UK Mortgage-Focused Banks May Face Funding Pressure
An anticipated slowdown in the UK housing market could put more funding pressure on mortgage-focused UK banks, Standard & Poor’s Ratings Services says in a new Commentary.
While funding conditions for large diversified banks have generally improved in recent weeks, this is less evident for the more mortgage-focused banks with above-average dependence on wholesale markets, S&P says.
The principal factors are as follows.
- The current absence of RMBS as a funding source puts additional strain on banks’ own funding requirements, enforcing a slowdown in lending growth.
- A growing view that UK house prices are around a peak is also contributing toward a reduced appetite for new lending.
- Banks are likely to structurally increase their liquidity over the medium term, imposing a further check on growth capacity.
- Higher wholesale funding costs and increased competition for deposits may contribute to margin pressure.
- Borrowers’ debt servicing is looking increasingly stretched at a time when public confidence in financial services has been shaken by the run on Northern Rock and the all-important financial services industry may be reducing headcount and bonuses.
- Subprime customers in particular face a payment shock, which will likely trigger further rises in delinquencies and defaults.
These factors aren’t merely a UK phenomenon, but S&P’s analysis suggests that the effects could be strongest there. This is mainly because the mortgage market is so big and important for UK banks and the economy at large, and because the RMBS market is of such relative significance in the UK.
Currently, we consider that the above factors are likely to lead to a modest deterioration in the dynamic of the U.K. banking sector.
Large diversified banks–for example, Barclays, HSBC Holdings and The Royal Bank of Scotland Group–are likely to be less exposed, although they could well experience weakness in the performance of capital-market operations, S&P says.
Smaller banks with greater focus on the UK, particularly the specialist mortgage sectors (self certified, buy to let, and subprime), which have made more extensive use of wholesale funding, are likely to be proportionately more affected. These are, for example, Bradford & Bingley and Alliance & Leicester.
“These business models may come under pressure, although we still believe there remains a role for these types of lending,” S&P says. “Such structural issues are longstanding and we believe that the resultant relative sensitivity to a weaker market is adequately captured by our lower existing ratings on these banks.”
The full report Northern Rock And The Liquidity Squeeze: Implications For U.K. Banks In The Longer Term, is available for purchase here.
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