HSBC advocates relationship lending
Joanne Atkin talks to Peter Dockar, head of mortgages at HSBC, about the bank’s mortgage strategy and rapid rise in lending over the last five years
At the start of this year HSBC announced it was setting aside £15 billion for mortgage lending to UK borrowers, including £3 billion specifically for first-time buyers.
The bank has made significant inroads into the mortgage market since the start of the credit crisis and almost quadrupled its share of new mortgage lending. Back in 2007, HSBC lent £9.2 billion representing a mortgage market share of 2.5 per cent.
Last year HSBC lent £13.2 billion giving it a 9.6 per cent share of the mortgage market. If HSBC lends its £15 billion target in 2012 the bank will take an estimated market share of more than 11 per cent and help in the region of 150,000 homeowners and 27,000 first-time buyers.
HSBC and is subsidiary First Direct hold a mortgage portfolio of just shy of £70 billion, which represents a total mortgage market share of 5.6 per cent making it the sixth largest lender in the UK.
Jump in mortgage lending
So why has HSBC made such sizeable strides into mortgage lending since the credit crisis took hold?
Peter Dockar explains: “Pre-credit crisis, we found ourselves in a relatively strong position. We have always recognised the importance of mortgage lending and it plays a big part in the customer relationship, which is what we value. So in 2008 we launched the RateMatcher campaign which saw our market share rise from under 3 per cent to closer to 10 per cent of new business and we’ve tried to maintain that share going forwards. The £15 billion of commitment this year represents a continuation of that aspiration.
The original RateMatcher enabled HSBC’s borrowers rolling off fixed rate deals to re-fix at exactly the same rate.
“Our approach is that we see mortgages predominantly as a means to require customer relationships, which is why we don’t tend to deal with brokers, as the customer relationship is with the broker rather than the lender.
“The vast majority of our borrowers also have their current account with us as well, which means we understand our customers a bit better and are in a good position to lend to them.”
HSBC has never been in the business of risky lending and very much concentrates on premium prime residential, predominantly owner occupied, with a little bit of buy-to-let.
However, the bank is keen to lend to first-time buyers and Dockar says about one third of its lending is for those making their first steps on the housing ladder. It supplied mortgages to one in eight first-time buyers last year; while one in three first-time buyers, who go direct rather than through an intermediary, uses HSBC. The current overall mortgage run rate is for HSBC to sell three mortgages for every one that First Direct sells.
But HSBC’s mortgage strategy hasn’t actually changed since pre-credit crunch, effectively the bank is just doing more of the same.
Dockar sums it up: “Our positioning is relationship lending, dealing direct with the customer, focussing on the mass premium parts of the market and looking to do substantial amounts of lending. We’ve stayed in the market and been competitive. Our strategy is really about acquiring relationships, we are doing the same type of lending but more of it.”
HSBC funds its mortgage business almost entirely from its deposits and rarely uses the wholesale markets for mortgage funding, which is unusual for a large bank.
Dockar says: “We have followed that strategy for a number of years. It is cheaper for us to grow our mortgage book because we already have these savings. It is extremely expensive to acquire new savings in the market but we’ve got this fantastic base we have built over the last few years to use.”
In 2008 HSBC experienced significant inflows as people became nervous about runs on banks, such as Northern Rock, and looked for a safe haven for their money.
What are the key operational issues facing a modern financial services company?
Dockar says: “In terms of fulfilment it’s managing your capacity. I think it’s making sure you keep complexity to a minimum as mortgages are wonderfully complicated products.
“It’s important to make sure your processes are completely customer centric rather than bank centric. Cost and efficiency are integral to that. You can’t offer competitive deals to people if you haven’t got control over your cost base.”
The customer centric philosophy carries on into the collections process. Arrears at HSBC are below industry average and the UK mortgage impairment charge for 2011 is roughly 0.05 per cent of the total mortgage book.
Dockar says: “Because of the type of lending we do we haven’t had the same arrears experience some lenders have had. We are four times less likely to experience lending that goes to possession than the market average.
“Again our approach is very customer centric. If the customer cannot physically stay in the house because the mortgage is just not affordable, we work with them. We generally get a much better outcome for them, and us, for example we are able get a better price for the property. It’s all about addressing each situation on a case by case basis. Our collections team has a wide variety of options in their toolkit, not least because we don’t have too many arrears cases, which is testament to the quality of the book and our strategy.
“Because we know our customers, we can spot things a little earlier before it gets too serious. Since 2005 we have assessed affordability rather than income multiples and no matter whether the mortgage is interest only or capital and repayment, we base affordability on a capital and repayment schedule. We don’t lend unless there is a buffer so the customer can accommodate payment shocks.”
This approach sounds similar to proposal in the Mortgage Market Review. Dockar agrees: “A lot of the responsible elements of the MMR are very close to what we do so we are very supportive of quite a lot of the MMR. The FSA has consulted well with the industry via its Mortgage Market Review by engaging with lenders, either directly or through the CML and other trade bodies. The FSA has really listened to lenders and that’s why areas like affordability have had a reasonable outcome.
“HSBC has had well thought through discussions with the FSA and CML. Its important to work with your trade bodies to understand what is landing and when, which will help you to be as prepared as possible. There is a multitude of functions within an organisation - keeping them all talking is the easiest way to respond to what could be challenging regulatory changes ahead.”
How does HSBC manage resources, such as people and systems, so it can respond quickly and efficiently to competitive market pressures?
Dockar explains that HSBC doesn’t run the mortgage business as a monoline, all the various functions work closely together. “We have operations experts, people who process the mortgages, and the distribution guys know how to sell. My team has the overall oversight. We work very closely with our service delivery partners, with distribution and operations to make sure that what we say we are going to do, we do.
“If it looks like there is going to be any variations, for example, launching a major mortgage campaign, we will work very closely with those guys up front to make sure they are going to have the capacity and built in tolerances to manage it, otherwise you end up having more people in than you need or not enough people. It’s about working really closely across the business to make sure everything is joined up.”
When it comes down to operational design and determining what is best done in-house and what can be outsourced, Dockar says it comes down to expertise. “We tend to focus on our core competency, which is understanding customers and making good lending decisions as a result. We use the appropriate software that is best in class, but we tend to build our operations in-house unless there is technical expertise and benefit of scale that perhaps we couldn’t achieve in-house, for example, automated valuation models.”
Like many lenders, HSBC uses panels for valuations and conveyancing. Its new conveyancing panel, which now consists of only 43 firms and is being run by Countrywide, has had a negative reaction from solicitors and the Law Society. HSBC borrowers can opt not to use a conveyancer on the panel but they will be charged £192 for using their own conveyancer.
Dockar explains why the bank has gone down this route: “Our focus on this has been ‘what’s the best thing we can do for customers and what’s the best thing we can do to protect ourselves, and customers, against fraud’.
“The FSA has said you’ve got to know your suppliers. For us panel management is the logical way to do conveyancing and valuations. We make sure the firms on our panels meet certain requirements of ours around quality, consistency, capacity and that there is a good customer experience.
“We, quite reasonably, want to have our legals done by our representatives but we are not limiting customer choice. It’s very transparent. When other lenders have bought in panels, the focus was on fraud and risk management, which is right, but our take on this is how can we make it cheaper and better for the customer. The customer has always paid for the bank’s legal work to be done, all we are dong is separating it out now.”
Market intelligence is very important to HSBC’s operational strategy, one of the reasons being that the bank doesn’t deal with brokers.
Dockar explains: “Brokers have many strengths, not least they know their market very well and know exactly what lenders are offering. But what we have is masses of customer insight and we keep our fingers on the pulse of customers sentiment. We also use a lot of benchmarking. Whenever we change something, whether it’s a price policy or a process we will always look at what is best in the market. So we do use market intelligence providers.”
As for the future, Dockar acknowledges the inevitability of far more regulation, at a local level and via Europe, as well as on a wider bank level with the Independent Commission on Banking, Basel 3 and so forth. This means the cost of banking is unlikely to get cheaper. “We may gain better protection through regulation but it will come at a cost,” he says.
“But there will always be a demand for mortgages. Customers still aspire to home ownership. There is an increase in the 25 to 33 year age range so there will be demand for mortgage lending. How people chose to manage how they get a mortgage is where we will see some changes. There will always be a core set of people who want to sit down in front of a bank manager but equally, we’ve seen a real shift in telephone and online applications.”
Last year HSBC launched two online mortgage services – one to apply for a new mortgage and the other for a remortgage. And in December First Direct followed suit using the same online application functionality.
Dockar says: “It’s relatively early days but we are seeing people use it. It’s all about convenience. If you have a straight forward remortgage transaction and you are a time poor professional, it takes 20 minutes - so you can see the demand and rationale for that.
“It will be interesting to see the different models the new retailers, such as Virgin Money and Tesco, apply. Some will make a nice face to face environment; others will be looking to build a slick, online process that can be done really quickly. It’s a good idea for there to be a plethora of business models. It keeps everyone on their toes. The market needs competition and it’s good for customers.”
“As and when competition returns to the mortgage market - it may not be back to the levels of 2007 at £360 billion - but increasingly competition will come back. We are preparing for that by making sure we have the best in class systems and processes and the flexibility to react to regulatory changes such as the MMR.
“It’s fair to say a tail of that £360 billion shouldn’t have been lent anyway, such as some of the self cert and adverse, so we are relaxed about not seeing any more of that. If you chop off that tail, you could certainly see lending levels picking up to £250 billion or so, that would not be unreasonable, assuming fair head winds, and the MMR has no unintended consequences.”
With mortgage lending in the UK at £140 billion last year, there is still some way to go but if that £250 billion does become reality, HSBC intends to be there and take its slice of the mortgage market.