Non-bank lenders should prioritise diversity of funding to compete, experts say

Speaking on a panel at Deal Catalyst’s Investors’ Conference on UK Mortgage Finance, Peter Beaumont, chief executive of The Mortgage Lender (TML), which was bought by Shawbrook Bank last year, said that despite being bought by a bank it still had an asset purchase agreement with Shawbrook.

Beaumont said that this was “unusual” and added that he “wouldn’t want to be in a world today where I didn’t have access to retail bank funding”.

He noted it would be a “tricky world” without access to that retail funding and it was a “big advantage” for the firm to be able to leverage those retail deposits.

Beaumont added that “we will securitise markets when markets are right to securitise…at the moment, they are not right”.

Shawbrook Bank completed a £343m securitisation of TML buy-to-let loans last year.

Balancing the right funding mix

Greg McClelland, chief commercial officer at Generation Home, said that the company was a forward-flow funded lender, and added that the firm was “constantly evaluating” its funding mix.

“I think the question on an ideal mix is a good one because I can give you one answer today, but the answer tomorrow could be different”.

McClelland said that continuity of funding, and giving certainty to customers, was paramount when it came to which mix to choose.

He explained that there were two sets of volatility currently, one was swap rates moving at “unprecedented rates” and the other was from bigger lenders.

“Three times this year the average prime mortgage in the UK has been sub-swap rate. So, as a non-bank lender that’s an incredibly difficult environment to compete at.”

He added that the “only way to manage that was with diversity of funding”.

Deposit lender advantage could be short-lived

Beaumont added that with people increasingly shopping around for savings deals, it was important to maintain balance sheet strength.

He explained: “You might have your balance sheet today but if you’re not keeping up, then the balance sheet can move away from you. So, you have to keep it and that pushes your overall cost of funds up as well. So, your cost of funds and swaps as you know, it’s a big challenge for all lenders at the moment.”

McClelland added that it would be interesting to see whether deposit lenders continued to have the cost of funds advantage over the next six to 12 months.

He explained that if interest rates continued to climb to over two per cent, with the current base rate set at 1.75 per cent, banks would have to start charging for their balances which “could take a lot of money away”.

“This move is starting, so what applies today is going to look very different tomorrow.”

He added that this was compounded by the fact that some banks were returning to the Residential Mortgage Backed Securities Market (RMBS) but noted there was a “mismatch” as some RMBS’ issued to fund mortgage books were costing more than the front book origination.

Specialist lenders could be targets for M&A

Panellists were mixed on whether the current economic environment could present an opportunity for high street lenders, or other parties, to pick up specialist lenders.

Beaumont said: “People are seeing some stressed lenders and so they think maybe they can get a bargain and maybe they will in some cases. But they’re often in for longer term.”

He added that there was going to be some “flux” for an uncertain amount of time that could be an “opportunity to look at some of the quite funky platforms that are out there”.

John Gomez, treasurer at LendInvest, noted that it was not such as a “doomsday” scenario for less well-funded lenders that their only option was to be bought by a larger party.

“I think there are a few more options…they could sell their portfolio if they wanted to, give the warehouse money back or stop doing that product.”

Simon Webb, managing director for capital markets and finance for LiveMore, said that it wouldn’t surprise him if there was some M&A activity, but that specialist lenders operating in certain niches would experience growth over the next few years due to the current economic environment, which could make them an attractive target for M&A.