Andy Hornby, the chief executive of HBOS, is making a habit of getting clobbered for doing the right thing. Before Christmas HBOS caught the flak over the Farepak debacle, even though it simply behaved like a responsible bank in refusing to extend an overdraft to the collapsing hamper business.

In the first few months of the year, Britain’s biggest mortgage lender sought to bring the terms that it provides existing customers in line with the good deals it offers new borrowers. This not only makes good business sense, it is also fair. Unfortunately, its effort to be more evenhanded sent droves of new borrowers looking for better deals elsewhere: HBOS’s share of the mortgage market in the first six months of the year has practically halved. The signal from Britain’s biggest mortgage lender yesterday was alarming, not only for HBOS but for the banking sector as a whole.

The bank insists that it moved promptly to reverse its lending practices when it saw that new lending was falling. After three to four months, it decided to abandon the plan to merge terms for new and old lenders. Nonetheless, this is disconcerting. HBOS is supposed to be the most successful mortgage lender in the UK. When it saw its core business collapse so dramatically, it is bizarre that it took months, rather than weeks, for the bank to react.

Other lenders, such as Northern Rock, seem to have had more success in aligning the terms for new and old lenders. It needs to be carefully calibrated but, clearly, it is doable. HBOS will be dogged by questions over whether its failure was one of execution rather than conception, whether it simply failed to sell suitably competitive products to either its new customers or its old ones.

BACKGROUND

• HBOS drops £1.5bn on mortgage mistake

• Halifax shock as UK new mortgage business plunges

• HBOS hikes SVR, hits borrowers

• Shares in HBOS drop nearly 5% on cautious outlook

• HBOS cautious as bad debts hit £1.7bn

HBOS must be more measured

The bank insists that it moved promptly to reverse its lending practices when it saw that new lending was falling

Related Internet Links

• HBOS company information

• HBOS share price chart

• HBOS forecast

Putting this announcement in perspective for HBOS, though, it is worth bearing two figures in mind. One, HBOS will still hit double-digit earnings growth this year. Two, HBOS has outperformed rival bank stocks over one, three and five years, but it has significantly underperformed in the past six months. So far, this has been more a market readjustment following James Crosby’s spectacular run rather than a comment on the bank’s stewardship under Mr Hornby. If problems resurface, that will change.

The broader lesson for the industry is that the mortgage market is enormously fluid. Customers do not seem to have any brand loyalty when it comes to home loans, but will go to whoever offers the best deal. The danger is that this competitive pressure will drive the banks into perilous territory – offering loans that are unsustainable, both for them and their borrowers.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive