Tesco cashes out of the mortgage business

Tesco Bank

Tesco Bank has left the mortgage market by selling its £3.7bn loan book, says The Daily Telegraph. This is in line with a strategy to “slim down the number of services and products it offers to reduce costs”. The 23,000 customers will be moved to Halifax, a subsidiary of Lloyds.

While supermarket banking services “were once seen as a credible threat to the dominance of major high-street banks”, tighter regulation in the mortgage market and a series of digital-banking apps geared towards winning over younger customers have hampered supermarkets’ financial divisions.

The deal is the latest sign of the “convulsions gripping the UK’s mortgage market”, says Ben Martin in The Times. These have been caused by post-crisis regulations forcing banks to separate legally their investment banking arms from their high-street businesses.

As a result, the capital that lenders with a global presence would previously have been “free to put to work across their businesses” is now “locked in their domestic divisions”. This in turn has encouraged large banks such as HSBC and Barclays to put the money into mortgages, creating “intense competition” that has hit the margins of firms such as Tesco Bank.

Margins in mortgage lending are so low that although the loans were bought at a premium of 2.5%, Lloyds claims that they “would still produce better returns than issuing new loans in current market conditions”, says Nicholas Megaw in the Financial Times. It is hardly surprising, then, that Lloyds was not the only bank to bid for them.