Lenders that rely solely on capital markets for funding ‘dead in the water’, experts say

Speaking on a panel at Deal Catalyst’s Investors’ Conference on UK Mortgage Finance, MQube’s chief executive Stuart Cheetham said: “Right now if you rely on capital markets, your business model is fundamentally dead in the water.”

He explained that there were three main areas of funding in the specialist lending market; retail deposits, capital markets and pension funds, the latter of which he said was increasingly eyeing the sector.

“You need to be playing in all those marketplaces if you want to have a sustainable business strategy and that allows you to meet all sorts of different needs for consumers.”

He continued that different funding sources would allow you to have different risk appetites, different cost structures, allowing lenders to replicate standard products or create new products. Therefore, diversification of funding is “absolutely essential”.

Francesca Carlesi, chief executive of Molo, which temporarily had to cease new business earlier this year due to funding issues, said that one of the lessons she took away was to “pick you partner carefully” and agreed diversification of funding was “key”.

She added that Molo Finance was “back again”. It has recently entered into a funding arrangement with ColCap Financial.

Retail banks could review specialist lending position

Cheetham said that those in the retail space could take a step back from the more niche specialist side of the market as net interest margins (NIM) were “being repaired”.

He said that banks would “make more money over this period of time, than they have done previously” due to “natural arbitrage between the base rate and that not being passed onto savers”.

Cheetham explained that as banks make more money they would likely pay more dividends, invest in more technology and they would start to move away from specialist lending market.

“What we’ve seen…with the bigger high street vendors, they’ve moved into more complex lending to prepare their NIMs. They won’t need to do that….They will walk away.”

He added that that could then ease the dislocation in the capital markets but that recovery “won’t be quick”.

New entrants have to do “something fundamentally different”

Regarding new entrants to the market, John Goodall, chief executive of Landbay, commented that it was probably more “challenging now to enter, and to come up with a genuine proposition”.

He added that there was “already a lot of choice in the market” and “competition was good”.

Goodall noted that the specialist lending market is a very intermediary-based and to “build that franchise and platform of intermediaries I suspect is a lot harder now than it was six seven years ago”.

Cheetham continued: “Competition is good, and new entrants good, the industry hasn’t embraced technology, that is clear.”

He added that as a new entrant, positioning yourself as a “disruptor” was a “brave strategy” as working with incumbents was “more logical”.

“If you look at the prime space at the moment, the cost of funds that you need to price competitively… you can only do that through the top 10 banks or possibly some pension funds. You have to work with these people and to work with those people you have to offer something fundamentally different, something that they can’t do themselves.

“That is the way transformation will work going forward. I do not expect anything to radically change, like high street lenders disappearing or anything like that. It’s just simply not going to happen,” Cheetham explained.