Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) announced yesterday that it was placing a lending cap of four times salary on mortgages of more than £500,000 for London homes.
According to property website Rightmove, the average asking price in London has risen by £80,000 since the start of the year, so some move to cool lending seems prudent.
However, this is an investment website — what are the implications of Lloyds’ decision for shareholders? After all, retail mortgage lending accounts for £246bn of Lloyds’ £344bn loan portfolio. A significant drop-off in new lending could hit the bank’s profits.
How much lending will be affected?
Lloyds hasn’t commented on how much lending will be affected, except to say that the cap is expected to affect 8% of its London-based mortgage lending.
A crude way of approximating the impact of this decision might be to look at London’s population, which at 8 million, is around 13% of the UK’s 63m population.
If this reads across to Lloyds’ mortgage lending, then my calculations suggest that just over 1% of Lloyds’ mortgage lending decisions might be affected by the cap. Although London’s high property prices will mean that the value of the lending is greater than 1%, I don’t think this decision is likely to have a significant effect on Lloyds’ profits.
Will other lenders follow?
Lloyds accounts for a big slice of the mortgage market, as it lends through the Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows brands, all of which will be affected by the cap.
The big question is whether other mortgage lenders will follow Lloyds’ example. If they do, then the net effect should be zero, but if Lloyds is left standing alone, then the bank could lose some business to competitors who are prepared to continue lending at higher income multiples.
Lloyds could end up the winner
A recent report from the think tank Resolution Foundation estimated that rising interest rates could leave 2.3 million households unable to afford their mortgage repayments by 2018.
The impairment rate on Lloyds’ mortgage portfolio fell to 1.7% in 2013, from 2.0% in 2012, and it’s important for shareholders that the bank is able to continue this reduction.
I believe that by acting first and capping lending in this way, Lloyds is protecting future profits, and should be applauded by shareholders.
Buy Lloyds?
Lloyds currently trades on a forecast P/E ratio of just 10.6 for 2014, and I continue to rate the bank as a strong buy.
