Get-tough policy sees HBOS lose mortgage market share

Britain's biggest mortgage-lender, HBOS, saw its share of the market slip below 20% in the first six months of the year as it tightened its lending criteria to adjust to the climate of higher interest rates.

In a statement ahead of its results next month, HBOS said yesterday that its deliberate policy of adjusting lending rules each time the Bank of England raised the cost of borrowing had already had an impact on its market share.

Rates have risen four times, by a total of 1%, since November last year, as the Bank moves to keep a lid on the housing boom. Economists are expecting at least one more increase by the end of the year. A spokesman for HBOS said that each rate rise had meant firmer rules for prospective borrowers.

"It's fairly mechanical - it's a process of nip and tuck here and there," he said. "For example, we reward people with a lower rate when they put down a bigger deposit."

In 2003, HBOS had a 25% share of the mortgage-market, so yesterday's statement suggested the change of tack had begun to have an effect. Two years ago, in 2002, its share was 31%.

"It's going down over time," the spokesman said.

Several of the big lenders have been repositioning themselves to prepare for a housing market slowdown.

Barclays has been reducing its exposure to buy-to-let mortgages, which chief executive Matt Barrett has said are especially risky, prompting a row with Bradford and Bingley, the former building society which has actively pursued a strategy of lending to buy-to-let borrowers.

HBOS's lending practices came under fire late last year when staff at one of its subsidiaries, Birmingham Midshires, were shown in a BBC exposé encouraging customers to inflate their earnings when applying for "self-certification" mortgages.

HBOS said this week that its economists were predicting a slowdown from the current 20% annual rate of increase in house prices over the coming months - but it insisted that it was not worried about the threat of a crash.

Because of the higher cost of money as rates go up, HBOS used yesterday's statement to issue a warning that it could miss its target for a 20% return on equity for the full-year 2004.

Chief executive James Crosby stressed that it was a knock-on result of interest rate rises, and "not a consequence of competitive pressure".

The bank said it was making "good progress" towards the 20% target, and hoped to offset some of the effect by keeping its costs under tight control.

With full results for the six months to June due out next month, HBOS also said it was "very comfortable" with market forecasts of its full-year profits for 2004. Analysts have pencilled in pre-tax profits of about £3.8bn, which would be a 20% increase on 2003. "Overall, HBOS's half-year results are expected to point to another strong outcome for the full year," the statement said.

HBOS said that sales of its insurance products had shown "good growth," in the last six months. Its corporate banking arm was also expected to record healthy profits as a result of slower cost growth, strong non-interest income and a "benign credit experience".

It added that its international arms were making "good progress", with Australia and Ireland expected to make strong contributions to the final results.