Some lenders mask the true riskiness of their mortgage books by the different ways they work out average LTV ratios, according to Moody’s.
The rating agency says the system used by Lloyds Bank and Santander gives lower average LTVs than the one used by firms like Nationwide, HSBC, RBS and Barclays.
Moody’s says the transaction value weighted approach used by Lloyds and Santander therefore makes their books “appear less risky than that of peers” using the rival loan balance weighted approach.
Moody’s vice president – senior credit officer Michael Eberhardt says: ” Lloyds Bank and Santander UK reported year-end 2016 average LTV ratios of 44 per cent and 39 per cent respectively using the transaction value weighted approach, significantly below their peers.
“However, their LTVs would rise in line with their UK peers if calculated under the loan balance based approach used by most of the peer group.”
The rating agency says the difference between the two reporting systems is “an important consideration” as UK housing affordability becomes increasingly stretched.
The transaction value weighted approach defines average LTV as total loans and advances as a percentage of the total indexed collateral of these loans and advances.
The alternative loan balance works out average LTVs based upon individual loan amounts rather than the transaction or collateral value amount.
Moody’s says the latter “provides a more accurate picture of the distribution and concentration of LTVs and is more representative of credit quality”.