Lenders frustrated by increased competition and low returns

The decision by Dexia comes after one bank pursued an increasingly aggressive strategy to gain market share over the past few months.

An industry source said: “Dexia is not being aggressive in looking for new business because returns are slipping. Suddenly lenders are being really outgunned by someone and one or two players are going to drop out. Anything that’s a manageable size – say £75m – they just undercut everybody else. History shows that whenever someone goes aggressive on price they clearly win a large slice of the market.”

The bank is believed to be Abbey National, which declined to comment. It has recently beaten off competition from a number of other lenders on transfers in Cheshire and London.

Ian Clark, Dexia deputy general manager, said returns would have to rise to sustain the current number of lenders in the sector.

He said: “It is so low at the moment we’ve just stopped lending. At current levels it’s not viable for us to match some deals being done.

“I’m not sure how long it’ll take to turn around. It could be as long as two years.”

Royal Bank of Scotland head of housing finance, Clive Barnett, said: “I think we’re in the dangerous cycle again. The returns are too low to be sustainable. A number of deals are being done that would not interest us.”

Such a situation would initially benefit housing associations, which would experience lower costs. But Barnett warned: “Six months of this will squeeze people out. If competition gets too limited, suddenly the boot could be on the other foot and choice taken away.”

However, Peter Williams, deputy director at the Council of Mortgage Lenders, thought the concerns would shortly blow over.

He added: “What’s certainly not happening is new players coming into the sector. The moment the market starts to get fat and complacent, new people will enter.”