Tesco looks to cash in on the mortgage crisis

Published on Tuesday 30 September 2008 22:02

TESCO may begin offering home mortgages and current accounts to compete with the major lenders as a result of "opportunities" arising from the credit crisis.

Britain's largest retailer yesterday claimed it was "at its best" in difficult trading conditions as it shrugged off the impact of a consumer slowdown to report an 11.3 per cent rise in pre-tax profits to 1.44 billion in the six months to 23 August.

Tesco said that as part of its plans to expand its financial services offering it was considering a range of new products.

In July, the high street giant announced plans to buy out Royal Bank of Scotland, its joint venture partner, from Tesco Personal Finance, for 950 million, with the deal expected to be completed in November.

While Tesco had previously resisted offering mortgages on the grounds that the margins were so tight that they were unprofitable, finance director Andrew Higginson said yesterday that the credit crunch appeared to have created an opportunity.

"It hasn't been good for the consumer, but we have seen the return of rational pricing in mortgages and that would potentially offer us the opportunity to get in there," he remarked.

Difficulties in the wholesale credit markets have driven up the cost of mortgages.

Higginson said Tesco may also begin offering customers current accounts which, despite often operating at a loss, create a relationship with customers to offer other products to.

Tesco, which said it wants to increase profits from Tesco Personal Finance to more than 1bn a year over the next few years, warned that substantial changes would probably be at least a year away, with a large amount of integration required in the short term.

Group chief executive Sir Terry Leahy said he would prefer to be operating in a stronger economy, but claimed the company was at its best when times were difficult.

"It (the slowdown] is quite a healthy thing really, the business shouldn't rely on customers having more money to spend every year," he said.

Customers, who began tightening their belts towards the end of 2006, had become increasingly price sensitive, so the group had responded by offering new discount lines and cut price deals, Leahy said.

He admitted that the company's premium range, Tesco Finest, "certainly isn't growing", while sales of organic products have been flat in recent months.

Tesco shares closed up nearly 5 per cent yesterday at 387.6p after the company reported group sales excluding VAT up 13.8 per cent to 25.6bn.

The figures were helped by a huge jump in international sales, which grew by 26.8 per cent during the period, as the company continues its drive overseas, mainly in the US and Asia.

Tesco said it plans to increase its total floor space by 25 per cent this year.