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TSB flotation: High-risk mortgages account for almost half of bank's home loans

Bankers described TSB’s interest-only loans as extraordinary, eye opening and extremely high
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TSB admitted that nearly half of its residential mortgage book is made up of high-risk interest-only home loans – more than twice the comparable proportion at the Nationwide Building Society.

The admission was made in the prospectus for the “challenger” bank’s flotation as its shares were given a price range of between 220p and 290p, below the £1.6bn “book” value. Were the shares to come in at the mid point, the bank would be capitalised at £1.275bn when it joins the market.

TSB has been sold to investors as a low risk, UK only retail bank that will be able to challenge the existing players by picking up disillusioned customers.

However, the bankers spoken to by The Independent described the fact that 45 per cent of its residential mortgages are interest-only loans as “extraordinary”, “eye opening” and “extremely high”.

Regulators became alarmed at the overall number across the market last year and secured an agreement with the Council of Mortgage Lenders to contact all borrowers with loans due to mature by 2020 to warn them of risks.

People without effective repayment vehicles such as ISAs or endowments could be forced to sell their homes and downsize if they can’t repay.

Figures from the Council of Mortgage Lenders show that out of 11.2 million mortgages in Britain at the end of 2013 there were 2.2 million interest-only home loans with 620,000 that were part interest-only. Together they represented 25 per cent of the total. The number was down 12 per cent compared to 2012.

Britain’s biggest building society Nationwide had brought its figure at the end of 2013 down to 21.4 per cent, compared to 26.3 per cent  in 2012.

HSBC, generally considered to be a relatively conservative lender, gave a figure of 37 per cent in its year-end accounts while the proportion of such loans at Barclays is understood to stand at just over a third.

The figure for the bank which is floating TSB, Lloyds, was 41 per cent at the end of 2013, down from 44.6 per cent at the end of 2012.

Lloyds is having to sell TSB to comply with the requirements of EU watchdogs imposed as a result of the state aid the bank received during the financial crisis. Some 25 per cent of the shares will go this time, with two or three more sales expected follow.

In its prospectus TSB said of the interest-only loans: “TSB faces risks associated with the concentration of its credit risk, geographically and relating to its interest-only mortgage portfolio, which amounts to approximately 45 per cent of TSB’s residential mortgage lending as at 31 March 2014.

 “As these mortgages near maturity, TSB may face greater repayment and asset quality risks than competitors with a lower proportion of interest-only mortgages.”

The bank also cited the fact that Lloyds will be responsible for its IT and other services as a risk, given that Lloyds has “no experience of providing services of a comparable breadth and scale to a third party financial institution”. It admitted that its ability to operate would be “jeopardised” were Lloyds to hit fresh problems.

TSB said it planned to increase its share of the current account market from 4.2 per cent to 6 per cent, which is its share of bank branches. It has 631 in total and is planning to relocate some and refurbish others. It claims to have branches within two miles of most Britons.

With 4.5 million customers, TSB said the business made an underlying profit of £172m last year, compared with £28m in 2012 and £57m in 2011. It could ultimately pay between 40 and 60 per cent of its earnings as dividends.