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Mortgage price war starts to hit big banks

The ongoing mortgage price war that has hurt lender profits and pushed the average mortgage rate to a historic low — causing some smaller players to drop out of the market — has started to hit the big banks.

Sustained pressure on mortgage pricing, due to a competitive mortgage space which has seen lenders cut rates in a ‘race to the bottom’, has dwindled lenders’ profits in recent years.

Larger banks have so far been more resilient than smaller players mainly due to the economies of scale at which they operate.

Last year FTAdviser reported the mortgage price war had slashed lenders’ profits in the first half of the year — with some building societies seeing their income drop by up to 10 per cent — but this had not affected larger retail banks to the same extent.

But Lloyds Banking Group’s full results, published today (February 20), suggest the trend was starting to chip away at the big banks too.

The group reported its net interest income had dropped 3 per cent due to a 5 basis point reduction in its net interest margin — the difference between the interest it pays in funds and the interest it makes from lending — over the course of 2019.

Lloyds put the drop down to “continued pressure on mortgages margin”, which was only partly offset by its lower funding costs.

It also reported a net interest margin of 2.88 per cent for 2019, warning this could drop to 2.75 per cent over the next year as well as an expected return on tangible equity of 12 – 13 per cent for 2020, compared with this year’s 14.8 per cent.

The group’s chief executive, António Horta-Osório, said: “In 2019 the group has continued to deliver for customers while making significant strategic progress and delivering a solid financial performance in a challenging external market.

“Given our clear UK focus, our performance is inextricably linked to the health of the UK economy. During 2019, UK economic performance has remained resilient in the face of significant political and economic uncertainty, supported by record employment, low interest rates and rising real wages.

“Although uncertainty remains given the ongoing negotiation of international trade agreements, there is now a clearer sense of direction and we remain well placed to help Britain prosper, support our customers and deliver strong and sustainable returns for shareholders.”

By Imogen Tew

Source: FT Adviser