UK MORTGAGE MARKET BECOMES INCREASINGLY COMPETITIVE LEADING TO WIDER DIFFERENCES IN LENDERS' CREDIT WORTH (BUILDING SOCIEITES AND CONVERTED BUILDING SOCIETIES)
London, September 28, 1998 -- In a flat-price housing market currently prevailing in the United Kingdom, the country's mortgage lenders - - both building societies and converted building societies -- face increasing challenges in maintaining both their market share and their margins, said Moody's in a report on UK mortgage lending institutions. Lending margins continued to narrow in 1997 and 1998, the trend being sharpest for those lenders that have preserved a mutual status. On average, the building societies currently offer higher deposits rates and lower mortgage rates than their competitors which had converted to a bank status (plc).
In spite of these challenges, the mortgage lending sector in the United Kingdom remains relatively sound, being characterized among other things by good efficiency indicators (compared to other European financial institutions), and healthy levels of economic capital. Based on these elements, Moody's said that it believes that the sector will continue to be able to absorb further pressures, at least for the medium term.
The report, written by Alan G Reid, a senior credit officer with Moody's in London, notes that all UK mortgage lenders face tough times in the years to come. Building societies (those institutions that have chosen not to convert but to preserve their mutual status) justify the low lending margins offered to home buyers as being the consequence of them not having to pay dividends to shareholders. However, Moody's added that in its opinion, some societies' margin cuts may go beyond these theoretical dividend amounts in their efforts to remain competitive. Moreover, these societies, many of them small-sized, have reduced influence over pricing trends, and are therefore responding to market developments rather than driving them.
For those societies that converted to a bank status (plc), additional challenges come from the need to build a shareholder value-driven strategy in a market characterized by product commoditization. Looking at these structural changes on a case-by-case basis, Moody's noted that some of these ex-building societies - - the best example being Halifax plc -- are well placed to manage them in view of their strong market position.
In the report, Moody's also commented on a weakening property market in the United Kingdom, in which a more uncertain economic outlook starts to affect homeowner confidence. In this context, increased mortgage arrears cannot be excluded, being the result of higher interest rates in 1997 and 1998 and eroding tax relief. One negative consequence of these trends is that, as mortgage lenders vie for market share and attempt to offset narrower margins through increased volume, credit criteria may be loosened.
Moody's rates 21 house lending institutions, as follows:
LENDER NAME LONG TERM SHORT TERM FSR
Abbey National Aa2 P-1 B+
Alliance & Leicester A1 P-1 B
Birmingham Midshires A3 P-2 C
Bradford & Bingley A1 P-1 B
Bristol & West A1 P-1 C
Britannia A2 P-1 C+
Chelsea Baa1 P-2 D+
Cheltenham & Gloucester Aa2 P-1 B
Cheshire Baa1 P-2 D+
Coventry A3 P-2 C
Derbyshire A3 P-2 C
Dunfermline A3 P-2 C
Halifax Aa1 P-1 A
Nationwide A1 P-1 B
Northern Rock A2 P-1 C+
Norwich & Peterborough A3 P-2 C
Portman A2 P-1 C+
Principality A2 P-1 C+
Skipton A3 P-2 C
Woolwich A1 P-1 B
Yorkshire A2 P-1 C+
NOTE TO JOURNALISTS ONLY: For a copy of this Moody's report, please contact Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Beverly Hughes in Sydney (612) 9270 8111, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Lorraine Yee in Hong Kong (852) 2916 1112, Kathryn Kerle in Singapore (65) 333 6321 or Christiana Aguiar in São Paulo (5511) 3043-7186.
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