Thursday 25 February 2016 12:05 am

Challenger banks: Moody’s says smaller lenders are poised to compete with Britain’s big banks for a share of the UK mortgage market

British challenger banks are poised to compete with larger lenders for a share of the mortgage market, Moody’s Investors Service has said.

In a new report out today, Moody’s said challengers are likely to use securitisation to compete for a bigger share of the UK mortgage market.

“Increasing competition in the mortgage market driven by the return of the incumbent banks and the gradual maturity of the Bank of England’s Funding for Lending Scheme will add pressure on the banking sector's net interest margins. As a result, lenders with a small deposit base or growing at a very fast rate, such as some challenger banks, could consider alternative funding options, such as securitisation, to fund new loan origination,” said Annabel Schaafsma, a managing director at Moody’s.

But Ian Gordon, head of banks research at Investec, told City A.M. that while “we might see” additional use of securitisation by the challengers, alternative funding would be “incrementally helpful” and was “not likely to be transformational”.

In the report, Moody’s cited figures on market share of mortgage lending in 2014, showing that Lloyds was the industry leader, controlling 24 per cent of the market share, followed by Santander UK with 13 per cent, Nationwide with 12 per cent, and Barclays and Royal Bank of Scotland (RBS) with 10 and eight per cent, respectively.

Secure Trust Bank chief executive Paul Lynam, who chairs the British Bankers Association (BBA) challenger banks panel, told City A.M. the data “easily” shows why chancellor George Osborne has “previously referred to UK banking as an oligopoly” and that while alternative funding would help challengers, they will only be able to fairly compete if the government implements major reforms.

“Oligopolies thrive due to high barriers to entry,” Lynam said. “In the mortgage market these barriers are the disproportionately higher capital requirements and funding costs faced by the challenger and smaller banks.”

“If via initiatives like the CMA review, government creates a truly level competitive playing field, those equitable conditions and the increasing access to the securitisation market will help the challenger banks to compete more effectively with those referred to by Osborne as oligopolists,” Lynam added.