UK banks’ cumulative net mortgage lending reached £13.8 billion for 11 months to November 2013, 24% higher than the same period in 2012, notes Citi in its recent research report.

Andrew Coombs and team at Citi Research in their recent report titled “UK Banks Big Picture: Winter 2013/14” point out UK housing prices also continued to rise with all regions reporting gains.

UK Banks: Recovery in household lending

The Citi analysts point out that apart from mortgage lending, credit card lending and unsecured lending volumes too continued to improve in UK. However, corporate lending volumes remain subdued, as lending to UK commercial real estate continues to contract.

The following table summarizes the recovery in household lending volumes witnessed in UK.

Recovery in household lending UK Banks

UK banks’ cumulative gross lending of £145.6 billion for 11 months to November 2013 was 22% higher than in the same period in 2012.

As can be deduced from the following graph, cumulative net mortgage lending reached £13.8 billion, 24% higher than the same period in 2012.

Cumulative net mortgage lending UK Banks

As far as housing prices are concerned, the Citi analysts point out that by mid-December, the Halifax house price index was up 5.7% year-on-year, while Nationwide’s index was up 8.2% year-on-year. The analysts anticipate further appreciation in the near term.

The analysts point out two key drivers of house prices are base rates and mortgage approvals. Citi’s economists anticipate base rates to rise in early-2015 or late-2014, and hence the analysts believe no impact will be witnessed near term.

UK Banks: Subdued corporate lending

The Citi analysts note loan growth to non-financial corporates rose to a 10-year high in 2008. However this has declined substantially and remains in negative territory. The following graph captures this trend.

Corporate lending

The Citi analysts in another report titled “Decoding UK Retail Banking: Buy Barclays & HSBC” point out in recent years funding and capital constraints have been the main driver of mortgage market share changes. The analysts note that while Barclays has captured share, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) has lost share. The Citi analysts anticipate in future pricing, service quality and strategic positioning, to include regional positioning, to be bigger drivers.

The analysts believe in the long-term Barclays PLC (NYSE:BCS) (LON:BARC) and HSBC Holdings plc (ADR) (NYSE:HSBC) as best placed for loan growth, aided by a strong market position in London, which is expected to show some of the fastest population growth and contributes a disproportionately large share of UK GDP.

The Citi analysts assigned Buy rating on Barclays PLC (NYSE:BCS) (LON:BARC), HSBC Holdings plc (ADR) (NYSE:HSBC) and Standard Chartered PLC (LON:STAN), while assigning Neutral rating on Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY), and Sell/High Risk rating on RBS.