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HSBC’s £35bn mortgage push is good for borrowers, but it’s risky

HSBC’s £35bn mortgage push is good for borrowers, but it’s risky

SBC has been the bank that has prospered most from globalisation. Hong Kong has been its gateway to an emerging China, its UK domicile has provided regulatory and legal respectability, and its US operations have enabled it to become one of the biggest US dollar clearing banks in the world. But has globalisation now stopped working in the bank’s favour?

Hong Kong – where the bank makes about half its profit – is gripped by street protests at the same time as the US and China are engaged in a tariff war, while the UK is in a crisis of its own making. The surprise is that the bank’s share price hasn’t fallen further than it has. It’s down 10% since last August, but that’s rather better than Barclays or Lloyds, which have fallen even more steeply.

What do banks do when things get a bit rough abroad? They go home and focus on their knitting. In an interview with the FT, HSBC UK chief executive Ian Stuart said it plans to expand mortgage lending in Britain to raise its market share to about 11%, implying an increase in its lending book of about £35bn.

HSBC has long been the sleeping giant of the UK mortgage market, with a share of loans currently about 6.5%, compared with 20% at Lloyds. It also has the financial might to drive down pricing, much to its competitors’ ire. It is already at or near the top of the best-buy tables for first-time buyers wanting three- or five-year fixes, and also features strongly in the remortgaging best-buy tables.

HSBC’s expansion is good news for borrowers – its 2.29% on a five-year fix for first-time buyers is better than any other bank on the high street. Barclays is about the only major rival trying to keep up, slicing its rates in recent weeks to remain competitive.

But this sort of competition is bad news for any bank’s net interest margin – the difference between what it pays savers in interest on deposits and what it receives from borrowers.

It’s also bad news for savers. If HSBC’s rivals try to compete, then they will also have to cut rates to savers to maintain their margins. Let’s not rule out the possibility of interest rates going negative for savers in the UK as they are in parts of Europe, with the yield on the 10-year gilt already below 0.5%. Other banks will also effectively pull out of the market, largely by leaving their rates high and seeing the business drain off to HSBC.

Is it a smart move by HSBC? Focusing on Britain when Hong Kong is on fire makes sense. But an aggressive expansion into the UK mortgage market when transaction volumes are flat and house prices in the crucial London and south-east market are forecast to fall on a hard Brexit carries its own special risks. Borrowers should by all means grab these rates while they last. But it gives share buyers yet another reason not to hold bank shares.

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