Building societies forced to act on losses

Building society customers can expect to see more mergers, and more increases to the standard variable rate (SVR) for their mortgages, as mutual lenders struggle with low profitability.

Savers and borrowers with Yorkshire Building Society this week backed its effective takeover of Chelsea, another big society, in the latest consolidation move in the sector.

The merger, the eighth tie-up among mutual lenders since the start of the credit crisis, was voted through by Chelsea members the previous week.

Meanwhile, Skipton – the fourth-biggest society – has become the largest mutual yet to increase its SVR for borrowers.

It blamed the cost of competing for savings, as the banks reduce their reliance on wholesale funding.

The changes come ahead of the start of the sector’s 2009 results season next month, in which losses are expected to be reported by a range of societies.

SVR increases and mergers are two ways for societies to address business pressures, according to the Building Societies Association (BSA), as they allow lenders to improve interest rate margins and take out costs, respectively.

“[Societies’] margins are being squeezed on both [mortgage and savings] sides,” said Brian Morris, head of savings policy at the BSA.

Many societies still have significant numbers of borrowers paying low tracker mortgage rates, which unlike SVRs cannot be changed, while having to offer savings rates of 3 per cent or more to attract deposits.

“SVRs are one of the few mechanisms in societies’ control,” said Ivan Gould, chief executive of Buckinghamshire Building Society.

More than half a dozen building societies have already pushed up their SVRs – or, at Nationwide and Yorkshire, the standard rates of specialist lending subsidiaries – while the base rate has been at 0.5 per cent.

The longer the base rate remains at the current low, the greater the likelihood other lenders may follow suit.

“More will put up SVRs unless there are reasonably significant moves in base rate,” predicted Gould.

David Black, banking consultant at Defaqto, the research firm, said that with societies that increased SVRs – or reduced rates for loyal savers – “you have to question whether they’re acting in the interests of members”.

Industry executives and analysts said that further mergers could also follow the 2009 results season.

The BSA is “hopeful” that there will be fewer societies reporting losses than for the previous year, but some analysts predict that underlying business performance will be worse.

About 10 societies – a fifth of the sector – were lossmaking in 2008, with many hit by the collapse of the Icelandic banks and increased levies for the Financial Services Compensation Scheme (FSCS).

A loss need not be critical, said Morris, if a society could “see the light at the end of the tunnel” in terms of future improvements in performance.

But Stuart Bernau, outgoing executive chairman of Chelsea, said “you would like to think” that other society boards were considering mergers.

In recommending the merger with Yorkshire, he had warned that without a deal, the lossmaking Chelsea would have been forced to worsen its rates.

Instead, the enlarged society would now look to take out £35m to £40m of business costs a year, allowing it to offer better rates, while preserving the Chelsea branch network.

“Societies should always be looking at whether they are putting members first,” Bernau said.

However, with merging societies aiming to conserve financial strength, members are unlikely to be offered windfalls currently.