In 2006 Kensington has continued to show solid growth particularly in its newer markets in Ireland and second-charge mortgage lending in the UK.
Credit performance has been encouraging and it is on track to deliver an improved performance in the areas of arrears, losses and overall bad-debt charges.
However, the value from new business lending in the UK first-charge mortgage market has continued to decline as competition has reduced margins and lower income is being received from early redemption charges.
New business completions for Kensington for the eleven months to 31 October 2006 were over £3.7bn, up more than 19 % on the same period in 2005 and the offer pipeline at the end of October 2006 was over £430m, up over 15 % from 12 months ago.
However Kensington Mortgages and Money Partners has been hit by competition in the mortgage market, from both new entrants and existing lenders. Against this background, Kensington has chosen to maintain its prudent lending policies and manage margin reduction in its first-charge business. As a result, new business completions in UK first-charge mortgages for the eleven months to 31 October 2006 have been 7% higher than the same period in 2005.
The direct-to-consumer distribution business, TML, continues to deliver low volumes of mortgage completions to Kensington Mortgages. Over the eleven month period it generated 5% of the total new business completions for the group. TML’s cost-base has been reduced further but the cost of origination, for Kensington, via this distribution channel remains high.
A new managing director was appointed in July 2006 and all aspects of the TML business model are being reviewed including the potential growth opportunities for its broker facility. The level of goodwill held on the group balance-sheet for this business will be reviewed.
Second-charge lending in the UK, through Money Partners and first-charge lending in Ireland through Start Mortgages delivered strong growth over the eleven month period. New business completions for these markets are over 100% ahead of the same period in 2005.
Gross new business margins for the group have remained stable at 3.3% over LIBOR. In UK first-charge lending this has fallen by 0.3% to 2.7% whilst origination costs have remained broadly unchanged, both driven by increased competition. Gross margins in second-charge lending in the UK have reduced to 8.0% in 2006 from 8.3% in 2005. Margins in Start have remained at 3.7% over ECB.
Rates of customer redemptions for UK first-charge mortgages have remained at the lower levels seen since the end of 2004. More customers are choosing to remortgage outside the early redemption charge period and, for the eleven months to 31 October 2006, this has reduced the average income per redemption to 2.8% compared to 4.4% in 2005.
The decrease in new business margins and falling redemption income has reduced the value of new first-charge mortgages and has also led to lower premiums on whole-loan sales during 2H 2006.
Kensington continues to adopt a careful and disciplined approach to lending. Its new business risk profile remained prudent with an average loan-to-value ratio of 77 % across the group.
Following continued success from its collections management strategy, credit performance has been encouraging in a challenging risk environment. The percentage of mortgages more than 90 days in arrears and losses per repossession have fallen modestly over the period and, as a result, the group bad-debt charge for the 2H 2006 is expected to be lower than the charge for 1H 2006.
The mortgage book has continued to grow and as at 31 October 2006 stood at £7.1bn
Kensington continues to operate efficiently and, in 2006, expects to operate at a lower cost per mortgage asset under management than in 2005
The demand for Kensington securitisations continues to be strong and in the first eleven months of FY 2006 Kensington issued £1.65bn of bonds. The overall initial cost of funds increased slightly to 0.33% over LIBOR compared to 0.30% in 2005 due to a higher proportion of second charge mortgages.
The demand for whole loan sales continues to increase and, for the financial year to date, the group has sold portfolios of loans totalling £1bn, including the most recent transaction of £210m in November 2006. Given the capital efficiency of this model, we expect to use loan sales as a growing and complementary funding approach to securitisation.
Kensington expects that it will see lower levels of growth in pre-tax profits in 2007 when compared to the growth seen in 2006.
In response to the competitive challenges facing the core UK businesses, the group is making good progress to reinforce its leading position in the UK market and develop new income streams in attractive new markets.
Kensington Mortgages has successfully launched a pilot of specialist prime first-charge mortgages and has sold specialist prime mortgages in two recent whole loan sales. This incremental, capital efficient income stream is expected to be rolled out more widely in 2007.
Kensington Personal Loans has successfully completed its first second-charge loans, is extending into new intermediary partners and is expected to make a positive contribution to group earnings from 2007.
In November 2006, Kensington increased its equity stake in Money Partners by 37.5% to 57.5% to increase the Group’s share of the income from MPL. The additional equity was purchased at an initial cost of £13.1m with deferred consideration of up to a maximum of £11m due in 2009, depending on performance.
Start Mortgages has accelerated its growth programme and broadened its products and distribution sources. This business is expected to contribute materially to Group earnings growth from 2007 as a result of our 64% stake in the business.
In April 2006, Kensington acquired a minority stake in Bluestep, the only non-conforming lender in Sweden at a cost of £2.7m providing the Group with an entry into this attractive, under-developed market. This business is now operating profitably and showing encouraging growth.