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Lending in a brave new world

Nigel Stockton, managing director of HBOS Intermediaries in Lloyds Banking Group, talks to John Murray about the future shape of mortgage lending at the newly created superbank

JM:

To start with, it might be helpful to talk a little about yourself and HBOS Intermediaries, given that one of the ideas behind this interview is to explore the integration of HBOS with Lloyds TSB and Cheltenham & Gloucester and where that might take the market.

NS: I started at HBOS in September 2003. I’d been head hunted into corporate partnerships primarily to look after Sainsburys and the AA. Then in March 2004 Grenville Turner put me into Halifax Intermediaries and I did that for the rest of the year. I’ve been responsible for Halifax Intermediaries ever since that time.

I then moved across to become managing director of Birmingham Midshires and took responsibility for the running of the whole business – profit and loss, savings, mortgages, everything.

That was at the beginning of 2005 but in the middle of that year I was given responsibility for The Mortgage Business, Halifax, BM, and Bank of Scotland. It was an interesting time. Michael Bolton left MB, Bill Dudgeon’s team left TMB to join Deutsche Bank and we brought in Nigel Payne and Charles Haresnape.

About a year after that I took on the whole thing. It’s now down to me to make sure that anything to do with the broker proposition works – BDMs, national account managers, national account strategy, sales teams, cross-sales responsibilities and so on.

JM: You started to run HBOS Intermediaries in 2003 so is it fair to say that until last year you had only known a bull market, and the credit crunch and its consequences were never factored into your business strategy?

NS: True, but I lent money from 1990 to 1993 for NatWest in Battersea, when I was responsible for trying to keep a lot of small and medium-sized corporates trading.

I was also lending in the City in 1987 after the stock market crash at that time and I was at the Financial Times in the recession that followed the first dotcom boom. So I have a wealth of experience in downturns. One of the advantages I bring to the table is 16 years’ experience in retail banking.

The speed with which the environment changed caught everybody out. The freezing over of the capital markets in particular meant that any organisation that needed access to funding had to have a serious rethink when it came to their lending strategy.

This clearly included HBOS and that was evidenced in the way we managed our mortgage portfolio. Not only were we prudent but we also managed to maintain one of the widest and deepest portfolios in the market.

JM: HBOS ended up with a five-brand lending strategy which was then rationalised down to four with the demise of TMB last autumn when things began to unravel for the group. Two questions stem from this – how much of a surprise was the takeover by Lloyds TSB and how is it influencing your strategy?

NS: First, it is important to decouple the closure of TMB from the Lloyds TSB takeover. TMB would have closed regardless of the takeover – strategically, this was the right decision as you don’t need two packager brands in the constrained mortgage marketplace in which we are currently operating.

In answer to your second question it was clear that something had to be done to restore confidence. I’m really interested in the Lloyds Banking Group opportunity. We have the chance to build an exciting retail franchise that is sustainable in the long term. JM: Late last year Phil Jenks who recently left HBOS said to me that it had been responsible for more than 50% of lending to the first-time buyer market and that this position was unsustainable. Given the way the FTB market has shrunk, was lending to that sector a burden and where do you go from here?

NS: Jenks was a mentor to me and not surprisingly I agree with him. His point is that HBOS did not get the credit it deserved for the breadth of its range last year. We tried to stay with the builders, the affordable sector and FTBs. Yes, we priced for risk but we tried to keep the market open.

We could never do that on our own and nobody came with us, so the situation was not sustainable.

JM: The new business entity has its work cut out. First, there’s the challenge of integrating systems and rationalising branches and products. And with the government having a 43.4% stake in the business won’t you be expected to return to lending at 2007 levels while passing on every Bank base rate cut to borrowers and paying interest on the bailout cash at 12% to the government?

NS: With a question like that, I need to take each bit in turn.

First, cost control and tight discipline when it comes to cost has been an HBOS strength for the past few years. Nothing changes there – in fact, it’s even more important when operating in a market in which capital is constrained. It is clear that we will look closely at the markets and brands in which we operate but I’m looking forward to meeting talented people from our enlarged business and working out the best way to win.

With regard to lending, nobody is expecting a return to 2007 lending levels. The point that our important shareholder is making is that we have to support the home owner market and that our combined share of 28% of the acquisition market should be supported.

Given that remortgaging is going to be much smaller from now on it is heartening that our FTB/home mover share is strong. And when you add in C&G and Lloyds TSB Scotland we will be well placed to add assets in a controlled fashion, keeping our returns acceptableWhen it comes to base rate cuts, we will try to ensure consumers benefit from the broader economic policy. But remember savers in all of this – we need to continue to build our balance sheet while operating in a low interest rate environment. Not easy.

As for the 12% bailout interest – it’s not for me to comment.

JM: Fair enough. I suppose it is good news for you that Dan Watkins has been confirmed as managing director of mortgages in the new group but it is still early days. Can you tell us anything about your current thinking?

NS: I’ll work with anyone who has good ideas and Watkins certainly falls into that category. We have always worked well together. I succeeded him at BM so I know him well and have a lot of respect for him.

And yes, it is far too early to speculate about the future. I hope I will be a part of it and can contribute during what will be an exciting few years.

JM: The integration raises many questions. For a start, C&G has a huge branch network legacy which leaves many issues to be resolved. To what extent are you going to sweat your assets and drive business through your branches rather than via the intermediary route?

NS: Lloyds Banking Group is a relationship banker and I expect the strategy to be to ensure we get as much as possible out of the branch network. It is a sunk cost and it’s right to exploit this. You see that with HSBC, and it was no different with HBOS in 2008.

That said, the majority of consumers prefer to get advice and also like the choice available through brokers. So as long as the returns make sense, I expect the new group to build its relationships with consumers through brokers and that this will continue to be an important channel for us.

JM: Looking at your intermediary lending strategy, it appears that you’re on the brink of favouring a select number of distribution routes including certain networks and the likes of Premier Mortgage Service rather than wanting to deal with directly authorised firms.

Having more control over lending volume is obviously a plus but do you really see restricting your inflow of business as fair to brokers and consumers, especially now the government has a big stake in your business?

NS: The fact is that we are the biggest lender so we will deal with the broadest distribution. We do that now and will continue to do so.

Equally, broker consolidation is a given in 2009. I expect the top six distributors to take some 40% of the mortgage market.

Having said that, it’s only right that we should look at our distributor strategy and think through where changes may be needed.

You’re right that we have restricted the number of clubs we recognise. This is a small change that was overdue. Directly authorised firms have plenty of routes available to do business with us, not just going through PMS which remains our biggest distributor.

JM: Picking up on broker consolidation, has this affected the percentage of business coming to you through the in-termediary channel?

NS: In percentage terms, it hasn’t really changed. Depending on the day of the week it’s somewhere between 65% and 80% through intermediaries and the remainder comes through branches. Even at the height of the so-called dual pricing controversy the proportions had not changed.

JM: But volumes had come down?

NS: Yes of course, but the percentages haven’t really moved. There’s a piece of research by the Association of Independent Financial Advisers that shows brokers did more mortgage business at that time.

I’ve said it before and I’ll say it again – the issue about the direct channel is that you’ve got fixed capacity. It’s absolutely right that lending banks such as Lloyds Banking Group optimise the direct channel. If we are to cater for between 20% and 30% of the market there’s no way we can manage without the help of brokers.

JM: I can see that but given the depletion we are seeing in the sector, will intermediaries be able to effectively respond if and when there is an upturn in the market?

NS: My view is that intermediaries will be able to respond a darned sight quicker than the fixed capacity of the branch channel.

Business volumes are less than half of what they were two years ago and brokers’ income is less than half of what it was two years ago from core mortgage products, so it’s little surprise that firms are running into difficulty.

Coupled with the slow Q4 2008 which will manifest itself in poor payouts in March and April of 2009, by the middle of this year we will have a better idea of the survivors and winners.

Let’s be under no illusions – IFAs and mortgage intermediaries in particular are facing probably the most difficult marketplace since I sold my first mortgage in 1987.

JM: So it’s not possible to end this interview on a positive note?

NS: On the contrary. By 2011/12 we could end up with a broker shortage and professionals who left the market in 2008/09 may decide the time is right to come back in.

I wouldn’t surprised if, after some difficult years, the number of intermediaries grows in 2012. And if the mortgage market comes back to any semblance of normality the sector could expand relatively quickly.

You have to remember that we haven’t yet seen a business case or strategy in which brokers don’t take a decent proportion – or even the majority of – our lending.

Nigel Stockton – personal profile

Position: Managing director of HBOS Intermediaries in Lloyds Banking Group.

Always wanted to be a lender? I started at NatWest in 1987 and apart from four years in the media, have worked in banking ever since then. I am comfortable being a lender.

Likes: Golf, food and drink, music, film and film posters – and I’m a bit of a runner now too, I guess.

Hates: People who take credit for others’ work and non-noise-reducing headphones for iPods.

Relaxation: See Likes.

Favourite food/restaurant: Murano, Gordon Ramsay’s restaurant in Mayfair, although in the present climate I’m not sure how many times I’ll get to go.

Current bedside book: Galilee by Clive Barker for relaxation and I’ve just finished Richard Attenborough’s autobiography. I tend to alternate between fiction and non-fiction. Gotta read.

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