BUILDING societies are capitalising on increasingly fertile money markets, accessing fresh funds to boost lending to homebuyers.
Customer-owned lenders have been active in the wholesale money markets in recent months, taking advantage of more benign debt conditions to raise cheap funds.
Typically, building societies raise the bulk of their funds through customer deposits, but also access wholesale money markets to diversify their funding.
Leeds Building Society this week raised £250m through a covered bond issue which it said was “very well received and oversubscribed”.
The UK’s fifth biggest building society raised the money from insurance firms, asset managers and other institutions at low rates. The debt matures in three years, and has been highly rated by Moody’s and Fitch ratings agencies.
“Amongst all the doom and gloom, there are signs that the mortgage market is picking up,” said Leeds chief executive Peter Hill. “There’s a slightly more optimistic outlook across the country. It’s difficult to put your finger on it but you can certainly see it coming through, and from our point of view, we are very well placed to take advantage of it.
“In terms of our wholesale aspirations, we have got a lot of firepower and hold very high levels of funding.”
Leeds also raised 175m euros (£146m) last month, tapping the European Central Bank’s three-year discounted funding window, which is widely credited with boosting confidence in the eurozone. “We realised it was a good opportunity for three-year funding at effectively one per cent,” said Mr Hill. Bigger players Barclays, Santander and Nationwide have all recently accessed the money markets. Nationwide this week raised £1.5bn through a securitised debt issue.
Some building societies are using the new money to successfully fund major expansion in mortgage lending, a market which is still trading way below pre-crisis levels.
In 2011 Leeds grew its new mortgage lending by 25 per cent to £1.23bn, which it said was one-and-a-half times its natural market share.
Mr Hill said while this year’s mortgage expansion will be “very much market-dependent”, it hopes for more growth this year.
Yorkshire Building Society yesterday launched a four-year covered bond issue aimed at raising £500m – although this is expected to rise to £750m on strong demand.
It recently completed its acquisition of internet savings bank Egg, which came with £2.1bn of savings and reduced the need for the UK’s second-biggest building society to tap wholesale money markets. It even bought back £724m of Government-backed debt in November ahead of maturity.
The Yorkshire is almost 100 per cent funded by savings, and after growing mortgage lending by 46 per cent in 2011, plans to increase it further this year.
“We always fund first and then lend,” said a spokeswoman. “We have a very prudent model that’s very retail funded. However, the fact we can access the wholesale money markets is a demonstration of our strength and reputation.”
Skipton Building Society more than trebled its mortgage lending in 2011 to £1.7bn. The mutual, which is 91 per cent retail funded, completed an inaugural securitisation last year – “a sign of the markets’ confidence in our strength”.
By law, building societies can only be a maximum of 50 per cent wholesale funded. However, in practice, no building society comes close to hitting this threshold, according to the Building Societies Association.