TIME TO GIVE BANKS MORE CREDIT?

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It’s easy to see why ‘debt’ is seen as a dirty word. It’s often presented as a burden, an inhibitor or a restriction. Yet, as our recent research collaboration with The Bancorp highlights many “HNWIs expect to embark upon a lifetime of debt, where their liabilities ebb and flow like their income. They accept that their wealth is defined not just by what they own but by what they owe.”

Many HNWIs believe they need to use debt strategically to reach their wealth creation goals, and sometimes it is the retail operators who are driving innovations in lending to best meet these needs.

This month, NatWest – the high street retail bank that is part of the RBS Group – announced that it will begin to offer paperless mortgages to existing and prospective customers. Borrowers will be able to apply for a mortgage by uploading, sharing and verifying all necessary documents online, without the need to send, sign or receive bundles of paperwork through the post.

The bank believes that simplifying the way customers apply for and receive approval for mortgages will “transform the way homes are purchased in the UK”. And while this may very well be case, NatWest’s decision to further embrace digital technology underscores the broader strategic rationale of most high street lenders – to more effectively engage with mass market consumers in their quest for volume.

Interestingly, this hasn’t stopped these lenders from realigning some of their mortgage offerings to also attract a number of wealthy clients at the higher end of the home loans market.

Over the past five years, an increasing number of high street lenders have begun to unwind liquidity restrictions, originally placed on larger loan lending in the aftermath of the financial crisis. With higher lending targets and more benign market conditions – it is perhaps unsurprising that high street banks are restoring their interest in this lucrative segment of the market.

Today, many retail banks offer £1m-plus mortgages to affluent consumers in direct competition with private banks; some are able to obtain a mortgage valued as high as £10m. This is helping retail players reach their lending targets quicker, while reaping the cost saving benefits associated with servicing a higher value loan.

But this is not merely a supply-side issue. High-net worth individuals (HNWIs) are increasingly turning to high street lenders in order to meet their requirements, in a way that private banks have been reluctant to meet in the past. More specifically, HNW homebuyers are attracted to the highly competitive interest rates on offer, flat fee structures, longer term lengths, as well as the advantage of not needing to deposit a minimum level of assets with a retail bank in order to access a mortgage.

This form of ‘dry lending’ – where no assets need to be placed under administration with the lender – is particularly appealing to HNW individuals, who are often dissatisfied with the stringent requirements placed upon them by private banks.

With high street banks well aware of this friction – their strategy to undercut the existing price model and its requirements is beginning to have an impact on private banks’ behaviours. Indeed, some have begun to relax their lending requirements as a direct response to these pressures.

More explicitly, some private banks are reducing the costs associated with facilitating mortgages by lowering investment requirements, while others are starting to engage in ‘dry lending’ themselves i.e. offering HNW homebuyers large loan mortgages without requiring any assets to be deposited with the bank.

This shift in the way firms attract new clients will ultimately have a bearing on how private banks nurture and develop relationships with their customer base. And while many lenders will continue to place an emphasis on gaining a hold of clients’ assets immediately at the point of contact, an increasing number of private banks may very well begin to place a premium on developing a wider wealth management relationship over a longer period of time.

News from the world of wealth:

Start-up builds flash crash early warning tool – Risk.net

How advisers are reaching out to younger clients – MoneyMarketing

MiFID research rules have Nordic regulators as muddled as banks – Bloomberg

China accelerating the opening of futures market to foreign investors – Reuters

Invesco expected to buy Guggenheim Partners ETF business for over $1bn – FT.com

Thought of the week:

“The real essence of work is concentrated energy.” – Walter Bagehot

croppedAuthor: Nabil Elhihi, Analyst.

Background: Prior to joining Scorpio in 2016, Nabil worked as an Associate Economist at the Foreign and Commonwealth Office. He has also worked as an analyst at a commodities research and consultancy group.

Education: Nabil holds a Bachelor’s of Science degree in Economics, as well as a Master’s degree from King’s College London.

And at the weekends: In his spare time, Nabil enjoys attending music festivals, exploring new European cities when the opportunity arises, and hoping that Liverpool FC pick up three points every weekend.

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