The recent article published in the Financial Times (12th November 2015) describes the high level of mortgage redemptions in the third quarter of this year at the Co-op bank. Possibly an unfortunate headline for the bank as the market experiences its highest level of mortgage churn since the start of the financial crisis.
This level of churn is not unique to Co-op of course. Banks across the UK are experiencing very different trends than 2 years ago and I would argue, worrying trends as we near 2016.
In 2007, at the mortgage-lending peak, to grow total net lending by £100 required lenders to advance £350. In 2014, banks would have needed at least £850 of new lending to achieve the same net lending growth (full research available here).
Over the past two years, all banks have seen an increase in the attrition of mortgage customers which has fuelled a price war as banks try to replenish their lost back book. Some have suffered more than others as they try to regain profitability but the trend is not set to go away.
So called "liberated switchers" have re-entered the market as LTVs reduce because of the 25% property value increase seen in the uk since the start of 2013. The flurry of activity has of course spurred the increase of broker mortgages with almost three quarters of all first time buyers now choosing to direct their business through the broker channel. In fact, broker activity has increased by almost 40 % across all mortgage customers (FTBs and existing).
While funding costs for banks have reduced in the last two years, driven by lower deposit costs, the margin on average mortgages has fallen dramatically. Margin over BoE base rate has decreased by 58% in two years with the average mortgage customer rate falling by up to 50%. Sure, these have been offset somewhat by funding costs, but the outlook for base rate rises in 2016 will undoubtedly increase the level of customer churn and by default, squeeze the real margin on mortgages as banks continue to fight for volume share.
We can also expect an increase in deposit activity in 2016 as customers look to regain some return from their savings. New cash savings regulations will increase the competition on liquid deposits while the end of the Funding for Lending Scheme will reduce the volume of "cheap funding" in the market. With this, banks will be seeking to bolster deposits in light of growing asset funding demands. Potentially the era of low funding costs will start to disappear and mortgage businesses will feel real pressure.
The article on the outflows of mortgages refers to these being "higher than expected", but the use of more predictive customer analytics in banks is reducing this level of the "unexpected". While behaviours change and markets move quickly, managing the business using the type of data analytics that has been used in other industries for many years will allow banks to become faster to react, more accurate in predictions and more proactive in strategies.
Nomis' use of data analytics and market level information in client banks has proven the positive impact of these strategies. We have seen our client banks significantly improve retention of maturing customers, acquisition of profitable and lifelong customers and improvement in net margins across the board.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.