JM: You used to play hockey for Wales. Does that mean you started out in life as a full-time sportsman? I mean, you’re a qualified chartered accountant so you must have set your sights on a career in finance fairly early on.
DC: Well, hockey is an amateur sport so becoming a professional was never on the agenda.
JM: You joined Skipton Building Society in 1993 as head of audit and took over as chief executive in January 2009 from John Goodfellow who is something of a legend in the industry and had been in the post for 17 years. How intimidating was that?
DC: Yes, I took over from Goodfellow and as you say he had been doing the job for many years but I’d worked with him for most of that time. Of course, taking over in such extraordinary economic circumstances – right in the middle of a worldwide recession with falling house prices and plummeting interest rates – was an interesting experience.
So I concentrated on the future rather than looking back on the Goodfellow legacy, although I was fortunate to have inherited a diversified and well constructed model which will serve us well through difficult times.
JM: What were the biggest challenges you faced you in your first year in the new role? I guess the most disappointing event was writing a £16.3m cheque to the Financial Services Compensation Scheme.
DC: You’re right. In late 2008 we provided our estimate of the interest charge that would be levied on us principally to bail out Bradford & Bingley.
And of course, there’s still the unknown in terms of what happens if there is a capital shortfall at the end of winding up that business.
Obviously, building societies are bitter. We feel penalised for having a safe model so we can now bail out some of the more risky models of the day. We’re also concerned that there’s no transparency or representation on the creditors’ committee for the societies or other deposit-takers that are paying the bill.
JM: In an interview in the Daily Telegraph you once said the government had become your biggest competitor in the mortgage market – a reference to Northern Rock – and in the savings market which was reference to both the Rock and National Savings & Investments.
In your view, has the situation changed much or is it worse, given the massive state backing for the Royal Bank of Scotland and Lloyds Banking Group?
DC: It’s probably got more extreme with the recapitalisation of RBS and Lloyds group. You’ve got to sense there’s a distortion in the retail funding market when fully and partly nationalised banks have an implicit 100% guarantee. So while we are subject to a £50,000 FSCS limit the likes of NS&I and Northern Rock are not.
JM: This time two years ago Skipton called on the government to make pensioners’ savings tax-free. Your research had shown that 84% of over-55s had to cut back their spending because interest rates were so low.
At that time the Bank of England base rate was 2%. It’s now 0.5% with no sign of upward movement so obviously the Treasury didn’t listen. But what has been the impact on your savings balances and do you have any evidence that the situation for the over-55s has got worse?
DC: This is an area of concern for us. As I’ve been saying for months, savers are the victims of the credit crunch and they’ve been forgotten. They prudently saved in times of excess and now find themselves earning low interest rates which have been imposed to try and sort out the mess in the economy.
That’s had an effect on them in financial terms and if you look at the statistics it appears that savings balances are static, if not contracting. That in turn is having an effect on societies in particular, which are experiencing a net outflow of funds.
JM: And that doesn’t help your ability to lend. Speaking of which, in June 2009 you bought the savings book of Capital One for an undisclosed sum. And there was also the Scarborough Building Society acquisition in March.
Did these moves significantly improve your ability to lend or were the sums involved too modest to have much effect?
DC: In the late spring we did anticipate the retail price war, particularly on the back of ratings downgrades for a number of lenders.
We were just fortunate to hear that Capital One’s savings book was up for sale. It fulfilled a need at the time for us to obtain additional retail funding.
JM: So has this helped with your 2009 lending figures? In the extreme conditions of 2008 your lending was down from £2.2bn to £1.3bn, probably with the second half of the year showing the biggest drop. Have things picked up since then?
DC: The downward trend has continued and we’ll end up at less than£500m in terms of gross lending in 2009.
JM: Is that also a result of pressure to deleverage your balance sheet or is it simply a reflection of the lending market in the recession?
DC: We’ve been conscious for a long time of uncertainties in the economy and there are still question marks over where house prices will end up so we have been prudent in our lending and our volumes have been modest compared with previous times.
JM: Returning to balance sheet issues, last November Skipton accessed £650m of additional funding under the government’s Credit Guarantee Scheme. What was the thinking behind that move?
DC: Initially, in the circumstances of 2009 we thought the scheme was expensive but as the year went on and the cost of retail funding went up it turned out to be a prudent and efficient mechanism that would ensure some of the large maturities we have coming up in 2010 could be adequately funded.
So we applied to access the scheme as a sensible way to cover ourselves for the next couple of years.
M: Still on the topic of the balance sheet, capital seems to be a growing problem for societies generally and that’s being aggravated because of a number of issues – there are the liquidity requirements and I think there’s also now a problem with permanent interest-bearing shares. Some professionals feel that societies are being unfairly singled out.
Do you have a view on this and how hopeful are you that these things can be resolved without further consolidation in the sector?
DC: Capital is the biggest long-term issue facing the sector. Our model means we rely on the organic generation of capital which is becoming ever more difficult in the current environment.
This is not helped by the Financial Services Authority and the Treasury’s degrading of the rules in terms of permanent interest-bearing shares and their thinking on capital.
We are seeing the invention of fresh types of capital for exceptional circumstances. With West Bromwich Building Society this certainly helped to resolve an issue but it also severely knocked the confidence of investors which means the subordinated debt market is now effectively closed to societies.
JM: Your decision to increase your SVR has been condemned by Which? and the media and has not proved popular with borrowers. Was it prompted by a need to redress the balance between your mortgage rate and what you pay to savers or are you looking to further deleverage your balance sheet?
DC: Our action reflects what is happening in the savings market. There’s intense competition for a finite amount of deposits and higher demand from banks as they cut their exposure to the wholesale funding markets has driven up prices.
But the root cause of the exceptional circumstances is the Bank of England base rate being incredibly low at 0.5%. We have a duty to run the business in the long-term best interests of the society and its members. To achieve this we need to address the margin between what we pay savers and what we earn on mortgages, hence the increase to our SVR. We have no further plans at this stage.
JM: The environment for societies is getting tougher and news of your SVR decision was closely followed by an announcement of structural changes which will result in branch closures and job losses. Is this going to be deep surgery and how far can you go given that you already run a tight ship?
DC: The only branch closure we have announced is in Leeds, where we have an overlap following our merger with Scarborough last year.
We believe the proportionate efficiencies we are making across the business will ready the society to seize opportunities we expect to emerge.
We believe the changes will ensure our members remain at the heart of everything we do as we control cost to maximise the value we offer them while maintaining a personalised service.
JM: When I interviewed Goodfellow a couple of years ago the society appeared to be moving towards providing a financial service for the seven ages of man, embracing everything from child savings accounts to will-making. Is this something you are still pursuing or is it on hold for the time being?
DC: One of the highlights of the group in 2009 was the growth in our financial services division. We now have five IFAs and see this as an important part of our growth strategy.
We’re offering a comprehensive range of services including investment and Inheritance Tax advice. And we are also looking to sell about 2,500 wills per year. So we’re still trying to cover all ages.
JM: It’s interesting, the way you’ve diversified. Over the years Skipton established a diversification model which was first ridiculed by other societies and then imitated, sometimes with unfortunate results.
An example of that would be Scarborough which, like Skipton, had an outsourcing business but which you had to rescue about a year ago. Why does diversification seem to work for you but not other societies?
DC: It’s a process that has taken decades to perfect and to be honest we’ve had knocks as well as successes along the way.
But there are some criteria which we have always relied on and these have been invaluable. Probably the most important is that we have always invested in quality management teams that truly understand the markets in which they operate.
Other organisations have diversified in the lending sector by chasing yield and taking on board risky assets. Our diversification has mostly been in peripheral activities along the mortgage chain so the vast majority of our subsidiaries are trading companies with good management teams that control their costs and understand their markets. This gives them a good chance of success.
JM: Still on the theme of diversification it seems to me that you must have welcomed the Treasury’s proposal that societies should share their services to cut costs as your subsidiary Mutual One would have a role to play. Is that the case?
DC: We have two subsidiaries that operate in that space – Mutual One which mainly provides internal audit services and Bailey Computer Services which provides an IT bureau platform used by five other societies.
And then there’s HML which provides mortgage administration services to a variety of lenders. I’m sceptical about whether the Treasury initiative will take off because several commercial organisations have operated in that space for a number of years and it takes time to build these businesses.
I think societies have more pressing concerns at the moment.
JM: At the last count Skipton had 20 subsidiaries including estate agency Connells and servicer HML. Doesn’t that create problems with the FSA because your business model is outside the box?
DC: The governance of such a diverse group is always top of our agenda. It’s something we’ve worked on continually for 20 years to reassure regulators and ratings agencies.
It’s a subject we take extremely seriously and we will continue to refine our processes in this regard.
JM: The other issue with your subsidiaries is that the media is forever speculating about one or another that might be up for sale. Is that annoying?
DC: In terms of speculation I think we’ve sold all our subsidiaries at least twice in the past year, if you believe what you read in the press.
JM: So you’re pretty relaxed about it?
DC: Yes. It’s just something that comes with the nature of the group.
JM: There’s certainly been a lot of speculation about the future of HML and Connells so it was a bit of a surprise when you announced the sale of credit reference agency Callcredit. What was the thinking behind that move?
DC: Callcredit has been a fantastic success story since we created it in 2000 but in a strategic review early in 2009 it emerged that it had big plans to continue to take market share and expand overseas. This would require significant investment so it was a good time to test the market and offload the company.
JM: I recall having animated conversations with some people working at your Baseline subsidiary which was set up to help lenders pool data and comply with Basle II capital requirements. Now, with Basle II heading back to the drawing board does Baseline have a future?
DC: We’re integrating the Baseline operation into HML and it is changing its direction more towards helping lenders and other stakeholders in the industry better understand their data. This is the sort of activity that is becoming more important as a result of the FSA’s Mortgage Market Review.
JM: I remember Tim Fletcher, when he was sales and marketing director at Baseline, showing me some interesting predictive data on mortgage performance over time.
With that kind of data as well as the aggregated information that Baseline, HML and Connells collect do you feel you have enhanced insight into the way the market is going?
DC: We’ve built Chinese walls in the group to maintain confidentiality around client data but it’s true that at senior management level we are privy to some interesting leading indicators in terms of what’s happening in the housing market.
I wish I had taken heed of what was happening in the summer of 2007 because Connells spotted that something was up in May, just before the Northern Rock drama. The asset price bubble was beginning to pop but many of us in the lending industry were slow to react.
JM: At the moment there’s a lot of political uncertainty as a general election is just months away. Have you factored into your strategy what a change in government might mean for Skipton? For example, do you think it might change the reg- ulatory landscape?
DC: Where we are is not healthy because we’re in a state of limbo. What the country needs is a credible plan to rebuild government finances but it’s not going to get one until after the election. It makes planning difficult.
So we’re also keeping an eye out for changes in the regulatory regime, especially with regard to the FSA’s future. But in the meantime we’re just getting on with business.
JM: Finally, in the previous year’s annual report you said 2009 was likely to be a year for battening down the hatches and weathering the storm. Is anything happening to suggest that 2010 is going to be any different? Or to put it another way, do you have any reasons to be cheerful?
DC: We achieved our activity targets in 2009 and I hope we can increase our lending levels in 2010. The money markets appear to be easing slightly so I hope that will continue. But I believe the road to recovery for the economy will be long, slow and uneven.
JM: But is there anything you feel optimistic about in 2010?
DC: The mutual sector has never had a better chance to capitalise on the public mistrust of banks. Unfortunately, this comes at a time when it’s difficult to cash in on that feeling in a financial sense.
Even so I am optimistic that the sector will come through the storm, maybe smaller in numbers but similar in size, and that we have a healthy future.
David Cutter – personal profile
Position: Chief executive of Skipton Building Society, the UK’s fifth largest society. Founded in 1853, Skipton has 90 branches from Aberdeen to Plymouth and more than 860,000 customers.
Always wanted to be a lender?: No. I once wanted be an architect.
Likes: Playing golf in warm weather.
Hates: Pretentious people.
Relaxation: Playing the piano and listening to music – mainly classical.
Favourite restaurant: The Casa do Lago in Quinta do Lago, Portugal
Current bedside book: The Snowball: Warren Buffett And The Business Of Life by Alice Schroeder.