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Sector
Consumer Defensives
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Market Cap £23.53bn
Enterprise Value £37.72bn
Revenue £64.09bn
Position in Universe 50th / 1843

INSIGHT-In Brexit Britain, battling home lenders chase risk and pensioners

Thu 4th July, 2019 7:00am
* Lenders push mortgage durations, slash prices amid
competition
    * Smaller players targeting niche markets to survive
    * Some lenders quit mortgage market amid tough competition

    By Lawrence White and Iain Withers
    STOKE-ON-TRENT, England July 4 (Reuters) - The framed coat
of arms hanging in the headquarters of the Hanley Economic
Building Society in Stoke-on-Trent depicts two squirrels in
ermine robes above the motto 'Save Safely, Build Surely', which
the mortgage lender's customers have duly done for over 150
years.
    Now with Brexit looming, rock-bottom interest rates
squeezing margins, and behemoth competitors cratering loan
prices, 'The Hanley' as it is affectionately known in its
central England hometown, is taking some radical steps.
    In the past year, the lender has started offering more high
risk loans, targeted borrowers in their 70s and 80s and launched
an interest-only mortgage aimed at retirees that lasts up to 55
years -- the principal is repaid when the borrower dies or moves
into a nursing home.
    The Hanley is one of just 43 building societies left from
the hundreds that sprung up in Britain in the late 18th century.
Community-focused and customer-owned, they are lenders with a
traditionally conservative approach and account for around 23
percent of mortgage lending in the UK.
    Across Britain, smaller players in the £1.4 trillion ($1.77
trillion) mortgage market -- building societies among them --
are seeking out niche segments and taking on more risk as they
try to compete in a price war with the biggest banks.
    A post-financial crisis housing market boom along with
record employment levels have so far kept default rates at
decade lows.
    The fierce competition on price may be good for consumers,
but if Britain's exit from the European Union leads to a
dramatic slump, analysts and consumer experts warn that debts
and loan losses could overwhelm some borrowers and lenders.
    "The increase in mortgages available for older borrowers has
been a positive development, but some of these products have not
been tested in a severe downturn," said Gareth Shaw, personal
finance expert at consumer advice firm Which?.
    Unlike the United States, where banks have pulled back from
the mortgage market in the wake of the financial crisis,
Britain's largest lenders have maintained a steady grip.
    Regulations introduced in January have also had the
unintended consequence of strengthening the hands of the big
five banks-- Lloyds Banking Group  LLOY.L , Santander  SAN.MC ,
Royal Bank of Scotland  RBS.L , Barclays  BARC.L  and HSBC
 HSBA.L .
    Along with Nationwide Building Society, the No 2 mortgage
provider which has made a push into lending to older customers,
those six lenders have held 70 percent of the market since 2009,
according to data from UK Finance.
    Nationwide said lending to older people had great potential.
    “Later life lending is a fast growing sector which, given UK
demographic trends, we believe has the potential to grow into a
material part of the market," said Henry Jordan, Nationwide's
Director of Mortgages.
    Forced to separate their retail divisions from their riskier
investment banking operations, large banks have been left with
little choice but to push deeper into mortgages to earn a return
on the pools of customer deposits ringfenced by the split.
    The increased competition has cut prices on mortgages,
particularly riskier products with a high loan to value ratio
(LTV) -- the higher the loan to value ratio, the greater the
risk of default if house prices fall. 
    "In competition terms it's predatory pricing. The use of a
scale advantage to disadvantage competitors," said Ian Smith,
chief financial officer of mid-sized lender Clydesdale Bank
(CYBG)  CYBGC.L .
    A HSBC spokesman said the bank's strategy to expand in
British home loans had been set in 2015, adding its strategy
"remains positive for consumers". Santander said it was focussed
on "sustainable growth" and had a conservative approach to risk.
    Barclays, Lloyds and RBS declined to comment.
    Britain's central bank has acknowledged that the regulations
separating the big banks' retail and investment banking
operations were partly to blame for the price war, but said the
effects were 'manageable' for now. 
    The price of the average two-year fixed rate 95% LTV
mortgage has fallen to 3.25% from over 5% in the last five
years, while the number of such products has doubled to 146.    
With a LTV of 95 percent, the borrower is in the red if house
prices fall more than 5 percent and they haven't paid off any of
the principal.     
    Sam Woods, deputy governor at the Bank of England, told an
industry meeting in May that the central bank was watching the
build-up of risk in the mortgage market "like a hawk",
particularly the activities of building societies.
    The Bank of England sent a letter to the chief executives of
20 unnamed fast-growing lenders on June 12, warning that some
are underestimating potential losses from higher-risk loans.
Some of these firms, launched after the 2008 financial crisis,
have yet to experience an economic downturn.
    
    A RACE TO THE BOTTOM 
    Founded in 1854, Hanley Economic has survived shocks to the
coal mines, steel works and ceramics factories of Stoke, known
locally as the Potteries because the UK pottery industry is
based there.
    The twin forces of competition and Brexit, however, have
impacted the lender. Despite voting by nearly 70 percent in
favour of leaving the EU, earning Stoke the nickname Britain's
'Brexit capital', uncertainty over when and how the UK will
depart has prompted some locals to delay buying a house.
    Rather than engage in a price war with bigger rivals to win
more business, Hanley Economic decided to specialise. Its older
customer base -- the average age of its borrowers is 51 --
seemed a natural focus.
    "We have adapted our strategy by looking into more niche
areas of lending, we don't want to wind up competing in a race
to the bottom on pricing," David Lownds, head of marketing and
business development, said in an interview at the lender's
headquarters in a business park on the edge of Stoke.
    Rivals are making similar moves.
    There were 1,074 mortgage products on offer in Britain in
June for people whose age when the loan matured was 80-84 years,
compared with none in February 2014, when the dataset started,
according to price comparison website Moneyfacts. 
    Home loans with a maximum age at the end of the term of over
85 years have similarly spiked from 33 to 239 products available
in the same period.
    The retirement interest-only mortgage (RIO) offered by
Hanley Economic is aimed at older borrowers struggling to get a
standard mortgage or to repay existing interest-only loans.
    Customers only have to prove they can afford the monthly
interest payments rather than the tough checks on income
demanded by more traditional home loans.
    The RIO product offers a useful alternative to more commonly
used equity-release mortgages, Shaw, the consumer finance
expert, said. But both are expensive and there are concerns some
mortgage advisers may not be fully explaining the alternatives. 
    "If older customers are looking to fund an extension to
their house or go on a cruise, they might just be better off
with a credit card or a loan," he said.
    To mitigate the risks of its push into high-LTV loans,
retirement mortgages and other products, Hanley Economic has
taken out insurance on 80%-plus LTV loans and maintained high
core capital levels of 17 percent, Lownds said.  
    "We've managed a decade of low margins, and we've not much
direct exposure to Brexit," he said.
    The risk is that house prices, which have risen 45% on
average nationally over the past decade, and 30% in Stoke in
that period, drop sharply if Britain leaves the EU on Oct 31
without a divorce deal.
    Some lenders have crunched the numbers and decided to
retreat, including Tesco Bank - which has put its 3.7 billion
pound mortgage book up for sale - and SecureTrust Bank which
stopped writing new mortgage business.
    Both firms said they were withdrawing due to competitive
pressures. 
    Credit rating agency Fitch warned more lenders would likely
follow Tesco Bank's lead and quit the market, or increase their
risk exposure.
    The credit agency singled out Coventry Building Society as
one lender that had upped its risk profile through higher LTV
lending and an increased exposure to interest-only mortgages on
rental properties, downgrading it as a result. 
    The building society said it was disappointed by Fitch's
action.
    "We’re financially very strong and secure, with the highest
risk-based capital of the UK’s top 20 lenders and loan
impairments that are not only amongst the lowest in the industry
but continue to get lower," Coventry said in a statement. 
    CYBG told investors it would not join the mortgages arms
race but prioritise growth in business and unsecured lending.
 urn:newsml:reuters.com:*:nL8N23Q10H
     It raised the pricing of its home loans this year and is
committing only to holding its market share at around 4%.
    "Customers are getting a great deal," said Smith. "But
someone has to question whether really cheap mortgages are the
be all and end all of competition in banking."
($1 = 0.7925 pounds)

 (Editing by Carmel Crimmins)
 ((lawrence.white@thomsonreuters.com; +44 207 542 6137; Reuters
Messaging: lawrence.white.thomsonreuters@reuters.net))
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