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The future of UK retail lending

13th December 2006
By IB Staff Writer

A less rosy economic climate is expected to lead to a slower growth in the UK retail lending sector in the coming years. A pick-up in new lending is forecast for 2006, but advances will fail to grow at the rapid pace witnessed in recent years as a weaker lending environment, poor retail sales and an uncertain housing market have intervened to restrain the retail lending sector.

'Content The consumer credit market is predicted to grow at a compound annual growth rate (CAGR) of 4.5% from 2006 to 2010 to reach GBP251.5 billion in 2010 compared to the 5.2% CAGR observed over the previous five-year period.

The UK mortgage market continues to exceed expectations, reaching record lending levels in Q3 2006 despite an increase in the base rate. Outstanding performances delivered in the first nine months of the year ensure that the UK mortgage market will reach a new peak in 2006.

Remortgaging delivered mixed results, with new lending amounting to GBP28.7 billion. This compares to GBP31.7 billion realized over the previous quarter. Mortgage lenders' successful retention strategies are driving down the remortgaging market. Gross lending for house purchase and remortgaging is expected to amount to GBP261.8 billion in 2006. However, the mortgage market is likely to experience a gradual slowdown over the next year, as the impact of the recent two successive increases in the base rate in H2 2006 and rising unemployment start to adversely affect demand.

On the whole, gross advances for loans for house purchase and remortgaging will grow at a CAGR of 0.7% from 2006 to 2010 to reach GBP269.7 billion in 2010.

Rising bad debts lead to cautious approaches

Debt levels have become an increasing concern in recent years. Fuelled by various factors, such as a healthily growing economy, low interest rates, low unemployment and a rampant housing market, consumers have been more than willing to borrow and spend. There is now evidence that many households are feeling the pressure of high levels of indebtedness, and bad debt has become of increased concern for lenders. While lenders' unsecured lending portfolio is the most affected, borrowers' difficulties in meeting repayments have started to feed through their secured book.

Undoubtedly, lenders will continue to shift to more stringent lending policies, which will adversely impact upon the growth of the retail lending sector. Moreover, consumers have started to rein in borrowing and spending. With a change in both supply and demand dynamics, the retail lending sector in the UK is set to witness slower growth than previously observed.

Regulatory crackdown will lead pricing structure redesigns

Following the credit card sector, overdrafts and mortgages have become the latest products to be scrutinized by regulators with respect to excessive fees. The fact the regulators are clamping down on excessive fees is, undoubtedly, a huge issue for retail lenders. Indeed, they are likely to lose a significant source of revenue. For instance, over limit and late payment fees accounted for an estimated 11.5% of total credit card industry revenues in 2005. Furthermore, the enforced reduction in default fees will cost the credit card industry an estimated GBP524 million in lost revenue.

Similarly, mortgage exit fees are a considerable income stream for lenders. Indeed, the mortgage market is well known for its intense price-competitiveness. With many lenders competing on low if not headline rates, margins are increasingly being squeezed. This has led to a number of lenders opting to review their fees upward in order to boost revenue while acquiring market share. It is highly likely that the loss in income will force lenders to alter the way in which their products are priced in order to boost revenue.

Greater competition

The retail banking sector in the UK has undergone quite a few changes in recent years. Perhaps one of the most interesting is the emergence of a converging market. Indeed, many in the industry believe that the delineation between the various retail lending products is blurring, as the sector has become more sophisticated and consumers more financially-astute.

There are now a number of hybrid products in the retail lending landscape combining structured repayments with unstructured repayments, secured products with unsecured products and even combining mortgages with current and saving accounts.

While the fact that boundaries of products are blurring is giving rise to new opportunities, it will lead to more competition in the retail lending market. With the trend of a converging market likely to accentuate in the long-term future, lenders will face the daunting prospect of facing competition from a greater range of players.

Operating in such an environment obviously poses various challenges to lenders' models. Various strategic areas are going to be affected, including product design, pricing, marketing, acquisition and retention. Going forward, lenders will face the challenge of how to make their products stand out in an intensively competitive lending market where boundaries are blurring.

Foreign players to play increased role

While domestic consolidation looks less likely, the UK retail banking sector is expected to attract increased interests from foreign players. So far, cross-border consolidation has been slow to take off due to various reasons, such as national regulations, different market structures and cultural barriers. However, EU initiatives towards the creation of a single market for financial services will open the door for more international M&A activities.

Despite the maturation of its retail banking sector, the UK remains attractive, and it is highly probable that it will be impacted in some way. Indeed, with the support of a partner, existing players will be able to benefit from greater resources, new knowledge and the possibility of economies of scale. This, in turn, will impact upon the competitive landscape of the UK retail sector by creating an even more challenging environment.
'End Intelliext

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