Mid-sized lending agencies in the British Isles may face some near-term difficulties, but should make it through those problems intact, according to Fitch Ratings. However, both Fitch Ratings and Standard & Poor's set a cautious tone about the state of the construction sector in the U.K. and Ireland.

For instance, lenders Alliance & Leicester and Bradford & Bingley have seen share prices fluctuate widely during the recent liquidity crises. They managed to remain in a solid position because of their funding models and timing, said Fitch. Both banks correctly anticipated growth in loan origination business for 2007 and funded themselves accordingly through securitization and covered bond issuance. This meant that neither institution needed continued access to capital markets when the paper dried up.

The strength of their portfolio, matched with their street-side business kept the banks propped up. "Alliance & Leicester's and Bradford & Bingley's funding is well diversified with retail deposits representing around half of their funding," explained Andrea Jaehne, of Fitch's Financial Institutions Group.

A vibrant housing and construction sector in both countries have contributed to their successes, say sources. In the U.K. and Ireland, the pace of housing price increases have been among the fastest in Europe, S&P said. On the other hand, both markets are at least 30% overvalued, as recent downturn in sales suggests. Ireland is set for hard times in the two markets, "while the U.K.'s more diversified economy, which is currently experiencing a less stark moderation in house price and construction sector growth, should weather the storm to a greater degree," S&P said.

Currently, the Irish economy is heavily exposed to the direct effects of the housing market slowdown on the construction sector, though the across-the-board economic problems have yet to materialize. "The boom in construction in Ireland has been partly based on a period of catch up," said S&P. "Ireland's housing stock was significantly below the EU-15 average, suggesting that there could be further room for growth in the market over the coming years."

"We expect the U.K.'s housing stock to have moved closer to the EU-15 average," the agency added. "There is still likely to be some room for further investment, however, particularly in the south east of the country where lack of supply has been a key factor in the recent house price boom."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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