Mutuals - talk about pressure

Lending Strategy March 2010 | By Christine Toner

It’s safe to say 2009 was a dismal year for building societies. The Financial Services Compensation Scheme levy hit mutuals hard and ratings agency Moody’s released report after report including dour findings about the sector. It still is.

Then there was the collapse of the likes of Dunfermline Building Society together with the last-minute rescues of the Derbyshire and Cheshire societies that sent shock waves around the industry.

So with the sector pondering how to address continuing funding pressures this year’s Building Societies Association annual conference looks set to be the most interesting for many years.

Due to be held at the Manchester Central convention complex on May 6 and 7 it will bring together some of the biggest names in the sector to discuss the past 12 months and consider what societies can expect from the year ahead.

In his ’Welcome’ foreword to the conference programme Adrian Coles, director-general of the BSA, says this year’s event will take place against a backdrop of unprecedented change in, and challenges for, the sector.

“Confronted by hostile market conditions - the lowest interest rates for at the least the 316-year history of the Bank of England and the deepest post-war recession - and taxpayer-subsidised competition from a range of large banking brands societies have seen both savings and mortgage balances decline in the past year,” he says.

Confronted by hostile market conditions and taxpayer-subsidised competition from a range of large banking brands, societies have seen both savings and mortgage balances decline in the past year

“Add to that unwelcome mix a disproportionately large share of the bailout costs of Bradford & Bingley and the Icelandic banks - a penalty on the prudence societies exhibited during the run-up to the credit crunch - and it is perhaps not surprising that societies have at times found it hard to take advantage of the difficulties facing the banking sector.”

But Coles adds that the sector remains in good spirits, claiming it has generally been able to sort out its own problems without having to rely on the taxpayer.

He also points out that arrears are lower for mutuals than in the mortgage market generally and says that, judging by the line-up at this year’s conference, “the ability of the BSA to attract a wide range of distinguished speakers to its events is undiminished”.

This year’s speakers include Graham Beale, BSA chairman and chief executive of Nationwide Building Society, Philip Collins, former chief speech writer for Prime Minister Gordon Brown, Charlie Mayfield, chairman of John Lewis Partnership, Michael Portillo, political pundit and former Conservative MP, and Coles himself.

While Beale will no doubt be spoilt for choice on subjects to cover given his role at the BSA and the fact that Nationwide became something of a knight in shining armour for smaller, struggling societies last year, the rest of the speakers will have specific areas to cover.

Unsurprisingly Collins will tell delegates about life in 10 Downing Street. One wonders if the topic of bullying will rear its ugly head given the revelations that been given wide publicity recently.

Mayfield will discuss the advantages of the partnership business model. With his job title it would be the surprise of the conference if he were to point out any disadvantages but given the success of JLP this is likely to be an illuminating speech.

Portillo is set to offer a perspective on issues and opportunities facing the industry, drawing on his experience in government and at the Treasury.

Portillo was shadow chancellor when present Prime Minister Gordon Brown was chancellor and during this time managed to annoy his party leader William Hague by announcing that “the next Conservative government will respect the independence of the Bank and legislate to enhance that independence while increasing its accountability to Parliament, and it will not repeal the national minimum wage”.

Both the above are Labour-facing policies, so this address by a man not afraid to speak his mind should not be missed.

Difficult decisions
In his foreword Coles, who will also appear in the Question Time debate at the conference, remarks on some of the technical subjects up for debate.
“The subjects being covered suggest we can hardly be accused of ducking the main issues,” he says. “Shared services and cost control are key challenges, potentially involving difficult decisions.

“The session on the outlook for the housing market is one of the most important for societies, while looking at the range of business models in British and European financial markets is important in understanding our strategic options.”

There will also be appearances from the likes of Hamish McRae, associate editor at the Independent, Andy Golding, chief executive of Saffron Building Society, and Gary Hockey-Morley, marketing director at the Post Office.

Last year’s seminar session threw up several important issues but one dominant theme was the FSCS and the need to reform it.

Addressing delegates, then chairman John Goodfellow outlined the need for a fairer system that reflects the risk most societies pose compared with poorly run banks.

Goodfellow focussed on the example of what happened with B&B and the Icelandic banks.

JLP chairman Charlie Mayfield will speak on the partnership model. It would be the shock of the day if he were to point out any disadvantages but given his company’s success his talk is likely to be illuminating

“It seemed to many prudently run societies utterly unfair that they and their members should face a bill for bailing out far less well run banks from Reykjavik to Bingley,” he said at the time.

“We need to find a fairer mechanism for funding the FSCS. And we need to put in place arrangements that give longer term certainty to institutions so they are not faced with huge additional burdens at short notice.”

He also raised the question of whether societies would ultimately have to pay for B&B’s downfall, adding that it would be appalling if societies were placed at risk as a result of the failure of the authorities to realise the maximum amount from the B&B loan book.

“The government should state clearly what it intends to do when such a shortfall arises,” he told delegates. “The potential cost to the members of all societies is significantly larger than the fiasco of MPs’ allowances.”

Meanwhile, it was revealed that societies believed mortgage rates might have to rise to pay for higher FSCS levies. Last year chairman John Goodfellow called for a fairer FSCS systemResearch unveiled at the conference showed that many society chief executives agreed the FSCS levy would have a significant effect on their businesses.

Some 60% of the bosses polled by the BSA thought that mortgage rates would have to rise to cover the cost of the levy, with a further 53% believing that savings rates would have to fall.

But on the whole chief executives were positive, with 55% optimistic about the prospects for their businesses for 2009.

“The past 12 months have been tumultuous so it’s encouraging to see that most societies have a positive outlook,” Coles said at the time.

Despite the challenges faced by mutuals their chief executives feel they are in a strong position to overcome these.

“Next year is not being seen as a period of growth but rather a time when balance sheets can be strengthened and businesses primed to take advantage when conditions become more favourable.”

Controversy
Meanwhile, there was something of an outcry when the Financial Services Authority used the conference to hit out at societies’ handling of the financial crisis, attacking them for being too slow to react to the downturn.

The FSA says some mutuals were quicker off the mark than others in dealing with the crisis.

The regulator’s address, delivered by Hugh May on behalf of his FSA colleague and the manager of its retail firms division Nick Lock, alleged that stress tests applied by societies in the run-up to the crisis were inadequate.

“A number of societies did not react sensibly to the onset of the crisis and some even saw it as a business growth opportunity,” May told delegates.

He added that the regulator had on several occasions given societies ample warning to protect their businesses - warnings that the FSA claims some mutuals ignored.

“We warned you to think about the issues long before the risks crystallized,” May added.

In response Andy Caton, corporate development director at the Yorkshire Building Society, acknowledged that the quality of liquidity held across the sector needed to be improved. But he also attacked the downgrade by Moody’s of nine societies, claiming the stress tests seemed to be “at the far end of extreme”.
May declined to comment on whether he the downgrades were extreme, as did his FSA colleagues who were present.

Since the last BSA annual conference times have again been tough for societies and this year’s event will give delegates a valuable opportunity to discuss what can be expected in the months to come. So 2010 is unlikely to be much easier than 2009 for societies but will it be harder?

That doesn’t seem possible.