Some questions will only be answered in the fullness of time, but the dust is beginning to settle after the initial flurry of activity and lenders are no doubt wondering what kind of pitch is left behind to play on. How has Brexit interfered, if indeed it has interfered at all?
The most apparent movement has come from the Bank of England which recently cut interest rates and is signalling that these may fall further. For lenders that means margins are likely to be cut as competition for good quality business increases. In recent years competition has been intensifying with traditional lenders finding themselves pitted against challenger banks, specialist lenders and alternative finance providers for various sections of the market. The question now is whether economic headwinds will make this environment even more challenging.
Considerations for lenders
If the economy stalls there are macro factors all lenders will need to consider. Firstly, if consumer and corporate confidence recedes, demand for credit will reduce and, as a result, aggregate loan origination will fall. Equally, in this scenario loan arrears will increase as borrower’s incomes fall and some will not have the necessary headroom to meet repayment obligations. Add to this any fall in UK house prices and that changes views on LTVs and the realisable value of security. Time will tell if such a bearish picture will emerge but if it does then it will negatively impact originations and the fundamental dynamics of existing lender portfolios.
The dual challenge for lenders is how to keep originating without taking more credit risk and how to manage portfolios where borrower affordability may become stressed. We could see new battle lines being drawn when it comes to originations.
As witnessed since 2008/09 the tightening of criteria of some lenders from certain sectors creates opportunities for others. As a result, a customer-centric approach and better market information is more crucial than ever before. Do lenders understand customers well enough to meet their needs appropriately and efficiently, or to identify when they are starting to slip into arrears or becoming stressed? If the answer is no then they may have a problem. Not only does it make it more likely they will struggle on origination they will also miss opportunities for refinancing.
With lower rates there is a greater opportunity for refinancing. Only with the systems and processes in place to accurately gather the right kind of intelligence will lenders be able to identify the right kind of customers to offer these opportunities to and not lose out to competitors.
On the other side of the coin, if the economic picture worsens, the need for managing arrears increases. The compliance challenges remain, and with increasing regulatory focus on treatment of vulnerable customers and use of pre-impairment indicators, the preparedness of lenders will be tested as volumes rise.
Do lenders have the capacity, resource, technology and processes internally to do this effectively and efficiently? Squeezed margins inevitably mean that any successful business needs streamlined but efficient processes. For some outsourcing non-core functions to focus on what they do best – namely market understanding, underwriting, pricing and credit risk – will be the most sensible course of action.
The pitch may not have changed dramatically but we are still playing the same sport and lenders need to revisit their tactics to stay ahead of competitors as we move towards Brexit.