The latest updates from Tesco Bank and Nationwide Banking Society have underlined how intense competition has dragged on the margins of British retail banks.
Tesco PLC (LON:TSCO) said on Tuesday its banking division was considering offloading its mortgage portfolio because “challenging market conditions have limited profitable growth opportunities”.
At the same time, Nationwide warned in its full-year results that it expects fierce competition in the mortgage lending market to continue to squeeze its net interest margin (NIM) – the difference between what it earns from lending and what it pays for deposits.
“With transaction levels painfully low, the mortgage market has never been as competitive as it is right now,” said Andrew Montlake, director of the UK-wide mortgage broker, Coreco.
“Margins are being squeezed as rates race to the bottom in a bid for market share and Tesco appear to be saying that the numbers no longer stack up for them.”
Low borrowing costs, a slowdown in the property market and a regulatory crackdown have added pressure on the profit margins of high street banks.
Net interest margins under pressure
First-quarter results from the UK’s four biggest banks – Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC), Royal Bank of Scotland Group PLC (LON:RBS) and HSBC Holdings (LON:HSBA) – all revealed a drop in NIMs.
“Tighter regulation in the wake of the financial crisis closed off some of the more exotic ways banks looked to make money and saw a return to more traditional activities like lending and taking deposits to generate profit,” said AJ Bell investment director Russ Mould.
“This, combined with the emergence of challenger banks and a recent slowdown in the property market, means an increasing number of participants have been scrapping over slices of a diminishing pie.
“Cheaper mortgages are obviously good news for prospective homeowners and in that sense the market is working but the banks’ desperation for new mortgage business needs to be closely monitored.”
'Bad debts could rise'
Mould added that the increase in low-rate mortgages could lead to a rise in bad debts if loans are given to riskier individuals simply to get new business.
That would put pressure of balance sheets and undermine the sector’s renewed commitment to dividends, he said.
Challenger banks have come in droves since the financial crisis, shaking up a sector once dominated by the largest banks.
But tough competition has kicked off a consolidation among these challengers.
The industry could be braced for further consolidation unless competitive pressures ease.