Fierce mortgage competition to weigh on banks’ margins, warn brokers
Brokers have predicted that intense competition within the deposit and mortgage markets will squeeze banks’ margins as the tailwind from high interest rates comes to an end.
Barclays, Santander and Lloyds released third-quarter results on Tuesday and Wednesday, while Standard Chartered and NatWest will report earnings on Thursday and Friday respectively.
HSBC will report its results next Monday.
Mortgage profitability is a key focus for investors as lenders have significantly reduced rates in recent months to attract business against a gloomy backdrop of high interest rates from the Bank of England.
Chris Sykes, technical director at Private Finance, told Morning Wire: “This year, lenders are far off targets and have market share to make up, so we have seen some really competitive interest rates in the last few weeks, with in some cases very little premium above SONIA swaps.”
Spanish bank Santander reported this morning that its UK business reduced mortgage lending by £10.1bn in light of the higher cost of capital.
It said households and businesses would continue to feel the pressure of high-for-longer interest rates in the future, with the bank’s net interest margin — measuring the difference between what banks pay out and receive in interest payments — forecast to peak in 2023.
“These results from Santander will be similar across all the major lenders who are all far below their lending targets,” Stephen Perkins, managing director of Norwich-based Yellow Brick Mortgages, told press agency Newspage.
“Rates are unlikely to reduce significantly in the next 12 months, so lenders are setting expectations that their lending volumes will remain reduced for the foreseeable, also with lower margins as they compete for business.”
Barclays’ latest results showed the Bank of England’s interest rate hikes had boosted its performance. However, the bank lowered its net interest income guidance amid an increasingly competitive deposit market.
“Interest rates rising so substantially from record lows has been a real shock to the system and many people face much higher borrowing costs – particularly when it comes to mortgages – than they have been used to,” John Moore, senior investment manager at RBC Brewin Dolphin, told Morning Wire
“Inevitably, that will temper credit demand from the likes of Lloyds and Santander, which have large mortgage books and benefit more from a stable to buoyant housing market.”
Lloyds is the UK’s largest mortgage lender, with 16.8 per cent market share as of last year.
The bank reported a bumper profit this morning but said its net interest margin would decline due to competition.
“All eyes will be on NatWest’s update on Friday,” Moore added. “After years of ups and downs, the bank found a degree of stability in its performance and recent stock markets updates were reassuringly dull – with one obvious exception.
The senior investment manager continued: “The bank is much more focused on lending than it was in its heyday, so will likely be more impacted by changes to the mortgage market than it would have been a decade or so ago. But NatWest will be able to offset some of this through its efficiency drive.”
Ashley Webb, UK economist at Capital Economics, expected further weakness in the housing market to weigh on GDP and pull the country closer to a recession “if it isn’t already in one”.