Hoping to hit UK market on a rising curve

THE acquisition of The Mortgage Corporation has given the First National Building Society a loan portfolio in Britain almost …

THE acquisition of The Mortgage Corporation has given the First National Building Society a loan portfolio in Britain almost as big as its entire Irish based business. It will increase its total asset base by 40 per cent and the State's biggest building society will now be looking to generate close to half of its annual profits in the British market over the coming years.

First National (FNBS) is expected to pay somewhat less than £53 million sterling for the business. This is based on price adjustments related to profit targets which are written into the deal. Analysts in Britain say the price is not "unreasonable" but have warned that the going is still tough in the British mortgage market.

With official Bank of England lending figures showing signs of strong improvement in the housing market, fierce competition between mortgage lenders has, as in the Irish market, dramatically reduced lending margins and squeezed the long term profitability of bank and building society mortgage business.

Yesterday, Britain's second largest building society, Abbey National showed that it was feeling the pinch, with its mortgage operations underperforming against its other activities. If the recovery, which recent lending figures suggest is underway is sustainable, the growth in mortgage lending will go some way to restoring profit margins for lenders in the British market, including The Mortgage Corporation and Mortgage Trust.

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International credit rating agency, Moody's, however, believed the acquisition of The Mortgage Corporation would further fuel price competition among mortgage lenders, saying the deal was "one more step in the broader process of rapid consolidation of the UK mortgage sector".

The agency also cautioned that the acquisition might negatively affect the building society's fundamental financial position, while in the long term it suggests it will "do little" to enhance its business franchise in the British market.

In the light of these concerns, it warned of a possible downgrading of its ratings for FNBS following the purchase. Moody's had assigned a A2/prime rating to the building society.

A second rating agency, the IBCA yesterday confirmed its long term A rating for the society but questioned its ability to absorb a loan book of The Mortgage Corporation's size. The agency also cautioned that the quality of the loan book was not as good as FNBS's existing portfolio in the Republic.

Like Bank of Ireland, which earlier this year bought the Bristol & West building society, FNBS will be hoping to have made a timely move to benefit from an upturn in the British market.