What is surprising is that the Nationwide is taking on two at a time, leaving the big question mark, who and how many are to follow?
There has been a rumour circulating the industry that the Financial Services Authority has briefed Adrian Coles at the Building Societies Association to “prepare” the media for a growing number of building society mergers this year.
However Tony Prestedge, executive director of group development for Nationwide, emphatically denies that any other mergers are in the pipeline.
He says: “We have not been approached by any other building society. We are not in discussions and our view of the sector is that it is well capitalised, has strong liquidity, and few problems with the wholesale markets and we don’t think those fundamentals have changed by these mergers.”
The Cheshire, with assets of £4.9bn has been limping along with poor results even in the bull market years that preceded the credit crunch.
Indeed, current chief executive Karen McCormick was appointed some four years ago to turn around the society and in her first year had to fight a rear guard campaign against the Mail on Sunday which was question the safety of investing in the society.
That followed the publication of The Cheshire’s 2005 year-end results which, after taking into account a £10m provision for a suspected commercial mortgage fraud and the £3.8m costs of its change programme, saw the society go into the red.
Its 2006 results showed the society record post tax group profits of £10.6m but by the end of 2008 that had slumped to £5.1m and worse is to come. It expects to incur an unaudited pre-tax loss of £10.5m for the half year to June 30 2008 due to an exceptional £11.5m impairment charge on a single secured commercial loan
The irony for The Cheshire’s 440,00 members is that because the merger is effectively a rescue package there will be no windfall payment as there would have been when the Portman Building Society, now also subsumed into Nationwide, made overtures to take over the society after it went into the red in 2005/06.
In contrast to The Cheshire, The Derbyshire, with assets of £7.1bn has seen its profits after tax grow under a diversification programme only to slump dramatically as a group from £16.4 in 2006 to just £8.7m last year when it took a £4.5m charge to increase its provision for bad debt.
The luckless man in charge, Graham Picken, took over from former chief executive Peter Richardson in December last year, but the legacy of an adventurous diversification programme in a difficult market appears to have been one mountain too high to climb and he approached Nationwide over the summer months.
The Derbyshire pulled out of sub-prime lending earlier this year and there are concerns over the quality of the mortgage books that it had acquired from GMAC and Kensington to build its balance sheet and increase its margins.
Indeed, it expects to report an unaudited pre tax loss of £17m for the half year to June 30 2008 arising predominantly in its near-prime, sub-prime and commercial loan portfolios.
According to Nationwide the mergers will be completed as two separate transactions. “These are prudent and pre-emptive actions taken independently by the boards of The Derbyshire and The Cheshire following the identification of financial issues faced by both societies”, Nationwide says.
Prestedge says that both The Derbyshire and The Cheshire brands will be retained for direct to consumer business at branches and call centres and on the internet but won’t continue to trade those brands as business to intermediaries.
Subject to approval Prestedge expects The Derbyshire merger to be confirmed by 1 December.
Negotiations with the Cheshire started later but he expects that merger to be confirmed by the end of the year.
With The Derbyshire and The Cheshire integrated into Nationwide, the society, which is already the UK’s largest by a big margin, will have around 1,000 retail branches, assets totalling more than £191 bn, and £122 bn of retail deposits.