The advent of sub-prime lending began in the US during the early 1990s. As the mainstream lending market became increasingly competitive and saturated, lenders began to look to as-of-yet unexplored niche markets that would give them higher profit margins and a greater pool of customers. With US sub-prime lenders expanding into the UK, and because developments in the UK retail banking market tend to follow that of the US, the UK has since become a highly developed sub-prime lending market, with Canada and Australia going in the same direction as well.
Sup-prime lending is developing gradually in many Western European markets
Sub-prime lending is gradually gaining momentum in many Western European markets. Just as sub-prime lending in the UK followed the US, so Western Europe is slowly following the UK. Many countries have significantly deregulated their financial markets, which make a more competitive and sophisticated lending market possible. For example, Ireland is fast becoming a more competitive sub-prime lending market.
Yet most sub-prime lending markets remain small, and as such, pose opportunities to lenders looking to get involved. In fact, a number of lenders have set up operations, but Datamonitor expects many of these markets to become significantly bigger over the next decade.
Caution required
Notwithstanding the current difficulties in the US sub-prime mortgage market, lenders remain interested in other opportunities in sub-prime lending markets around the world. Though bad sub-prime loans cut its 2006 second half profit in North America by 87%, HSBC still plans to increase lending to high-risk borrowers in Latin America. Moreover, UK lenders have so far not shied away from this sector; Nationwide recently announced that its subsidiary UCB Home Loans will be entering the UK sub-prime mortgage market.
Yet in order to be successful, lenders should study the US as an example of which mistakes not to make, such as easing lending criteria too much or going after market share. Indeed, lenders should always bear in mind that sub-prime lending is a more risky enterprise than mainstream lending, even in the midst of a favourable economic cycle.
The future holds significant potential
The development of sub-prime lending is linked to a competitive and often times a saturated mainstream lending market. Yet there are a number of other factors that also have to be weighed into the equation. A country needs to have a large enough sub-prime population, the right regulatory climate, enough information available by which lenders can make their risk decisions, as well as favorable distribution channels, among others.
Sub-prime lending is held back in Italy for example, because of its weak legal system (in that repossessions take years to complete) and its interest rates that are capped by the Government, which are often too low to allow for lenders to undertake the necessary risk involved in sub-prime lending. Meanwhile in Spain, these characteristics do not inhibit lenders.
Taking such characteristics into account, Datamonitor believes a number of countries in Western Europe pose particular potential to sub-prime lenders and are likely to see increasing competition within this sector over the next decade. For instance, Ireland is fast becoming a more competitive sub-prime lending market, with a number of lenders (and UK lenders) in the market, including CitiFinancial, HFC Bank, Start Mortgages (a subsidiary of UK group Kensington), and GE Money. Moreover, investment banks are entering the market, as well as the announcements that mainstream lenders IIB and Permanent TSB will also become involved. 'End Intelliext
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