HBOS plays it safe as risk attitudes shift
FOUR months ago HBOS got a right kicking for misreading the mortgage market. The “calculated” bid to bring some stability to a crazy market backfired and the bank’s share of new lending dived to 8% in the first six months, from 17% a year before. For a previously sure-footed bank, it was a worrying stumble.
Since then the market has been rocked by the spectacular near-collapse of Northern Rock, a brutal liquidity crunch and clear evidence that homeowners will pay more for their mortgages.
At first glance, the fall of Northern Rock – which was killing the competition and grabbed 19% of net new mortgages in the first half – should present HBOS with a great opportunity to hoover up market share.
But the game has moved on. Last week, HBOS chief executive Andy Hornby revealed that Britain’s biggest mortgage lender was now making a concerted attempt to jack up its margins.
HBOS’s annual target of grabbing 15%-20% of new lending has been scrapped after three years. Instead, Hornby and his crew will judge the trade-off between volume and margins month by month.
It’s tempting to think this is another attempt to get some stability by a different route. Another view is that HBOS is shrewdly ensuring that in future it will not be a hostage to strict targets.
For Hornby, it is all about a “sea change” in attitudes to risk. Mortgage competition will still be fierce, but pricing will be more sensible.
That suits HBOS. The credit crunch has more or less played into its hands – Northern Rock has been neutralised, while other lenders’ use of wholesale funding has been scaled back. HBOS may not chase market share, but it will make gains.
Others argue that it is not the first to adopt this high-margin versus volume trade-off – Abbey executives claim they have been doing this for more than a year.
HBOS is a big savings player but it, too, tapped the wholesale markets for funds. Even so, it has been reducing the risks – just 16% of this funding now matures in one month against 40% five years ago. Hornby observes that the past few weeks have proved conclusively that 2007 “was not a year to grow one’s mortgage book too aggressively”.
He is right, but his comment is also a bit smug. HBOS may have realised that the end of 2007 and 2008 were going to get more difficult, but it could not have predicted the scale.
There are headwinds. HBOS benefited from big gains linked to private equity at the half year. These will shrink.
HBOS may well get its wish for a more stable market. After a big sell-off amid the credit crunch, bank shares are on the turn. And with markets moving in its favour, HBOS (948p) looks good value.
DebtMatters
LAST week was a bloodbath for shares in debt-adviser groups. DebtMatters put itself on the block after it warned that competition and the hardening attitude of banks to individual voluntary arrangements (IVAs) had in effect scuppered its business model.
DebtMatters shares dived 73% on Monday. Shares in the rival Accuma plummeted 23%, those of market leader Debt Free Direct 29% and Debts.co.uk’s stock fell 21%. Debt Free Direct shares are down 65% from a year ago. Accuma has lost over 92%.
Debt Free Direct tried to put on a brave face, arguing it did not share concerns that IVAs were becoming unprofitable.
IVAs, where borrowers can write off a substantial portion of debt in return for set repayments, have boomed in recent years. They do have a role, but right now the industry looks decidedly shaky.
Some banks have refused to use IVAs. The Insolvency Exchange has made big changes to the criteria used by practitioners when they recommend IVAs. The British Bankers’ Association is screwing down the costs that IVA providers can charge.
There are similarities with the showdown a few years ago between accident-management groups and insurers. The IVA industry will be hoping that it, too, can reach a compromise, regroup and rebuild, but it will be a long slog.
I have warned before that shares in debt advisers are hugely risky. Last week underlined that the IVA market is toxic. Any investor foolish enough to have hung on should get out swiftly.
Source: times.co.uk
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