Remember self-cert mortgages, the home loans that allowed applicants to self-certify their incomes? Also known as liars’ loans, they led to a lot of fraud, defaults and repossessions when banks imploded 12 years ago (Patrick Hosking writes).
Now we have self-cert mortgage holidays. Borrowers don’t have to provide any evidence that they are in difficulties before being allowed to pause their payments. Many are taking advantage of these holidays to defer relatively cheap mortgage repayments and are using the cash saved to pay off expensive credit card debts instead.
This makes judging the important question of stress among mortgage borrowers hard to gauge — and that is crucial for One Savings Bank, which has an £18.5 billion book of buy-to-let and other specialist mortgages.
Borrowers asked for payment holidays on £5.2 billion of those home loans at the start of the pandemic, which sounds alarming. Most of them, however, have reverted to the normal payment timetable. Borrowers with £930 million outstanding have asked for a further extension.
One Savings has taken a relatively conservative approach in its half-year results to June, setting aside £54.4 million for loan defaults, up from £8.6 million the previous year. It’s impossible to say whether that will end up being too little or too much. Everything depends on the virus and the economy and whether the millions of renters will still have jobs when furloughing ends in October. In coming to its impairment estimate, One Savings has taken as its base case the Moody’s forecast that unemployment rises to 7.7 per cent and house prices fall by 14.3 per cent this year.
These are difficult times for banks, not simply because of default risk but because of the squeeze on margins, the effect of rock-bottom interest rates and ringfencing rules that have encouraged large banks to park spare cash in capital-light home loans.
One Savings’ net interest margin narrowed from 2.7 percentage points to 2.5 percentage points on an underlying basis, which assumes that it owned Charter Court Financial Services, its merger partner, throughout both periods. On this same basis, the group suffered a 14 per cent fall in pre-tax profits to £156.3 million, which Andy Golding, its boss, described as resilient.
It has been a bumpy but profitable ride for the Chatham-based One Savings since it was created out of the old Kent Reliance Building Society and was floated in 2014. Tempus made it a “buy” at the time of the flotation at 170p. Its shares are now at 301½p, having risen by 40¾p, or 15.7 per cent, yesterday.
Plus-points are that the bank is well-managed with good control of expenses The cost-income ratio is one of the best in the business at 26 per cent. It operates at the more sophisticated end of the mortgage market, where margins are fatter. Minuses are that profits from buy-to-let loans are much less reliable. Landlords under pressure will walk away from their liabilities, when owner-occupiers will do anything not to have their homes repossessed.
The buy-to-let sector is quiet. New loan originations in the period were down from £3.1 billion to £2.1 billion and loan applications today remain 40 per cent lower than they were before the pandemic. One Savings dropped its dividend when larger banks were forced to preserve cash by the Bank of England in March. This helped to strengthen the core capital ratio to a robust 17.4 per cent. On present numbers, it looks well placed to resume payouts next year.
Most of the worst predictions for landlords and the housing market are in the share price. The shares trade on only seven times prospective full-year profits.
ADVICE Buy
WHY Shares are priced for housing market slump
Just Eat
Jitse Groen is not going to let a pandemic stand in the way of his global ambitions (Simon Duke writes).
A month after lockdown, the Dutch food delivery tycoon finally got his hands on Just Eat after getting the green light from Britain’s competition watchdog.
Three months later, when his Takeaway.com was only beginning to digest its UK rival, Mr Groen, 42, pounced on America’s Grubhub. The $7.3 billion all-paper deal will turn the London-listed Just Eat Takeaway.com into the world’s largest food delivery company outside China.
Shareholders will need to approve the takeover in October, but they’re unlikely to block the billionaire’s path. He has delivered tasty returns in the past.
Mr Groen founded Takeaway.com as a student in the Netherlands in 2000, received his first external funding in 2012 and floated his company on the Amsterdam stock exchange in 2016. Since then, he has swallowed a dozen rivals before agreeing the £6 billion Just Eat merger.
The company showed the benefits of scale during the pandemic. Its revenues grew by 44 per cent to €1 billion in the first half as the company processed 257 million orders. It declared an adjusted headline profit of €177 million, but its loss before tax widened from€7 million to €121 million.
The company makes most of its revenues from connecting consumers with takeaway operators, which pay it a commission and handle deliveries. Increasingly, though, Just Eat Takeaway.com is having to build its own distribution network to compete with the likes of Deliveroo. Hiring a fleet of riders threatens to crush returns, especially in the United States, where it will be competing with Doordash, Uber Eats and Postmates.
The global food delivery industry is consolidating; meagre profit margins leave room for only one or maybe two operators in any individual market. There is no reason to think that when the shakeout concludes Just Eat Takeaway.com won’t be among the survivors, but returns are unlikely to be as high as the present £13 billion implies.
ADVICE Avoid
WHY Returns from food delivery are unappetising
