Hearing an announcement that another company has merged or been taken over is less and less surprising these days as companies join forces in the industry. While the news that Nationwide and Portman Building Societies are merging was unexpected for some, others have predicted an increasing number of lenders to move in the same direction and consolidate their assets. Premier Mortgage Service has suggested that only 15 or 20 lenders will be left in the marketplace in five years time; a dramatic reduction from the 115 authorised lenders of today. So could there really be such a downturn in lender numbers?
Mass consolidation ahead?
John Malone, managing director of Premier Mortgage Service, firmly believes the market will face a tough time over the next few years and consolidation on a mass scale is inevitable. He says: “We will start to see a lot of small lenders finding it difficult to compete. The mainstream and non-conforming markets will be controlled by the ‘super groups’, such as HSBC or Lloyd’s TSB, which have several brands. Technology will be crucial and will drive business models. The super groups will have the resources and capability to implement it and that will be a key feature.”
But not everyone sees such a shift happening. Sue Anderson, head of external affairs at the Council of Mortgage Lenders (CML), says: “Much more significant consolidation has been predicted than has emerged. I have a strong suspicion that the next five years will be the same. I’m sure we will see mergers and consolidation activity, but to get down to such numbers would be difficult and we do not anticipate such a dramatic reduction.”
Mehrdad Yousefi, head of intermediary at Alliance & Leicester, believes that while numbers won’t reduce so quickly, consolidation has got to be on the agenda. “I think there will be a reducing number of banks and building societies, but it will be driven by competition in the prime market and falling profitability. It also depends on the regulator. I don’t think the Financial Services Authority (FSA) will allow someone like HBOS to have a market share of 25 per cent or more.
“It might go to 15 or 20 lenders if you take a 20-year view. But unless the regulatory landscape changes and the government starts to encourage consolidation, I don’t think it will be sooner that this.”
Yousefi adds that the effect on the consumer depends on who consolidates with whom. “Anything that results in less choice will result in mortgage prices being higher. But we have a very vigilant regulator in the FSA and it won’t allow prices to increase too much.”
Finding a niche
Paul Darwin, head of intermediary sales at Skipton Building Society, comments that small lenders will always have a place as they find niche markets to work in. “While technology is a key driver and there are certainly benefits of being first to market, smaller lenders can be more flexible and pick up aspects of technology to make it a niche. It will be super lenders that cover the whole of market.”
Malone adds that a large part of the consolidation could come from the introduction of retention schemes. “If all the schemes come in that we think will, there won’t be all the gross business that there is now. Lenders are looking to introduce longevity, where more and more borrowers remain with lenders for longer. Lenders can’t afford for borrowers to change mortgages every three years if they are lending in a loss-leading way. Customers will have to get used to paying a slightly higher product rate but getting the benefits. It means there will be less opportunity for business to be renewed.”
Working realistically
Darwin adds lenders have to move to more realistic and profitable financial products. He says: “Lenders can’t work on the basis of non-profitability. There has to be a sense of realism that there’s got to be a financial model that is self-supporting.”
However, Anderson says that retaining customers is seen as the holy grail for financial institutions and is an issue all lenders are grappling with. “I’m sceptical that in reality we’ll reach that perfect market nirvana of customer retention. Lenders constantly refine their offers and in a competitive market there’s no reason they wouldn’t continue to do that. The principle is right in that there will more retention. But we’re a significant way off from having that kind of market and I’m not sure it’s desirable. Different lenders offer niches that may be entirely suitable for consumers at different stages of their life.”
Whether the mortgage lending market moves in the same way that the life and pensions market did during the 80s as Malone predicts, we will have to wait and see. As Yousefi points out: “Never say never. Nothing is certain.”
