The month at a glance

Lending Strategy March 2010

It’s a vale of tears as borrowers and savers join Gordon Brown and Alastair Campbell in a public display of distressFebruary is the month when Valentine’s Day rolls around so it was fitting that our politicians got emotional as those at the top showed us they have - or at least can create the illusion of having - a sensitive side.

Prime Minister Gordon Brown, much maligned in the past for seeming aloof, spoke candidly about his enduring love for his wife and the moment he proposed to her with Piers Morgan on the former Daily Mirror editor’s ITV show Life Stories.

Sidestepping anything of political moment - such as a plan for economic recovery or a strategy on Iraq for example - Labour decided what the public really needed to know was where and when the PM popped the question.

Alastair Campbell, former spin doctor to Tony Blair, also paraded his softer side, choosing BBC1’s Andrew Marr Show as his vehicle.

When asked about the Iraq war inquiry Campbell almost broke down in tears, telling Marr that Blair is a “totally honourable man”. The phrase ’crocodile tears’ was prominent in the national press the next day. A political personality being false? Surely not.

For the mortgage market the month started on a bit of a low with the news that the number of approvals for house purchase fell slightly in December, from 60,045 in November to 59,023.

But Bank of England statistics showed that although approvals fell they were up compared with the average for the previous six months - 55,004.

Remortgage approvals rose to 27,276 from 25,619 in November but remained below the previous six-month average of 28,417.

Net lending to individuals rose by £1.2bn in December while lending secured on dwellings also rose by £1.2bn. Secured lending by banks, excluding the effect of securitisations, went up by £3bn.

Meanwhile, with house prices slowly rising the Centre for Economics and Business Research predicted that the average price will be around 20% higher than today’s level by the end of 2013.

Its forecast is based on an improved mortgage lending outlook, with approvals predicted to reach around 72,000 per month by the end of 2010 compared with today’s level of around 60,000, and to increase to around 90,000 per month by 2013.

Sidestepping anything of political moment - such as a plan for economic recovery for example - Labour clearly decided what the public really needed to know was how the PM popped the question

This is still some way short of pre-credit crunch levels but at least it points to a sustainable growth path for house prices in the medium term.
CEBR’s forecast for interest rates is that they will remain on hold at 0.5% until late 2011.

The rate of property price growth is expected to moderate in 2010 but prices will still be around 6% higher at the end of this year than at the start.

In 2011 house price growth will falter as economic expansion runs up against public sector cutbacks and the associated increases in unemployment.

The February meeting of the Bank’s Monetary Policy Committee offered little in the way of a surprise with regard to interest rates, with the base rate being held at 0.5% for the 11th consecutive month.

But there was a ripple of excitement as the committee said it would park its quantitative easing scheme. The Bank has used up its £200bn budget on buying government bonds in an attempt to boost the supply of money in the economy. In fact, it has spent £24bn so far.

And it was all change over at the Financial Services Authority on February 9 as the regulator announced chief executive officer Hector Sants is to leave the organi- sation this summer after three years in the post.

Sants maintained that when he was appointed he told the board he planned to serve for three years. Board members said they would announce the process for deciding Sants’ successor in due course.

Sants said at the time: “My three years have encompassed the most extraordinary circumstances for a financial regulator and I am very proud of the manner in which the FSA rose to the challenge of dealing with such unprecedented turbulence across global financial markets.

“Moreover, I believe the FSA candidly examined the failings in financial regulation that contributed to the onset of the crisis, learnt lessons and has gone on to reform itself into a much stronger organisation.”

He adds: “The success of any regulatory structure depends on ensuring supervision is carried out by high quality supervisors with sufficient resources and specialist support.”

Sants clearly believes the FSA has made great strides in ensuring that such individuals are in place and says he is sure that after he leaves they will continue to do invaluable work.

Adair Turner, chairman of the FSA, says that Sants has given outstanding service and leadership in the past three years and played a pivotal role in transforming the regulator.

Also in early February, Santander was reported to be considering a floatation of its operations in this country to raise money to fund the Spanish mega-bank’s expansion plans.

Sources told the Financial Times that Santander started discussing a floatation following an initial public offering of its Brazilian subsidiary in October.

The newspaper says a partial Sants - goodbye and thanks for all the rulessale of the lender’s UK operations including the recently rebranded Abbey business and Bradford &; Bingley branches would be one way to raise funds and make up for a weak Spanish market.

Santander, which also owns Alliance & Leicester, is said to be keen to raise enough funds to expand in the UK, which the group has identified as a core growth market.

But while Santander had its sights set on expansion two state-backed banks were being told off for cutting back.

The parliamentary Committee of Public Accounts announced that the Royal Bank of Scotland and Lloyds Banking Group were failing to meet legal commitments to lend to businesses, agreed as a condition of government support.

Under the terms of the Asset Protection Scheme Lloyds group pledged to lend an additional £14bn in the year to February 2010 while RBS committed to an extra £25bn over the same period.

These pledges were agreed between the lenders and the government in return for an indemnity of up to 90% of losses on their bad debts.

The committee said that although the banks were on track to meet their lending pledges at the end of last September, business lending to small and medium-sized firms was likely to fall short.

The Treasury was unable to tell MPs why business lending commitments were not being met, and the committee was unable to judge whether this was down to a lack of demand, a fall in the availability of funds for banks to lend or a combination of factors.

Then Moody’s decided to clamp down on any signs of hope in the market when it warned that UK mortgage lenders - especially building societies - face what it calls a life-threatening fight for retail deposits.

Lenders face a considerable funding challenge as the repayment of Special Liquidity Scheme and Credit Guarantee Scheme monies hoves into view in the next three years.

While the securitisation market is showing signs of life Moody’s says the average cost of such funding remains high and the prospects of a viable recovery in the sector are still uncertain.

The ratings agency says the scarcity of wholesale funds together with the perceived safety of government-owned lenders has increased competition for deposits, leading to margin compression for lenders that do not benefit from government ownership or are too small to compete.

Moody’s cites societies as the main victims. Mutuals saw a net deposit outflow of nearly £8bn in 2009, forcing them to scale back lending and cut costs.

Societies fight back
But it seems societies are not going to take it lying down. It was revealed that they are creating an investment instrument which meets European Union capital rules but also allows them to maintain mutual status.

The Financial Times reported at the time that “mutual ordinary deferred shares would raise capital while being loss-absorbing for regulatory purposes”.

The mutual model is under threat from EU capital rules and societies have been desperately trying to attract retail deposits while competing for wholesale funding.

One society chief executive told the newspaper that the new instruments are expected to be agreed by the FSA shortly.

Then it was announced that inflation rose to 3.5% in January - its highest level since November 2008. This is well above the government’s 2% target which meant Bank governor Mervyn King had to write a letter of explanation to chancellor Alistair Darling.

In his letter King says the effect of short-term factors on inflation should be temporary.

He adds that the MPC has taken unprecedented action to ensure the medium-term outlook for inflation remains consistent with the official target.

Meanwhile, The Co-operative Bank launched a securitisation deal worth £2.5bn backed by prime mortgages from Britannia Building Society.

The lender launched the residential mortgage-backed securities deal under its Silk Road fi- nance programme.

A spokesman for Britannia, which merged with The Co-operative Financial Services last August, said that feedback to the issue had been good. The move followed an RMBS deal from Lloyds group, also worth £2.5bn, at the end of January.