Lenders that are feeling the pinch may have to merge, says Moody's
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Vulnerable lenders such as New-castle Building Society and West Bromwich Building Society may be forced to merge due to market pressure, says Moody’s.
Its Outlook For UK Mortgage Lenders - Key Credit Themes In 2010 And Beyond report states that the two mutuals are vulnerable after rapid expansions and overexposure to poor quality assets.
The ratings agency expects to see substantial losses at West Brom and says Newcastle is in danger of being eroded by aggressive players.
But it adds: “We also note that these two societies have taken steps through distressed exchanges of various hybrid instruments to shore up their core capital.”
A spokesman for West Brom says: “We believe Moody’s has failed to acknowledge the society’s im-proving performance as evidenced by our 2010 results and the fact that we remain well capitalised.”
Moody’s report says small lenders are overburdened after years of rapid expansion and those with more economies of scale are better placed to cope with problems.
It lists lenders according to stability, with Santander, Nationwide and The Co-operative Bank being the strongest.
It says Norwich and Peter-borough, Principality and Notting-ham building societies are at a disadvantage, having high asset quality but low margins.
Marjan Riggi, vice-president and senior credit officer at Moody’s, says: “Mid-sized societies with a niche franchise, a strong local deposit base, solid underwriting skills or a more diversified revenue base are more resilient.”
Moody’s says the housing sector also faces uncertainty over prices, interest rates and unemployment.
Riggi adds: “We believe the next few quarters will be characterised by a number of credit themes that will culminate in sustained pressure on the sector’s profitability.”
She says the agency will monitor to what extent lenders compensate for their margin pressure with strategies that may unfavourably tilt the risk-return balance.
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