Halifax to axe Howard ads?

Halifax, the UK’s biggest savings and mortgages provider, is reviewing its £18m advertising account at a time when the bank, under parent company HBOS, is being urged to change its business model to weather the credit crunch crisis.

A spokesman for Halifax says the timing is “unrelated” but others suggest that the eight-year-old “Staff as stars” campaign featuring Howard Brown is out of kilter with how the business should be marketing itself in the current economic crisis. Moreover, they question whether Halifax can really deliver on its giving the customer “eXtra” premise of its advertising at a time when it is increasing mortgage rates despite falling interest rates.

One senior industry source suggests that not only must HBOS adapt its business model but that its marketing message must also change – and now, with the review, is a good time to do it.

He says: “We’ve been talking about them lately, mostly because of their now far less competitive mortgage offerings. Like most of the industry they are, while not pulling out of the mortgage market, clearly making products less attractive. Halifax has always focused on price, be it in mortgages or current accounts.

“There are those who would say this is not a sustainable brand value and as the mortgage market is currently proving, it is clearly hard for them to maintain it.”

He expects that Halifax will take the opportunity to axe its “Staff as stars” advertising in favour of something more appropriate to any shifting brand or business priorities. The Halifax spokesman insists no such decisions have been taken and that the review is about the bank “taking stock” of its options. The singing and dancing advertising that broke eight years ago has been “incredibly successful”, he adds.

Another suggests that HBOS could even cut the interest rates on its current accounts and savings products. Others say there is a “massive disconnect” between what is happening outside the branches, the brand experience and its advertising, which must be addressed.

Yet Elliott Moss, managing director of advertising agency Leagas Delaney, which produces the advertising for Nationwide, says that there is still room for the populist and unashamedly upbeat advertising, even in the industry’s current predicament. However, he cautions that the campaign “does not feel fresh any more” and adds: “The missed opportunity has been to evolve the campaign – retaining the core elements, and either refreshing or replacing the elements that do not work as effectively.”

That, though, could be secondary to a company that is competing in an industry battling its way out of what one source labels “self-imposed” problems. HBOS’s predicament is indicative of an industry on its knees, crippled by the exposure to the American sub-prime mortgage market and a subsequently stagnating UK housing market.

Just last week it defied government calls for interest rate savings to be passed onto customers, increasing rates on some of its most popular mortgage deals by 0.5%, despite a quarter point reduction to the UK interest rate last week.

Decades ago, banks kept mortgage loans on their balance sheets until the loan was repaid but over time they have increasingly passed on the loans to a third party, which often packages mortgages with others to investors, turning them into bond-style securities. In the UK, HBOS is the biggest securitiser of assets and can fund relatively low-cost mortgage deals without having to hedge against savers’ deposits. Securitisation has given banks the opportunity to quickly grow their businesses. But in the US, customers were increasingly defaulting on their mortgages, loans sold to investors started to turn bad and, globally, investors began to shy away from investing in mortgage-backed securities. Without that investment a number of banks, particularly in the UK, no longer have the ability to raise funds.

Northern Rock, the UK’s most prominent victim of the credit crisis, had relied on wholesale funding for 77% of its lending, a structure that spelt its demise when credit markets closed in September last year. The bank was nationalised in February after borrowing in excess of £25bn from the Bank of England.

HBOS, which has more than 20% of the UK mortgage market, gets a little less than half of its funds from the wholesale markets, while rival Alliance & Leicester gets almost two-thirds from the short- and long-term wholesale markets and Bradford & Bingley about 50%.

All are examples of former building or mutual societies that demutualised under the 1986 Building Societies Act in order to rapidly grow their business through access to more funding sources.

According to Collins Stewart analyst Alex Potter, these are likely to lose market share. Market conditions instead favour banks such as HSBC that do not have to fund their mortgage businesses through interbank lending. HSBC, with its liquid Far Eastern businesses and relatively modest market share in UK mortgages, is already ramping up activity to take advantage (MW last week).

Ironically, HSBC was one of the first banks to be hit by the mortgage woe in the US, shocking shareholders in February last year by issuing its first profit warning. It published far worse than expected bad debt in the bank’s US mortgage book, spurring remedial action such as chief executive Michael Geoghegan pledging to take “direct control” of the problem while assuring investors that the rest of its business was on track.

When the credit crunch first started to bite, HBOS – headed by former Asda executive Andy Hornby – coped better than its smaller rivals but as 2008 started that all changed, and many see HBOS as the worst performing of the “Big Five” UK high street banks. The mood has been shifting against the bank for months, especially since it published its 2007 profit figures in February. It announced a £434m exposure to subprime, as well as £7bn of Alt-A mortgages, which, although not subprime, are not prime either, and a 13% fall in retail profits. It was also hit – albeit temporarily – by robustly denied rumours of liquidity problems. At one point last month, the shares dived 20% but rallied.

Meanwhile, as rival Royal Bank of Scotland calls for shareholders to support a rights issue of about £12bn, analysts suggest that Barclays and HBOS may be next in line. All three have low tier one capital ratios, a key measure of financial strength, below the European average of 5.9%, with 4%, 4.8% and 5.7% respectively.

Yet for Halifax, its rivals and consumers caught out in the funding and interest rate merry-go-round, help is on the horizon. Chancellor Alistair Darling has this week unveiled plans for the Bank of England to take £50bn of hard-to-value mortgage-backed assets onto its books, swapping them for more liquid bonds for up to two years, to help the banks out of their funding problems – a move some have labelled unfair help. Vince Cable, the Liberal Democrats’ Treasury spokesman, has warned: “We cannot have a situation where the banks are able to privatise their profits and nationalise their losses.”

Howard Brown and his cohorts, credited with driving savings and mortgages by up to a quarter in eight years, will be hard-pressed to help Halifax out of this hole. The bank may well end up singing to a different tune.