire inflated UK residential property. With deposit rates near zero, banks that want to maintain their mortgage market share will have to lend the same amount or more at lower rates – and thus be left with less to pay dividends and bolster capital buffers against a future property crash. Regulators’ main source of comfort is that banks’ capital levels look healthy. Big lenders like Lloyds Banking Group have common equity Tier 1 ratios of 13 percent, while Nationwide’s is 10 percentage points higher. Hence they can bear a period of margin erosion. And the uncertainty of the post-Brexit period could mean a tailing off in the demand for housing – and thus house prices. Still, net interest margins are the main driver of how banks make money, and the more that banks’ mortgage books pivot from higher-yielding loans to newly-written lower ones, the less money they will make. Citi is modelling a sharp drop in net interest margins in 2017-18, and has flagged that the low-rate environment could especially hurt banks with a large stock of mortgages on variable rates, like TSB and Lloyds. If banks want to fuel the UK consumer’s property fetish, it could come at the cost of further undermining their investment appeal. mortgage A general view of a Nationwide building society branch in London, May 27, 2009. The customer-owned lender Nationwide reported a 50 percent drop in its full-year profits and warned on its outlook as impairments rise and competition for retail funds increases. REUTERS/Toby Melville (BRITAIN BUSINESS) - Related Links Breakingviews is not responsible for the content of external internet sites. Reuters: Nationwide says to pass on BoE rate cut, mortgage lending up Nationwide results, Aug. 12 Context News Nationwide announced on Aug. 12 that its net interest margin had fallen to 1.35 percent as of June 30 from 1.61 percent as of June 2015. Underlying pre-tax profit fell 6 percent to 368 million pounds, and Nationwide's share of gross residential mortgage lending rose 26 percent to 8.6 billion pounds year-on-year, meaning it has a 15 percent share of the market. Nationwide's common equity Tier 1 ratio rose to 23.4 percent from 23.2 percent in April. The group said lower margins were due to the impact of sustained levels of competition in the mortgage market. It added that expectations that the low interest rate environment would persist or that rates could decrease further in the wake of the European Union referendum decision might exert further pressure on margins. Most Popular Samsung’s next leader faces two big challenges Review: Europe gets some blunt marriage counseling Indian tycoon’s $9 bln tidy-up is too clever Hillary Clinton slips through Trump tax loophole M&A activist twist suits almost everyone Privacy Policy Terms and Conditions © Thomson Reuters 2016. All rights reserved. ====================== Investor lending picks-up in June The Australian Bureau of Statistics released housing finance data for June 2016 earlier this week. The data showed that the value of housing finance commitments was recorded at $32.6 billion which was the highest value since August 2015 but still -2.1% lower than its record high of $33.3 billion in April 2015. Chart 1 Looking at the split between owner occupier and investor lending in June, there was $20.8 billion worth of lending to owner occupiers and $11.8 billion to investors. The value of owner occupier lending was 1.8% higher over the month, 9.4% higher year-on-year and at its highest level since February 2016. The $11.8 billion in lending to investors was 3.2% higher over the month, -13.1% lower year-on-year but at its highest level since August 2015. Chart 2 Based on the four components of owner occupier lending, there was: $1.8 billion in lending for construction of dwellings, $1.0 billion for purchase of new dwellings, $6.9 billion in refinancing of established dwellings and $11.0 billion for purchase of established dwellings. Owner occupier housing finance commitments were higher over the month for each component except for construction of dwellings. Each component of owner occupier lending has increased year-on-year. Chart 3 The $11.8 billion worth of lending to investors was comprised of $1.8 billion worth of commitments for construction of dwellings and $10.6 billion for established housing. Over the month, the value of commitments for construction of dwellings was -1.4% lower and commitments for established dwellings were 3.8% higher. Year-on-year the value of commitments for construction of dwellings were 20.5% higher and commitments for established dwellings were -15.8% lower. Some interesting trends have emerged over recent months. After recently falling there has been a rebound in both owner occupier and investor lending however, both remain below recent peak levels. While owner occupier lending has picked-up, refinances have flattened out. Keep in mind that this data is to June and following recent interest rate cuts which weren’t passed on in full, it is reasonable to expect that refinance might pick-up again from August. In terms of investment lending, despite an uptick it is still much lower than its peak level. With investment housing credit increasing at an annual rate of 5%, well below the 10% speed limit, we may see a further increase in investment lending over the coming months given that lenders are now comfortably below the 10%pa speed limit. Source: www.blog.corelogic.com.au ======================