Shares in Kensington Group plunged yesterday as the specialist mortgage lender admitted its profits were being squeezed by "intense" competition from both established and new rivals.
Kensington was also hurt by fresh concerns over house prices sparked by influential Morgan Stanley economist David Miles, who voiced fears of falls in the next two years. The company's shares tumbled 100p to 805p, making it the biggest faller in the FTSE 350 index of Britain's biggest companies.
Kensington specialises in the sub-prime home loan market - people, such as the self-employed or those with poor credit histories, who are shunned by mainstream lenders.
High street banks once steered clear of them, but have increasingly been entering the market because of the high profits it offers. A number of investment banks have also moved in.
Kensington said this meant that this year's earnings would be towards the bottom of analysts' forecasts, while profit growth next year will fall.
The company, however, said that for the 11 months to the end of October, new business completions rose to £3.7bn, up 19 per cent.
Its chief executive, John Maltby, said: "Clearly at the half year people were concerned about credit but credit quality is very encouraging and impairment charges are falling.
"We do not lend at high income multiples and our loans are low compared with the value of houses. What we are facing is increasing competition and that is what people have responded to."
Mr Maltby said the company was excited about prospects for its Irish business and its second charge mortgage business - second mortgages taken out to fund home improvements or cut credit card bills.
"This is higher risk," he said. "But it is also higher growth and offers higher margins. Clearly the share price has come off but we believe we have good, strong prospects."
James Hamilton, an analyst at Numis, described the Kensington trading statement as "weak". But he said the real risk to the company was falling house prices. He said this was because Kensington relied on the security of property to protect its loans rather than the ability of the customer to repay.
He said: "This strategy with its super margins is ideal while property prices rise. The real risk is property price deflation removing the collateral supporting the loans."
He added: "Should this happen, the loan impairment charge would explode."
Fears about house prices and Kensignton's gloomy statement hit what were seen as an upbeat set of results by Paragon, which specialises in lending to professional landlords. Paragon reported pre-tax profits for the year to 30 September at £82.8m, compared with £71.7m, slightly ahead of the analysts' consensus.Reuse content