Britannia, the second biggest building society, this week announced it was cutting the “membership reward” bonus it pays more than 1m of its savers and borrowers, in a sign of how the credit squeeze has hit even the traditionally conservative mutual societies sector.
However, windfall seekers hoping that the more difficult credit environment will provide further impetus to long-running consolidation among the 59 remaining societies may be set for disappointment. Industry analysts are not predicting a rash of takeovers and mergers, and any near-term tie-ups may lead to only a limited or even no payout.
Britannia’s unique mini-windfall, effectively an annual dividend, is being cut by 22 per cent after a 12 per cent drop in profits last year to £115m.
The lower payout reflects sharply reduced profits outside the society’s core mortgage and savings business.
It also follows a sudden change in chief executive at Derbyshire Building Society last month, after the medium-sized society was placed on review for possible downgrade by Moody’s, the credit rating agency, over concerns about its buy-to-let exposure.
The unexpected early retirement of chief executive Peter Richardson, 55, and his replacement by, unusually, a non-executive director, 58- year-old Graham Picken, prompted speculation that the mutual lender faced being be sold off.
While Derbyshire insists it has had no merger approaches and is not seeking any, experts say that it may be among a clutch of societies about to announce a significant drop in profits.
One analyst says the current results season could see about half a dozen societies announce worse annual performances because of losses on sub-prime or buy-to-let lending, exposure to exotic financial instruments, or the cost of IT or other capital investments. He says the hit to profits could be as much as tens of millions of pounds in some cases.
Another analyst says: “[Societies’ results] could be a real mixed bag, some strong performances but also some reduced profits.”
Adrian Coles, director-general of the Building Societies Association, said he was not expecting any society to make an overall loss and that the mutual sector is “well-placed in a difficult market” with its strong base of funding from retail savings and relatively traditional loan books.
Societies have seen their highest ever savings inflows after the run at Northern Rock and as fund investors have sold out of the stock market. Coles says they have also “retained the confidence of the wholesale markets”, evidenced by raising a record £14bn of net wholesale funding in the second half of 2007.
He contrasts positive results at societies such as the Newcastle – Northern Rock’s Tyneside neighbour which posted a 52 per cent increase in profits – and Skipton, with big credit-related writedowns at many demutualised building societies: “We’ve had some strong performances, quite different from Alliance & Leicester and Bradford & Bingley.”
Higher profits being announced at many societies should “reassure safety- conscious savers” who want to know their provider has a “buffer”, he adds. A “not large” profit reduction such as Britannia’s should also not worry savers, he says: “It is too simplistic to say lower profits equal poorer [future] rates.”
Richard Gabbertas, financial services partner at KPMG, the accountants, adds: “Building societies are boring – and boring is good.”
Steve Williams, head of building societies at consultants Deloitte, says that as “relative winners” in the credit squeeze because of generally lower sub-prime exposure and greater funding stability, he was not expecting a series of crisis-triggered mergers. There could also be a lower appetite for acquisition among the bigger mutuals, says one analyst.
But, says this analyst, while the big societies would have most of the sector’s exposure to instruments such as collaterised debt obligations (CDOs), it was “absolutely a possibility” that a smaller society could have become embroiled in these exotic investments, many of which face big markdowns.
However, Coles argues that societies’ exposure to these instruments would only be relatively minor and adds that “if there a SocGen person [in the sector] they’ve yet to be found”.
With the tendency for mortgage fraud to be exposed in a housing and economic slowdown, one or two smaller societies could also face losses which force them to seek a merger, the analyst adds. And where a merger is effectively a financial rescue, there may be limited or even no payouts for members. “The payment might be equivalent to that [for shareholders] of Northern Rock,” says Coles.
In recent years, windfall payouts for members of the smaller society in any “merger” with another mutual have become the norm, with the amounts generally drifting up. Last year’s mega-merger between Nationwide and Portman saw more than 1m savers and borrowers with Portman receiving payouts of between £200 and £1,000.
Coles also questions whether payments would be so generous in a market where there was less competition for mortgage assets. “There has not been a market in building societies since the credit crunch started,” he says.
The BSA says that continuing sector consolidation is an “extremely slow” trend with recent years having seen an average of just one merger a year. And looking out, analysts are not predicting more than a couple of tie-ups a year.
Mike Lazenby, chief executive of the medium-sized Kent Reliance Building Society, foresees some smaller societies looking for mergers because of the “uneconomic burden” of greater regulatory requirements.
He also believes that many of the top 20 societies by size, including “wannabe national players” could also be merger material.
Industry insiders say that as well as Derbyshire, these could include Yorkshire, Coventry, Leeds and Norwich & Peterborough.
