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Mortgage data and Financial Policy Committee report put spotlight on the sector
Thursday 28 Sep 2017 Author: David Stevenson

Recent data presents differing views on the health of the UK’s high street banks.

The Bank of England’s Financial Policy Committee (FPC) released a report on 25 September suggesting that growing consumer debt could pose a major threat to the capital positions of Britain’s biggest banks positions if there was an economic downturn.

Shares in some of the largest high street banks took a small hit when the report came out on 25 September. Barclays (BARC) fell 1.1% to 189.4p and Lloyds (LLOY) shed 0.8% to 66.41p.

Secured lending is also hitting the headlines. Figures released by banking trade body UK Finance on 26 September said mortgage lending rose to its second highest level last month since April 2008.
The last time mortgage lending went above £24bn in a month was in March 2016, when an incoming hike in stamp duty caused buyers to act before it came in.

Lloyds is the largest mortgage lender by capital yet has also been growing its consumer credit division through the acquisition of MBNA’s credit card business. This theoretically puts the bank at a greater risk if, as the FPC warns, a market downturn does occurs.

We prefer Virgin Money (VM.) as an investment. It has an estimated 3% UK market share in mortgages. Investec analyst Ian Gordon says the FPC statement ‘indicates a primary focus on higher risk lending and/or any loosening of underwriting standards. This is not Virgin’.

On a valuation view, Gordon describes Virgin’s 5.3-times forecast 2019 earnings of 50.2p as ‘absurd’ giving a buy rating with a 395p target. That implies upside of nearly 50% versus the 267.4p price at the time of writing.

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