The UK economy is enjoying continued growth, with GDP estimated to have increased by 0.7% in Q2 (source: Office of National Statistics). As the economy remains on target to grow at 2.6% in 2016, the markets are anticipating an interest rates rise in H1 2016.
This expectation is causing a strong rebound of the UK mortgage market, particularly in the remortgage segment. Berkeley Research Group and Nomis Solutions have launched a series of market commentary and insights that will be released at regular intervals throughout the autumn of 2015. Mortgage Book Management: Would Your Business Pass the Retention Challenge? is the first opinion piece of the series discussing three main challenges lenders face.
Mortgage Book Management: Would Your Business Pass the Retention Challenge?
The Illusion of Growth... In 2007, at the mortgage-lending peak, to grow total net lending by £100 required lenders to advance £350. In 2014, to achieve the same net lending growth required £800 of new lending. The resultant inefficiency is increasing lenders’ operational costs notwithstanding automation and other cost reductions.
Growing Future Maturity Risk... Over the same period, the percentage of new loans on fixed-rate products has grown to 90 percent, with intermediaries now the dominant distribution channel. These significant structural shifts are the result of a combination of complex factors including new regulations, increased competition for the most credit-worthy customers, a historically low bank base rate and relatively low levels of new customers entering the market. In a rising rate environment the payment shock effect on future maturities presents a significant maturity risk.
The Retention Challenge... With net interest margins falling and likely to fall further due to intense competition and the entry of new challenger banks to the market, the combination of these trends will lead lenders to turn to back book management and customer-retention strategies.
Lenders need to ask themselves three key questions:
Can you grow your book and offset falls in net interest margin if you need to lend £800 for every £100 of net book growth?
With 90 percent of new customers on fixed-rate mortgages, how do you plan to retain these customers in a rising interest-rate environment, and can you handle the operational peaks?
As the remortgage market returns and intermediary lending continues to grow, how do you plan to deepen relationships with customers?
To address these trends, lenders will need to redefine “what good looks like” for existing customers. This will require more sophisticated retention strategies including customer segmentation and behavioural-based pricing while having due regard to the regulatory obligations to treat customers fairly.
BRG is a leading global strategic advisory and expert consulting firm that is working with Nomis Solutions, the global leader in mortgage segmentation tools, to deliver analytically underpinned portfolio management for lenders, allowing them to optimise back book management and retention strategies. If you would like further information, please contact Keith Green (Kgreen@thinkbrg.com) or Marc Gordon (Marc.Gordon@nomissolutions.com).
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of neither Berkeley Research Group, LLC or its other employees and affiliates, or Nomis Soltions (Europe) Ltd.
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.