Outlook improving for societies, says KPMG
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Building societies have been holding up in difficult market conditions, according to accountancy firm KPMG’s Building Societies Database.
It says providing they can deal with various short term pressures, the medium term prospects look better.
Two thirds of the UK’s building societies reported increased profits at their last year end, and the last couple of months have seen strong interim results from three of the largest societies, the Yorkshire, Coventry and Leeds.
KPMG’s analysis shows that a number of societies grew strongly over the last year - including the Swansea by 38%, Bath Investment, 17% and the Skipton, 14% - this was largely the result of the merger with the Scarborough Building Society in 2009.
However, overall two thirds of societies reported reduced total assets and many continue to face short term pressures, especially at interest margin level, with 77% of societies reporting a fall in their last full year’s accounts.
It says the impact post credit crunch has been to increase societies’ cost of funding sharply and the high marginal cost of funding has made it hard for societies to compete for new mortgage lending against some of the large internationally diversified banks.
Amongst the top 16 societies, average profits fell by 7% last year. Societies have commonly dealt with this by cutting costs - 60% of societies reported an absolute reduction in management expense ratios.
At some societies significant further cost reductions can still be achieved, according to KPMG, so more falls in costs can be expected next year.
However, for the vast majority of societies the cost of funding is a short term issue, with mortgages reverting to variable rates after the initial fixed or tracker rate periods expire.
As a result of falling house prices and tighter credit criteria, the rate of remortgaging has fallen sharply, meaning that for most societies over the next year the proportion of borrowers on variable rates will rise steadily, boosting margins.
KPMG predicts that changes in societies’ funding models, away from the money markets to rely increasingly on retail funding, will benefit many customers, notably savers.
More societies are also likely to offer simple current account facilities, some looking to widen distribution via agencies and others looking to the SME sector as a source of deposits.
Simon Walker, partner in KPMG’s Financial Services practice, says: “The past few years have been difficult for all kinds of financial institutions and this has of course included building societies. Most have needed to cut costs and some have sought efficiencies through mergers, and this trend is likely to continue.
’Such pressures have seen the number of building societies falling - there were 63 in 2004 and there are only 49 today.
“But the signs are that an easing of funding costs over the medium term will see societies’ positions improving and, for those that continue to manage their businesses carefully, the future may be brighter.”
The sector remains dominated by Nationwide Building Society which, with assets of over £190bn, represents on its own nearly 60% of the whole. The smallest building society, by contrast, is the Edinburgh-based Century Building Society with assets of just £23.6m.
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