S Times: How Lloyds adds £5,000 to loans; Bank has become a stock market darling at customers' expense

How Lloyds adds Pounds 5,000 to loans; Bank has become a stock market darling at customers' expense. Alexandra Goss. Sunday Times. London (UK): Sep 19, 2010. pg. 1

LLOYDS BANKING GROUP, Britain's biggest lender, has added more than Pounds 5,000 to the cost of a typical homeloan since the credit crunch began two years ago, in a stark indication of how consumers have been squeezed during the financial crisis.

Lloyds, 41%-owned by the government, has seen its shares soar 260% since the depths of the crisis and 50% so far this year as the bank returned to profit. An analysis for The Sunday Times shows how this turnround has come at the expense of borrowers with its Cheltenham & Gloucester and Halifax lending arms.

The average margin on five-year fixed mortgages at C&G has leapt from

1.09 percentage points in September 2008 to 3.76 today -- a 245% increase, said Moneyfacts, the data firm. This would add Pounds 5,340 a year in interest to a typical Pounds 200,000 loan. Many brokers are recommending five-year fixes to guard against a rise in Bank rate.

The margin largely reflects the difference between the rate borrowers are charged and the cost to the bank of securing mortgage funding in the wholesale markets, known as swap rates.

Customers who can raise only a small deposit are being hit hardest. For example, for borrowers with a 10% deposit, C&G charges 6.89% a year for a five-year deal, despite a current five-year swap rate of

2.19% -- a margin of 4.7 points, said Moneyfacts.

Royal Bank of Scotland, 84%-owned by the taxpayer, is also pocketing hefty margins on its average five-year fix. They are up from 1.1 points two years ago to 3.67 now, adding Pounds 5,140 a year to a typical loan.

Michelle Slade at Moneyfacts said: "Borrowers will be angry that they continue to pay the price for mistakes made by lenders, particularly those that have accepted government funding." Figures from Defaqto, the data firm, show that Lloyds is also charging aboveaverage fees on some of its deals. For example, Halifax charges Pounds 1,034 on its twoyear fixed-rate mortgage compared with a market average of Pounds

790. C&G charges Pounds 848.

Lloyds accounted for more than a quarter of all complaints made against financial services firms in the first half of the year, said the Financial Ombudsman Service. It received 22,420 complaints, up from 20,190 in the previous six months.

Lloyds reported pre-tax profits of Pounds 1.6 billion for the first six months of the year, against a loss of Pounds 4 billion for the same period last year, and City analysts are talking about the stock as one of the best bets in Europe. Citigroup said last week: "Lloyds is outperforming as a stock because the core UK retail banking business and mortgages in particular are doing so well. It is our top pick among domestic banks."

First-time buyers are being urged to opt for deals from the mutuals. For example, C&G charges 6.99% a year for a two-year fix for buyers with a 10% deposit. Yorkshire building society charges 4.95% and the Co-op 5.89% for equivalent deals.

David Hollingworth at L&C, the broker, said the cheapest five-year fix with a 40% deposit is from HSBC at 3.94% with a Pounds 99 fee. Those with a 10% deposit could opt for the Co-operative five-year fix at

5.89% with a Pounds 499 fee, he said.

Stephen Noakes at Lloyds said: "Swap rates do not take into account the cost of funding, which has significantly increased since the onset of market turbulence. When pricing our mortgages we aim to balance offering competitive deals with the commercial needs of our business."

Beat the raw deals at the banks, page 3

Should you buy the shares?

BANK stocks rose last week after new rules about how much capital they should hold were laid out.

The Basel III regulations are designed to prevent another financial crisis but British banks already hold enough capital to more than satisfy them. TD Waterhouse, the broker, said bank shares accounted for 53% of all trades last week.

LLOYDS BANKING GROUP

Shares are already up 50% so far this year, ending the week at 75p, but are still worth just over half of what they were in September

2008. Jonathan Jackson at Killik, the broker, rates it as a buy.

"Growth may be more subdued but valuations are also reasonable."

ROYAL BANK OF SCOTLAND

Citigroup upgraded RBS to a buy earlier this month but the Share Centre and Killik are more cautious and are advising investors to sell.

Jackson said: "RBS is still in government hands and there are restrictions on when it can resume paying dividends. It is not as attractively valued as Lloyds."

BARCLAYS

Barclays has resumed dividends this year and Jackson said investors should take advantage of the dip in the price and increase their holdings.

The shares fell 19p to end the week at 305p.

HSBC

Graham Spooner at the Share Centre recommends holding HSBC for its emerging markets exposure and 3% dividend, but for a purer play on Asia, Jackson likes Standard Chartered, which closed the week at Pounds 19.

Top five-year fixes* HSBC 40% deposit Pounds 99 fee Mansfield building society 25% deposit Pounds 999 fee Co-operative 10% deposit Pounds 499 fee *For purchases SOURCE: L&C Mortgages 3.94% 4.14% 5.89%

Credit: By Alexandra Goss