The Royal Bank of Scotland Group plc RBS, the banking and insurance holding company largely owned by the U.K. government, is planning its comeback in the sale of interest-only mortgages, as reported by Bloomberg. While the move comes on the heels of customer demand according to the company, the return to this riskier arena of lending could be attributable to the search for elevated profits.
These riskier mortgages, where monthly interest payments are made by borrowers at the end of the term, were discarded in the aftermath of the financial crisis of 2008. Such interest-only mortgages have been frequently criticized by the regulators as clients are not able to fully comprehend the repayment risks involved in them. Moreover, the customers are exposed to the risk of repossession.
However, with an increase in interest-only mortgages and zero percent credit card deals offerings by the banks in order to lure clients to raise market share and boost revenues, Royal Bank of Scotland’s step to offer riskier loans again to wealthier customers does not come as a surprise.
The company will begin providing these loans from Sep 21 this month. However, these offerings, which will be made only to consumers with earnings of at least 100,000 pounds ($155,000) per year excluding bonuses, are bound to have strict lending criteria. Also, the customers to avail such mortgages are expected to have a maximum loan-to-value of 75%. Further, borrowers will need to provide an “acceptable repayment strategy” to the lender.
“We are re-entering this market due to customer demand,” Lloyd Cochrane, head of mortgages and protection for RBS and its NatWest consumer unit, said in the statement. “We will keep in touch with our customers to support them to stay on track with repaying their mortgage.”
Royal Bank of Scotland has been aggressively streamlining its business structure to refocus on its domestic operations by reducing global and investment banking activities. With an aim to enhance focus on core markets and boost profitability, the bank plans to increase its domestic assets from 60% to 80% of its international business.
The company’s focus on mortgage improvement is expected to pay off in the form of an expanded client base and in turn increased revenue generation. Also, the company remains committed to develop its U.K. as well as Irish consumer and commercial lending.
Currently, Royal Bank of Scotland carries a Zacks Rank #3 (Hold). Some better-ranked foreign banks include Banco de Chile BCH, Deutsche Bank AG DB and Mitsubishi UFJ Financial Group, Inc. MTU. All these stocks hold a Zacks Rank #2 (Buy).
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