UK mortgage lenders' profit growth faltering

London

BRITAIN'S biggest mortgage lenders face faltering earnings growth as potential homebuyers pull back before next year's general election, regulators tighten financing and the economy slows.

Nationwide Building Society, the UK's third-largest mortgage lender, on Tuesday reported a 36 per cent slump in home loans in the six months through September, an indicator that other banks may encounter a similar slowdown. Lloyds Banking Group plc, the country's largest mortgage provider, this month had its shares rating cut twice in less than a week and faces the greatest risk to its earnings' growth, according to analysts.

"A meaningful slowdown in mortgage activity is likely to lead to faltering earnings growth and certainly higher-end earnings estimates are probably under threat," said Simon Willis, an analyst at Daniel Stewart Securities plc in London. "A slowing housing market has to have a drag effect, particularly for Lloyds because they've got the biggest market share."

Demand for homes is falling as more stringent lending criteria make it harder for buyers to get mortgages. The slowdown is led by London, where sluggish wage growth and the possibility of a tax on homes valued at more than £2 million (S$4.1 million) after the election pushed demand to a six-year low.

UK lenders issued 2 per cent fewer home loans last month compared with September, according to the British Bankers Association. The cooling comes as the Bank of England (BOE) cut its economic forecasts for the country this month because of weak global expansion and the "spectre" of stagnation in Europe.

"There's a lot of reasons for consumers to be a little bit cautious and uncertain," Nationwide finance director Mark Rennison said. "There was a lot of speculation on whether house prices were overheating. Now there's increasing speculation about the general election and what housing policy might be depending on which party gets elected."

Loans and advances to customers at Lloyds, which include mortgages and unsecured lending, fell 2 per cent to £486.3 billion by the end of September, the bank said on Oct 28. The stock of home loans at Santander UK plc, the nation's No 2 mortgage lender, rose one per cent to £150 billion at the end of September from a year earlier, the company said this month.

A spokesman for Santander said that Britain's economy would continue to grow, albeit at a slower pace than earlier this year, to help boost the housing market. He didn't comment on the impact on the bank.

Housing demand has slowed since the summer, while a "further moderation in house price growth is likely next year", said Martin Ellis, housing economist at Halifax, a unit of Lloyds. A spokeswoman for Lloyds didn't comment on the impact on the bank.

BOE governor Mark Carney announced measures to limit mortgage lending as climbing house prices outpace wage growth. These include curbs on how much banks can lend relative to a borrower's income, and requirements that banks refuse loans to homebuyers who fail a stress test that assumes an immediate three percentage-point increase in the benchmark interest rate.

House prices in the UK's 20 largest cities climbed by 5 per cent during the 12 months through October, according to property researcher Hometrack Ltd. That's more than three times the average growth in UK earnings. BLOOMBERG