Standard Life Bank: profits before market share in mortgages

21st April 2006
By Paul Marsh

Standard Life Bank has recorded a significant increase in full year pre-tax profit.

Standard Life's internet banking arm made pre-tax profits of GBP23.9 million in 2005 compared to GBP8.1 million a year earlier. Although it did succeed in modestly expanding its mortgage book, Standard's performance reflects the merits of its focus on profitable business over market share. In a slower mortgage market, where bad debt is a growing problem, Standard provides a lesson for others.

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The increase in profits for Standard Life Bank in 2005 was coupled with a rise of 4% in the bank's mortgages under management. This compared favorably to a 1% rise in the mortgage market as a whole in 2005. However, gross lending fell by GBP1 billion in 2005, which, while reflecting a more competitive market, was a larger fall than that seen in the market overall.

In recent years, during which the housing market boomed and the mortgage market was expanding at great speed, many lenders' strategies were focused on acquiring market share. While profitability of course remained important, providers were prepared to sacrifice short-term profitability in order to increase market share, which they hoped would pay off down the line in terms of cross-sales and/or customer retention.

However, the UK mortgage market is no longer what it was - times have changed. Lenders now have to compete in a smaller market. Moreover, profit margins are exceedingly low and bad debts are a considerable concern for mortgage companies. Indeed, the increase in arrears, although not at a level of real danger, is likely to result in a greater proportion of lenders adopting a more cautious and conservative lending approach, opting to concentrate on safer, proven profitable sectors of the mortgage market rather than going after market volume.

Furthermore, in the current economic climate, a large number of lenders have stated that they have adjusted their lending criteria to guard against the possibility that bad debts will increase. As such, it is expected that the next few years will be characterized by mortgage providers looking more at profitability and less at acquiring market share.
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