Chelsea and Yorkshire merger talks disappointing but unsurprising

2 December 2009 | By Ray Boulger, senior technical manager, John Charcol

This news is disappointing as it reduces competition, but it is far from surprising. When Stuart Bernau was parachuted into Chelsea in July as chairman he instituted a strategic review saying he would look at all options for the society including possible mergers.

Chelsea’s problems stem from bad commercial lending, significant fraud in its buy-to-let book and a £55m exposure to the failed Icelandic banks.

Some £44.3m of this £55m was written off in the 2008 accounts, although £9m was written back in the first half of this year. I understand much of this exposure was in the form of a three-year term deposit with what was then a highly respected British bank, Singer & Friedlander. The fact that S&F was subsequently acquired by Kaupthing demonstrates the danger of placing medium to long term commercial deposits with even quality banks and potentially inhibits the FSA’s push to get banks and building societies to extend the average life of their deposits.

In its 2008 accounts Chelsea also wrote off £15.4m from the 2007 acquisition near the top of the market of BCS Loans and Mortgages Limited, previously known as Britannia Capital Securities, a second and first charge mortgage broker. The effect of all these write offs, including a £10.2m contribution to the Financial Services Compensation Scheme, was that Chelsea reported a net after tax loss for 2008 of £29.2m.

Nevertheless, in its review of 2008, included in its 2008 accounts the mutual reported that it had, “total group capital in excess of £700m and members can be assured that we have more than adequate capital to sustain the business.”

As a result of a £41m provision against fraud on some buy-to-let lending made between 2006 and 2008 Chelsea reported a loss of £26m in the first half of this year.

But the losses reported for 2008 clearly did not worry depositors as Chelsea increased its savings balances by 5% to £10.06bn in the first half of 2009 and the number of savers by 6.7% to 606,000, no doubt comforted by the guarantee provided by FSCS.

Britannia’s merger with the Co-op left the Yorkshire as the second largest building society, with a Group Balance Sheet total of £23bn at the end of last year. This compares with Chelsea’s £13.56bn at the middle of 2009, which is just over £1m less than its end of year figure for 2008.

If the merger goes through the combined society will have assets in excess of £35bn, easily the second biggest society but way behind Nationwide’s £201bn. It will also improve the geographical coverage offered to the members of both societies.