Banks squeeze societies out of mortgage market

Nia Williams

September 21, 2010

The top six banks have increased their share of gross lending to 85%, leaving building societies struggling to keep up, according to Datamonitor.

Research from the independent market analyst has found some positive signs of growth in the mortgage market. However due to the government bailout brought in at the peak of the financial crisis, the competitive dynamics have changed.

The bailout has given banks access to cheaper borrowing, providing them with a competitive advantage over building societies.

Daoud Fakhri, analyst at Datamonitor, said: “Most people would have expected building societies to emerge from the credit crisis in a stronger position than banks. It seems that although they didn’t engage in high-risk lending which contributed to the banking crisis they have still suffered.

“Banks have been able to borrow from the state at advantageous rates which building societies haven’t had access to. As building societies didn’t qualify for this they’ve been forced to rely almost purely on retail deposits for funding, which they’ve had to pay 2-3% over the base rate for. As a result it has been incredibly difficult for building societies to compete with banks for mortgage business as they’ve been forced to charge more.”

Outstanding mortgage balances grew by £145.6 billion for banks (25%) but it shrank by more than £18 billion (9%) for building societies. Low savings rates, which make it less attractive to save, have also hit building societies.

Due to more favourable rates available to banks they’re also stealing savings market share from building societies. Banks increased their market share from 75% in 2008 to 78% in 2009 and building societies reduced their share from 21% to 18%. This has squeezed profits harder and made it even more difficult for building societies to offer competitive rates on mortgages.

Fakhri said: “Banks are able to cash in on their competitive advantage over building societies and as a result they are turning a corner and starting to show signs of returning to financial health.

“Ultimately this is good news for the mortgage industry as it means there is greater confidence and an increased level of lending. Banks are in a strong position and will continue to increase their dominance of the market. However, the fact that this is leaving building societies struggling will lead to less competition as banks continue to gain market share.

“We will see more consolidations and building societies will continue to disappear from the industry. In the long term, consumers will suffer as with less competition in the market, banks will feel less pressure so as a result there may be fewer ‘good deals’ available.”

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