Does the mortgage price wars over in the UK concern anyone? The latest update shows that the mortgage wars have had minimal impact so far on CYBG's lending (volumes down 0.3%). But I find myself questioning whether this is sustainable. I see CYBG as a high cost producer of mortgages because they don't have the same economies of scale as their big bank competitors, and also they can't rely on as much low cost retail deposits to fund their loans compared to the big banks. (CYBG's loan to deposit ratio is 1.15 vs Lloyds of 1.05 and Barclays <1).
Being a high cost producer of a largely commoditised product (mortgages) when a price war breaks out doesn't seem like an ideal position to be in. Particularly as mortgage lending is by far CYBG's biggest generator of net interest income / profits.
This is all well and good if it's only a temporary phenomenon. But I read that a driver of the mortgage price wars is the "ring fencing" rules put into place earlier this year. I understand that the effect of the ring fence rules is to prohibit big banks from using their retail deposit base to fund non-retail banking activities like investment banking. So apparently what's happened is that at least one big bank, HSBC, has decided to divert their under utilised retail deposits into the UK mortgage market - bringing mortgage rates down. If ring fencing is causing an oversupply of cheap funding into the consumer mortgage market, then isn't it reasonable to assume that as long as the rules are in place, this oversupply situation and thus high competitive landscape will continue?
Note that i'm an amateur at analysing bank stocks, I just rely on what information I can find about CYBG via Google news - so I most likely don't know what I'm talking about. But they are what's concerning me about CYBG, and I'd be interested to hear what others think about this issue.
