Societies well placed to face arrears problems

Building societies are in a stronger financial position than a year ago, with many well placed to cope with worsening arrears and funding problems, says Fitch Ratings.

Last week the ratings agency confirmed the long-term issuer de-fault ratings of eight building societies. It maintained the stable rating of Coventry, Leeds, Principality, Skipton, West Bromwich and Yorkshire and the negative outlook for Newcastle and West Bromwich.

But Norwich and Peterborough’s outlook has been revised from stable to negative.

Fitch says the ratings reflect tighter cost control by the societies in 2010 as well as more stable fund-ing bases and better management of commercial real estate exposure.

The ratings agency says residential mortgage arrears have declined and despite some challenges, in most cases the societies look well-placed to report better, albeit still depressed, profits.

Matthew Taylor, senior director in Fitch’s financial institutions team, says: “Future challenges are likely to stem from a possible worsening in residential mortgage arrears, some concentration in com-mercial real estate lending, subdued revenues, constrained access to wholesale funding and the absence of access to fresh capital.

“However, most of the societies are facing these challenges from a stronger position than a year ago and should be able to meet them.”

Fitch says N&P’s negative outlook reflects the challenges in gen-erating reasonable earnings in the short to medium term.

It believes the society will report minimal operating profit in the short to medium term due to uncer-tainty surrounding the one-off cost related to Keydata Investment Services’ investment products sold by its advisers. N&P is facing compen-sation claims from hundreds of clients it advised to invest in the collapsed firm.

But an N&P spokeswoman says: “We still have our stable rating and it is just our outlook that has been revised to negative.

“We are well placed to meet any liabilities that arise from Key Data claims. We are trading profitably this year at a time when profits in the societies sector are not huge.”