Specialist lender acquisitions could be more ‘common’ and ‘win-win’ – analysis

Earlier this week, Shawbrook Bank signed an agreement to buy specialist mortgage lender Bluestone Mortgages.

The lender said that with The Mortgage Lender, which it fully acquired in 2021, and its capital base and presence in the deposits market it would be “well-placed” to meet the growing demand for specialist lending.

It comes off the back of Barclays finalising its acquisition of Kensington Mortgages earlier this month.

Following the acquisition, brokers said that the buyout would reinforce the specialist lender’s existing proposition and signal the start of high street lenders diversifying into new markets.

Liz Syms, chief executive of Connect for Intermediaries, said that there had been a number of specialist lender acquisitions in recent years, pointing to OSB and Precise, and Australian-based ColCap acquiring an 80 per cent share of Molo earlier this year.

“It certainly appears that this type of acquisition is becoming more common, and I am sure we will see more moving forward,” she added.

‘Tough market’ for specialist lenders due to funding challenges

Syms said that it was a “tough market” for specialist lenders, with some experiencing funding issues due to economic uncertainty.

In February, speakers at The Specialist Lending Event said that funding across the board was more challenging.

They noted that non-bank lenders had had to diversify funding, going from one or two streams of funds to 16 or 18 in some cases with each stream catering for a specific type of lending.

Speakers added that the securitisation markets had also dried up and was “less and less available”, but it was easing.

Syms continued that some lenders were managing funding issues by increasing rates so they were “effectively pricing themselves out of the market for a while”.

She added: “Others withdraw temporarily. We have seen some withdraw permanently, such as Masthaven. If, therefore, a larger parent can give some funding stability, this has to be positive for advisers and their clients.”

Syms said that it would be a “shame” if specialist lenders that were acquired “lose their identity”.

“The value of some of the lenders is the difference they bring to the market with a wider criteria offering which serves a different market from their new parent.

“My understanding is that the specialism is attractive to the acquiring banks and they will be looking to capitalise on the differentials to expand their offering and bring in higher margins. So that, with the more secure funding lines, should make for a win-win for everyone,” she noted.

A ‘buyers’ market’ for specialist lenders

Some noted that the process for non-bank lenders trying to become a bank themselves to overcome funding issues could be more difficult now than it had been previously

One lender source, who wished to remain anonymous, said: “This is purely my view. It [the regulator] has issued a lot of licences.

“A lot of those have been successful, some have been less successful. I expect that process has become a lot harder than it was six or seven years ago.”

They said that this year may be more of a “buyers’ market” than it had been in previous years.

“Whether they get licences or whether they end up becoming part of a bank, I think is probably likely [more will go down banking route],” they noted.

Consolidation ‘shape of things to come’

Lewis Shaw, owner and mortgage broker at Riverside Mortgages, said that “consolidation in the specialist space may be the shape of things to come”.

He added that this would reduce trading costs and increase profitability in light of “significant economic headwinds”.

“Hopefully, it means those borrowers who have more complex circumstances can continue to be served, as it’s likely that demographic is about to grow by quite a margin,” Shaw noted.

Justin Moy, managing director at EHF Mortgages, said that Shawbrook had been the main funding partner for Bluestone Mortgages for several years so it was a “very good acquisition for both sides”.

“It looks like the Bluestone brand will stay for the time being, and Shawbrook will leverage some of the IT systems and processes that Shawbrook desperately needs for its own business. Specialist mortgage lending is a very profitable business area that will be a growth opportunity for many years to come.

“Increasing demand for flexible underwriting to help support business owners, complex incomes and credit-impaired borrowers will be welcomed by the market,” he added.

Amit Patel, adviser at Trinity Finance, agreed that specialist lending would be a “growth area in 2023 and beyond” and it was a “very profitable sector”.

“This is why we have seen some consolidation in the first few months of this year as lenders try to diversify their product offering to cater to this niche market. We may well see further announcements from other lenders as each lender jostles for a slice of the pie,” he noted.