UK Mortgage Lenders Face Slowdown – Financial Chronicle – 28-Nov-2014

December 2, 2014 - Uncategorized

Britain’s biggest mortgage lenders face weakening earnings growth as potential homebuyers pull back before next year’s general election, regulators tighten financing and the economy slows.

Nationwide Building Society, the U.K.’s third-largest mortgage lender, yesterday reported a 36 percent slump in home loans in the six months through September, an indicator that other banks may encounter a similar slowdown. Lloyds Banking Group Plc (LLOY), the country’s largest mortgage provider, this month had its shares rating cut twice in less than a week and faces the greatest risk to its earnings’ growth, according to analysts.

“A meaningful slowdown in mortgage activity is likely to lead to faltering earnings growth and certainly higher-end earnings estimates are probably under threat,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London. “A slowing housing market has to have a drag effect, particularly for Lloyds because they’ve got the biggest market share.”

Lloyds shares were unchanged at 79.59 pence at 1:25 p.m. in London. They have increased about 1 percent this year, while Royal Bank of Scotland Group Plc has gained 14 percent.

Europe Slows

Demand for homes is falling as more stringent lending criteria make it harder for buyers to get mortgages. The slowdown is led by London, where sluggish wage growth and the possibility of a tax on homes valued at more than 2 million pounds ($3.1 million) after the election pushed demand to a six-year low.

U.K. lenders issued 2 percent fewer home loans last month compared with September, according to the British Bankers’ Association. The cooling comes as the Bank of England cut its economic forecasts for the country this month because of weak global expansion and the “specter” of stagnation in Europe.

“There’s lot of reasons for consumers to be a little bit cautious and uncertain,” Nationwide Finance Director Mark Rennison said by telephone. “There was a lot of speculation on whether house prices were overheating. Now there’s increasingly speculation about the general election and what housing policy might be depending on which party gets elected.”

‘Further Moderation’

Loans and advances to customers at Lloyds, which includes mortgages and unsecured lending, fell 2 percent to 486.3 billion pounds by the end of September, the bank said Oct. 28. The stock of home loans at Santander UK Plc, the nation’s No. 2 mortgage lender, rose 1 percent to 150 billion pounds at the end of September from a year earlier, the company said this month.

A spokesman for Santander said Britain’s economy would continue to grow, though at a slower pace than earlier this year, to help boost the housing market. He didn’t comment on the impact on the bank.

Housing demand has slowed since the summer, while a “further moderation in house price growth is likely next year,” saidMartin Ellis, housing economist at Halifax, a unit of Lloyds. A spokeswoman for Lloyds didn’t comment on the impact on the bank.

BOE Governor Mark Carney announced measures to limit mortgage lending as climbing house prices outpace wage growth. These include curbs on how much banks can lend relative to a borrower’s income, and requirements that banks refuse loans to homebuyers who fail a stress test that assumes an immediate 3 percentage-point increase in the benchmark interest rate.

New Competition

Mortgage rates are being squeezed lower by increased competition among banks to win customers, hurting the profit lenders can make on home loans.

“Competition from lenders is significantly greater now than it has been for some time,” said Ray Boulger, senior technical manager at mortgage broker John Charcol Ltd. in London. “A few new lenders are coming in, some are expanding their propositions and we have a market that’s flat-lining — that brings about more competition.”

Smaller lenders such as the Paragon Group Cos. and Coventry Building Society are seeking to win customers, while Britain’s biggest banks want to lend more after a period of slow loan growth to help preserve capital to meet regulatory requirements.

Prices Climb

New lending at Coventry rose 17 percent to 3.4 billion pounds in the six months through June from the same period a year earlier, it said Aug. 1. Lloyds plans to increase its core loan book by 30 billion pounds over the next three years, it said last month.

“Banks were in the market and then decided to take a step back,” said Nationwide’s Rennison. “All of that has fallen away and everybody is now competing in quite normal terms.”

House prices in the U.K.’s 20 largest cities climbed by five percent during the 12 months through October, according to property researcher Hometrack Ltd. That’s more than three times the average growth in U.K. earnings.

The opposition Labour party plans to raise 1.2 billion pounds from an annual tax on homes valued at more than 2 million pounds, with overseas-based owners of second homes paying more than those in the U.K. Buyers from the Middle East and Asia are already being squeezed by a rising British pound as well as levies imposed by Prime Minister David Cameron’s government.

In a further sign that the housing market is cooling, the BBA said its members granted 37,076 home loans in October, down from a revised 39,127 the previous month.

“This appears to extend a trend of softening demand, which is not encouraging,” Ian Gordon, an analyst at Investec Ltd. in London, said in a note to clients. “A tightening of lending criteria has been the most significant factor in choking off demand. Political instability ahead of the 2015 general election may also prove unhelpful.”

 

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