Is Bob Diamond — currently under the kosh at the UK Treasury Select Committee at pixel time — getting the wrong end of the stick? At least in terms of Barclays’ lending habits?
Or, more importantly, are the UK government’s own policies getting in the way of a UK bank lending revival — in terms of new mortgages, anyway?
UBS bank analysts John-Paul Crutchley and Alastair Ryan suggest so in their latest note on UK mortgage lending. In it they split Britain’s banks into three categories:
- Growers - HSBC, RBS, Barclays and Santander UK
- Shrinkers – Building societies, nationalised or former UK lenders.
- SLS repayers – Lloyds and some building societies.
The SLS is the Special Liquidity Scheme started back in 2008 by the Bank of England. It essentially lent banks (liquid) nine-month Treasury bills against a set of eligible collateral — though most of the stuff pledged was own-name RMBS.
The scheme is due to expire at the end of 2012 but banks are already rushing to pay-back the collateral they took from it (as of October, some some £57bn of the £185bn of Treasury bills initially advanced had already been repaid).
First though, those mortgage-lending trends:
Ignore, for a second, the rather amazing stat that the ‘grower’ banks made a similar amount of gross lending available in the 18 months to June 2010 as they did in the heady pre-financial crisis 18-months to June 2007. Focus instead, on one of the SLS repayers — Lloyds — which, UBS says, is the UK’s biggest mortgage bank.
Here’s what UBS says:
Our analysis suggests that Lloyds’ apparent lack of appetite in the new mortgage market is a reflection of the fact that it is focused on repaying the SLS and similar facilities as fast as possible, at the Bank of England’s behest. From Lloyds’ perspective, this seems entirely rational, given the desire of the Bank of England to be repaid and the desire on the part of Lloyds to remove the perception that it is reliant upon government-supported funding. However, this obviously means that the funding capacity of Lloyds is dedicated to SLS repayment rather than new mortgage lending. For example, we estimate that Lloyds has raised c.£40bn in the term funding market YTD, twice its original target, but all the difference is being put into the SLS repayment (on our analysis).
According to UBS then mortgage lending contraction at shrinker banks is basically cancelling out the stuff being done at growing banks, leaving the UK with mortgage credit growth of about 1 per cent per year.
To remedy the problem, they suggest focusing on Lloyds and the SLS:
… the government-imposed timetable upon Lloyds to repay the SLS and related funding is constraining Lloyds’ desire to increase its exposure to mortgages. While Lloyds has been the largest lender into the UK market on a gross basis over the last 12 months, its overall level of mortgages outstanding has contracted modestly.
In our view, the fastest way of increasing the availability of credit to the UK mortgage market would be to make conditions more comfortable for the largest UK mortgage lender to lend. Unfortunately, the rhetoric from the banking commission – raising the possibility of reversing the acquisition of HBOS and accelerating the timetable required to extricate the group from government/central bank supported funding – are driving the opposite outcome, in our view.
Raising Lloyds’ net lending contribution to c.£12bn over the 18-month reference period we are using above, equivalent to c.£8bn of annualised net lending, we estimate would have added c.150bp to the total growth of UK mortgages –giving a growth rate of just over 2.5%, broadly equivalent to the trend rate of nominal growth in the UK economy.
It’s a rather pro-Lloyds view of course (and UBS do have a buy on the bank), but it also rather hits home some of the difficulties in reviving crisis-scarred banks.
The UK government wants banks to start lending en masse — but prudently, while boosting capital ratios and weaning themselves off central bank funding.
Not an easy feat.
Related links:
The mortgage finance squeeze – FT Alphaville
So long SLS, and thanks for all the liquidity - FT Alphaville