Investment: Banks face up to interest rate cut

RETAIL BANKING is a broad church these days covering everything from HSBC and Barclays, which play in the international league and pick up some heavy beatings, to the mortgage banks, which were until recently building societies and still mainly service the domestic housing market.

While Barclays and HSBC shares have halved this year and most of the losses have come in the past 10 weeks, The Halifax, Alliance & Leicester, Northern Rock and Woolwich have come down only 15-25 per cent from the year's highs and in the past 10 weeks losses have been limited to less than 5 per cent.

But mortgage banks, more than most companies, depend on a buoyant housing market and that in turn relies heavily on low or falling interest rates and potential buyers feeling secure in their jobs.

A half per cent cut in base rates today would be followed by a matching cut in variable mortgage rates, but a drop in fixed mortgage rates is rather more problematical. They are linked to the cost of five-year money in the wholesale money markets and that has been falling over the past 18 months while short term rates have been rising. Sooner or later the traditional relationship will start to re-establish itself.

The housing market has already come off the boil, unemployment looks certain to start rising as economic growth declines, and estate agents are starting to sound gloomy as the latest survey from Birmingham Midshire shows.

Mortgage lending has not had time to go seriously off the rails in the last two years and bad debts should not be a serious problem for the mortgage lenders. But margins between the cost of money and lending rates tend to shrink when interest rates as a whole are moving down.

Brokers are still forecasting earnings of 47p this year, rising to 51p next year at Halifax, for example, but the shares look fully valued at 763.5p, up 11.5p on the day.