First, congratulations on your new role. You’ve had an interesting time since joining The Mortgage Works with Portman in 1999 but the trickiest period must have been after the merger with Nationwide, with the possible integration of two specialist brands – TMW which was your baby and Nationwide’s UCB Home Loans. What’s your formula for coming out on top?
MW: We didn’t lose UCB because TMW was my pet project. We lost it because once the credit crunch started to bite the rationale for a dual brand strategy became superfluous. In a world where suppliers were consolidating, just being in the market was enough. We did not want the expense of running two brands so we had to make a choice and when we did our analysis, what drove the decision towards TMW was systems flexibility.
TMW was on a platform that gave us more in the way of agility and capacity to respond and more scope around the differentiated offerings we wanted. It was sad because UCB was a much older firm and arguably the first specialist brand in the market. It was well respected and known as a self-cert specialist in its day but we had to make a choice and in the end it had to be about flexibility.
JM: Could you not have migrated the UCB brand onto TMW’s platform?
MW: We could have but that would’ve been time-consuming and expensive. We would have had a problem with the back book and it would have been a messy solution. Anyway, our analysis suggested that the TMW brand had embedded itself well in the marketplace and UCB was not in a stronger position so I think we made the right decision.
JM: Looking back a little further, what drove the merger between Portman and Nationwide?
MW: Obviously, there was a lot that united the societies but there was a lot that differentiated them too. They had different cultures.
Graham Beale, now our chief executive, was clear about that when he first talked to me about the merger – and by co-incidence he probably talked to me about it before anybody else. He was still finance director at Nationwide when we had lunch and talked about how the businesses could complement each other and I remember he said he wanted to effect a culture change within Nationwide.
He’s worked like a Trojan to do that since he became chief executive. He’s been successful and the oil tanker is finally turning. It’s no mean feat changing a corporate culture.
I think bringing in an alternative culture helped because he was able to pick the positive features of each and I have been happy to be a part of the resulting process of evolution.
JM: What do you mean by culture change? Where was Nationwide trying to move from and what’s the goal?
MW: Like a lot of other financial institutions Nationwide had been trading through a period of exceptionally benign conditions so making money in retail banking wasn’t that difficult. It had pursued a culture of what I call soft mutuality and had allowed its connection with the realities of commercial life to become weakened.
Beale realised that it was not only possible but preferable to have a mutual culture with a strong sense of commerciality running through it – and of course the credit crunch made that even more of an imperative.
JM: At about the time Northern Rock was being nationalised and the securitisation model looked truly spooked I wrote that you and your specialist team at Nationwide would be crying into your champagne glasses. I assumed that the future belonged to deposit-takers and you’d take up the slack left by other specialist lenders. What’s gone wrong?
MW: You were quite right and should have had more confidence in your judgement. If you look at the way Nationwide’s position in the market has strengthened in the past two years, much of that has been attributable to the way we have traded during the credit crunch.
JM: Yes, but as a deposit-taker, is Nationwide not concerned about the Bank of England base rate falling to 0.5%? Surely at that level your funding model doesn’t work?
MW: I wouldn’t deny that a low interest rate environment creates unique challenges for retail deposit-taking institutions but the low interest rate is a function of the wider economic situation which has created huge challenges for retail and commercial banks.
The point is that with our model – which is not immune to low interest rates – we’ll spend an uncomfortable year or two migrating from the old high interest rate environment to the new one but that’s just the pain of a one-off adjustment.
If low interest rates endure we’ll prove to be just as robust in that environment as we have been in the world of high in-terest rates.
JM: But isn’t the result a fall in business volumes and that we’ll never see 2007 levels of mortgage lending again?
MW: It’s inevitable that we’re going to see lower levels of mortgage lending for the foreseeable future but a lot of the new business activity that was going on was simply the churning of existing mortgage business.
The parties that made the most money out of that churning effect were not lenders. I’m thinking of the intermediary market and all its associated service providers – lawyers, conveyancers, valuers and so on. Those providers could only make money when plenty of mortgage business was around.
We’re in for a period in which the average life of mortgages will stretch out and we’ll see much less churn. Service providers other than lenders will have to rethink their business models.
JM: Before following up that last point I’d like to talk more about low interest rates and their consequences.
Anecdotal evidence suggests savers are pulling out their money to invest in housing again while low rates are making it harder for first-time buyers to save up for deposits.
MW: I haven’t seen any strong evidence that low interest rates have yet pushed savers in the direction of buy-to-let and I’d question the premise.
The buy-to-let market is going through a period of maturation. We’ve seen a lot of speculators and naive investors in that market departing and that’s a good thing. The reduction in property values has reminded consumers that housing is not a one-way investment.
So we’re not going to see a rush to the housing market as an alternative investment vehicle but there’s no doubt that low interest rates will prove challenging for the substantial number of savers who rely on the interest from their deposits to supplement their income. We’re talking about many millions of individuals for whom low interest rates are a financial catastrophe.
JM: What will be the consequences?
MW: Ironically, this in itself will create deflationary pressure. Those people will simply not have the spending capacity they had but there’s another big cohort of savers who have suddenly woken up to the fact that the highest rate is not always the best. The Icelandic bank debacle and the implosion of a number of mortgage banks have reminded consumers that even cash deposits can involve risk.
Until now the government has seen fit to protect investors – particularly those in Icelandic banks – from the consequences of their misjudgement but nevertheless those lessons have been learnt.
Anyone who has stood with sweaty palms in a queue outside a Northern Rock branch will never forget the experience and that’s why we are stealing our competitors’ water. Nobody has ever stood outside a Nationwide branch with that sense of anxiety and I’m convinced they never will.
JM: Nationwide is the country’s third largest mortgage lender and hasn’t had to be rescued by the government but it has contributed significantly to the Financial Services Compensation Scheme. Do you think the market is being distorted by the nationalisation of Northern Rock and the massive amounts of money being sunk into the Royal Bank of Scotland and Lloyds Banking Group?
MW: We should be clear that this government didn’t have any alternative but to nationalise the banks that failed – or rather that the alternative would have been unthinkable. It would have been a disaster not only for the banks that failed but also for those that didn’t.
The big question now is – how much regard will the government pay to sound economics in the way it runs the banks it has taken over? Also, to what extent will it allow its political agenda to intervene in what should otherwise be a sound business model for those banks?
JM: Have you seen warning signs?
MW: Yes. We are uncomfortable about the way National Savings & Investments and Northern Rock have competed in the savings market. I believe Northern Rock now has an advantage and I’m not convinced the competition it is presenting us with is fair. There’s a risk the same issue will develop in the mortgage market.
We’ve seen Northern Rock announce that it intends to resume lending and yet Prime Minister Gordon Brown, who to all intents and purposes is Northern Rock’s only shareholder, is passionate about not returning to high LTV lending.
We can only conclude that Northern Rock will simply try to take a piece of the existing market and that won’t improve consumer choice – all it will do is drive commercial lenders’ margins down. That would be a sign of a dysfunctional element of government intervention.
JM: Returning to our starting point, your recent appointment represents a considerable expansion of your role. Is this restructuring the consequence of the various mergers or is it a response to the changing market and problems in the economy?
Also, you talked earlier about service providers who took money out of the value chain. Does this mean that you’re going to sweat your branches and forget intermediaries?
MW: Not at all. I know intermediaries are having a tough time at the moment but it’s clear to me that they’re in the mortgage market to stay.
Of course, brokers’ revenues are bound to be lower as a result of the crunch and it’s likely that only the best will survive but that’s not necessarily a bad thing – I call it economic Darwinism. Occasionally, one needs an event like this to sort out the sheep from the goats. That has happened among banks and it will happen in the intermediary community too.
Ironically, since I’ve been distribution director I’ve started to look at the opportunity we have to persuade intermediaries to sell more of our products, not less. Until now Nationwide has locked intermediaries into the mortgage product silo and I’m asking my colleagues why. We have a big network of intermediaries who know and trust our brand and who are short of revenue so why shouldn’t we use the opportunity to promote more of our product set?
JM: So there’s a future for intermediaries with Nationwide but is that also true for the Cheshire and Derbyshire brands?
MW: They will continue with the current game plan. The opportunity to build a set of strong regional brands with distinctive identities is interesting and we are exploring it.
JM: We first met when you were at Portman, shortly after the acquisition of Staffordshire. Portman then acquired Lambeth before going on to merge with Nationwide which has since rescued the Cheshire and Derbyshire, so you are familiar with what drives mergers and what they involve.
Now there’s the forthcoming merger of Britannia – your next biggest competitor in the building society sector – with Co-operative Financial Services. Where is all this going to end?
MW: There has to be some consolidation in the building society sector. The trend started long ago – it didn’t take the crunch to precipitate it but it is creating challenges which are forcing boards to ask if there’s a better way. Each mutual will make its own decision but I’d be surprised if there’s not more consolidation.
What I’d like to see is strong mutuals electing to merge with others because retail banking needs a robust mutual sector and this can best be achieved with fewer, stronger players.
JM: You are currently chairman of the Council of Mortgage Lenders and your chief executive is about to become chairman of the Building Societies Association. Have you and he talked about a co-ordinated approach?
MW: It’s honestly a coincidence. I became chairman of the CML because, with the disruption in the banking sector, the council needed to find an organisation that could provide it with stable chairmanship for at least a year and Nationwide was in the happy position to do that.
The CML adds a huge amount of value to the mortgage market. It has a strong team and has come to the fore recently when it’s had to engage at a complicated and detailed level with government agencies on a range of issues.
JM: So you don’t think that the government will bypass the CML because it can now influence the market through its ownership of Northern Rock, RBS and Lloyds Banking Group anyway?
MW: There’s obviously a risk of that but it would not be in the government’s best interest to go down that path.
The government wants to engage with the mortgage industry as a whole and agree initiatives with it that are not splintered by partial participation or abstention. I have seen no evidence that the government is using its ownership in the way you suggest.
JM: That’s reassuring. So what do you see as the most pressing issues facing mortgage lenders generally?
MW: The short-term challenges are reasonably clear. Obviously, all lenders have to contend with the impact of deteriorating economic conditions on their loan portfolios – and it won’t just be their mortgage portfolios either.
This will also affect other asset classes including whatever they hold within their treasury functions and their wholesale bank businesses. Credit losses are something that lenders will just have to manage to a greater or lesser extent.
So as far as the retail banking sector is concerned, players are going to have to look at the capital that will be destroyed through credit losses. Because of the current high cost of funding margins are not as wide as many pundits seem to think. In fact they’re pretty narrow and there’s a lot of pressure.
JM: And what about the low interest rate environment?
MW: Clearly the impact of low interest rates on business models is going to cause some pain and dislocation in the next year or two.
Frankly there’s an element of cross-subsidy from savers and current account customers to the asset side of balance sheets which will be removed. This means loans will become more expensive, whether secured or unsecured, residential or commercial. That’s inevitable because there isn’t enough profitability on the liability side of balance sheets at the moment.
Then we’ll have to work out what it is that consumers want in the new world. One of the questions we must ask – and this is not specific to Nationwide – is whether this period of economic dislocation and low interest rates is a short-term phase through which we have to trade or a fundamental paradigm shift so we have to radically review our business model. We might all have to build models that are responsive to permanently changed trading conditions.
Matthew Wyles – personal profile
Position: Group distribution director at Nationwide Building Society.
Always wanted to be a lender?: No, I wanted to be an opera singer. That’s how I started – as a tenor.
Likes: Loyalty, energy, flair, integrity and laughter.
Hates: Envy, greed and sloth.
Relaxation: Fine wine, opera and being with my children.
Favourite food/restaurant: I was recently introduced to Le Caprice in London by Checkmate chief executive Stephen Knight and that’s my current nomination.
Current bedside book: Bordeaux, Bourgogne: Les Passions Rivales by Jean-Robert Pitte.