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Between the margins

HBOS’s decision to focus on margin growth rather than volume growth is likely to result in other lenders doing the same, writes Tanya Powley

HBOS’s recent decision to scrap its annual lending target to focus on margin growth over volume could see the landscape of the UK mortgage market shift dramatically as rivals decide whether to follow or grab extra market share.

The UK’s biggest mortgage lender announced this month that following a fundamental shift in the mortgage market, it will take monthly decisions on the trade-off between volume and margins.

Chief executive Andy Hornby told a Merrill Lynch banking conference that he believed the mortgage market is about to undergo a fundamental shift. he says: “Over the past three years, we have seen a major decline in both mortgage margins and the average life of a mortgage. Put simply, the onset of Basel 2 and the consequences of six highly benign years of credit experience had led to a sharp reduction in mortgage profitability.”

Hornby said that HBOS had deliberately allowed its market share to decline in the past 12 months. But he made it clear that he had not been 100 per cent content with the performance of its mortgage business in the first quarter of this year.

He added: “The events of the past few weeks have proved conclusively that 2007 was not the year to grow one’s mortgage book too aggressively. Looking forward, we can already see that mortgage pricing is starting to adjust to reflect increased wholesale funding costs. Increased mortgage costs to consumers will inevitably lead to a slowdown in the mortgage market.

“I expect a mortgage market showing lower growth rates in 2008 although stock in the mortgage market will still increase.”

John Charcol senior technical manager Ray Boulger says HBOS’s recent increase in rates and its reduction of products was a clear sign that it wanted to do less business. He says: “HBOS is trying to persuade the City that margin is more important than volume. If it can educate the City in this way, it will be a long-term plus for it. An opportunity in this current climate has provided HBOS with the chance to rebuild its margins. If the biggest lender is not being so aggressive and taking its foot off the pedal, then it does provide other lenders with the opportunity to increase market share.”

So as HBOS decides to switch strategy, its rivals look set to use its decision to their advantage.

Abbey head of mortgages Nici Audhlam-Gardiner says it will not be retreating from its mortgage business: “It is about getting the right balance really. We improved our fixed rates recently so it shows that we are still in the market for more business. We know that customers are still choosing fixed rates over tracker rates. Our short-term practice is to provide competitive fixed rates.”

Audhlam-Gardiner says that the longer term outlook for Abbey will see it look at developing new products and expand its existing product range. She points out that Abbey has also got some big IT developments being implemented early next year that will make its processes a lot slicker.

Abbey is already seeing opportunities in the market following the fallout from the US sub-prime crisis. Audhlam-Gardiner says brokers and networks have been approaching Abbey from a proc fee angle following the Northern Rock debacle.

Mortgage commentators have also speculated that the newly merged Nationwide could be about to ramp up its market share. But it looks likely that it will decide to use this period to also increase its margins rather than to focus on growth.

Non-retail executive director Matthew Wyles says: “Mortgage lending for Nationwide is absolutely central to our business model. We are determined, however, to apply sound commercial discipline to pricing in order to achieve returns appropriate to the capital employed.”

Savills Private Finance director Melanie Bien says that there are definitely going to be opportunities to build up market share but that the industry is also likely to see a flight to quality next year.

“HBOS has basically priced itself out of it for the time being. Halifax’s two-year fixed rate is currently at 6.09 per cent, which is quite a bit more than the most competitive rate. It is obviously looking at the bigger picture but I don’t think we’re going to see HBOS completely drop away,” she says.

Brentchase Financial Services mortgage specialist Mike Fitzgerald says that with HBOS making the move to focus on margins, other lenders are likely to do the same.

Lloyds TSB says it cont-inues to look to grow the business but not at any cost. At its interim results it stated that its focus is on profitable growth, therefore market share is not one of its key objectives. Group financial director Helen Weir says: “Our focus is share of value, not volume for volume’s sake.”

Alliance & Leicester ref-used to comment on what its mortgage business strategy is currently.

Fitzgerald points out that as Halifax’s brand is so well known it can afford to take a rest for a year or so without having too much of an effect on its business. “As soon as it wants to turn the gas back up and become competitive again, it has the ability to do it really quickly,” he says.


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