HBOS suffers steep fall in share of mortgage market

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The Independent Online

HBOS, the Halifax - Bank of Scotland group, conceded yesterday that a crucial new mortgage strategy launched last year has resulted in a disastrous loss of business. The bank, Britain's biggest mortgage lender, said its share of the home loans market had plummeted during the first half of this year, following its decision to re-price the deals it offered to new and existing customers.

HBOS said: "In mortgages, the retention strategy introduced in the latter part of 2006, designed to trade an element of gross share for improved principal repaid, has not delivered the anticipated benefits."

The warning follows a major change of policy introduced by HBOS last summer. Concerned by the number of borrowers switching to rival lenders at the end of short-term discounted variable-rate or fixed-rate offers, the lender began offering existing customers access to many of the best interest rates it had traditionally reserved for borrowers remortgaging to it from other banks or building societies.

Crucially, however, shortly before implementing the new policy, HBOS effectively increased the cost of all its remortgage products. Ray Boulger, the head of mortgages at the independent broker Charcol, said: "As a result, the deals it was offering weren't attractive to either new customers or to their own borrowers, who were coming towards the end of its short-term deals."

HBOS said other parts of its customer retention strategy, including the introduction of commissions for mortgage brokers advising existing customers, had begun to deliver benefits in the first half of 2007 and particularly since April, when the lender cut the cost of remortgage products.

But the lender warned its share of the net lending market - loans to new customers minus the value of lost accounts of existing borrowers - would fall to about 8 per cent in the six months to the end of June, from a high of 21 per cent last year.

A spokesman for the bank added: "While some parts of our new retention strategy clearly had a very positive impact, it became clear towards the end of the year that the pricing element was not working as we had hoped."

HBOS said it was confident that the fine-tuning of its product range conducted in recent months would enable it to increase its share back up to between 15 and 20 per cent of net lending during the second half of the year. In yesterday's trading update, the bank said it also expected to record profits for 2007 in line with market forecasts of about £6bn.

Mortgage analysts said HBOS's problems reflected a serious dilemma facing all of Britain's biggest home loan providers.

"The business model of the early part of this decade for lenders was all about building business through relentlessly winning new customers with remortgaging deals, without worrying at all about existing borrowers and customer retention," Bernard Clarke, of the Council of Mortgage Lenders, said.

"However, lenders have begun to realise that mortgage borrowers are now increasingly sophisticated. They've become aware that if borrowers simply move on again at the end of short-term offers, they are forced to operate on increasingly thin margins."

Mr Clarke said lenders could no longer afford to offer super-cheap short-term deals to new customers because not enough borrowers stuck around once the offers ended.

HBOS's spokesman added: "Anyone can chase gross mortgage business, but we changed our strategy because we felt operating in a world where there was far less churn would be much better both for us and for borrowers."

The problem of customer retention is particularly acute for larger lenders such as HBOS, because they have greater numbers of existing customers for rival lenders to target.

Britain's five biggest mortgage lenders - HBOS, Abbey, Lloyds TSB, Northern Rock and Nationwide - did more mortgage lending to new customers than the rest of the market put together last year, according to the CML. But there are no industry-wide statistics on net mortgage lending and existing customers of all five have been targeted by smaller lenders. As a result, their share of total mortgage balances outstanding has been falling.