Although assets across the sector as a whole fell by £2.1bn, to £313.3bn in 2012, this reduction was due to a £5.4bn decrease in Nationwide Building Society’s assets, which, with assets of £190.7bn, represents nearly 61 per cent of the sector on its own, so skewing the overall picture.
If the Nationwide’s results were taken out of the equation, then total sector assets grew by 2.8 per cent to £122.6bn, principally on a combination of an improving economic outlook in the UK, and the corollary rise on the demand in mortgages, according to Richard Gabbertas, financial services partner for KPMG, in London.
That said, the profitability performance across the sector was more mixed, with 26 societies having posted a profit increase in 2012 while 20 reported a fall.
However, KPMG’s analysis shows that where a society has succeeded in improving its net interest margin, profitability improved at a bottom line level; of the 26 societies that reported an increase in profit, 19 reported an increase in net interest margin.
Looking behind the numbers, though, the picture of the sector is not all positive, according to Lee Fisher, director of Lancashire-based Burton & Fisher Financial Services: “Lending by building societies increased last year [mortgage balances rose from £246.1bn to £256.4bn in 2012] but not by as much as could have been expected given the ongoing Funding for Lending Scheme.”
Judging from government figures released at the beginning of June this year, it would appear that the cheap money made available by the government under the FLS has largely been used to repair the balance sheets of the UK’s financial institutions, rather than being lent to individuals and small to medium-sized businesses, as had been the intention behind the Scheme, according to Simon Walker, partner of KPMG’s Financial Services practice, in London.
Indeed, from June 2012 to June 2013, the outstanding stock of loans granted by banks and other financial institutions participating in the FLS, which together make up 80 per cent of lending to businesses and households, fell by £1.7bn.
Mr Gabbetas said that despite most building societies having availed themselves of this cheap way of bolstering their balance sheets – rather than having to do so by providing more attractive interest to attract saver deposits – more balance sheet pressures can be expected as a result of the implementation of the Basel III directive.
He added: “An increase in capital requirements under Basel III, from a leverage ratio of 3 per cent to 4 per cent, as seems possible, would indicate that we would see a contraction in balance sheets and more expensive mortgages.”
That said, building societies have been aware of the possibility of tighter capital adequacy requirements for some time, according to Adrian Coles, outgoing director general of the Building Societies Association, in London, and have been making contingency plans to deal with them.
“Strictly speaking, the UK doesn’t have to abide by the Basel III directive, of course, but it does have to follow the line of the EU’s Capital Requirements Directive IV, which should come into force in 2014,” he said. “So what many of them are looking at is raising new capital through deeply subordinated debt that is offered at a premium, but which is capped at a specific level and can be counted on balance sheets in a way that counts as relevant capital under the EU rules.”
As an adjunct to this, he said, it may be expected that the trend towards further consolidation in the building societies sector will pickup, having seen just a couple of smaller such deals done this year, as smaller entities look to add the tier-one capital strength of the larger ones to their balance sheets, and the larger ones look to benefit from the local expertise of the smaller institutions.
Looking further ahead, a couple of major challenges will come into focus in 2014, according to Mr Coles: the first being the government’s guarantee of Help to Buy mortgages at the beginning of January, and the second being the mortgage market review at the end of April.
“No building society has actually signed on the dotted line for any firm Help to Buy proposal as yet, and the precise details of the mortgage market review will not be finalised until we get a clearer picture of how the economy and the housing market is panning out in the last quarter of this year.”
One area, though, from which some significant cost-savings through increased efficiency can be expected looking ahead, said Mr Coles, is the ongoing increasing use of technology, with UK building societies having embraced the changing ways in which customers buy financial services, especially through the internet.
He added: “In this respect, I think that many of the smaller firms will be quicker to respond to the benefits that technology can offer, as they don’t suffer from the legacy issues and costs that are often associated with the bigger firms, but the bigger ones will clearly have to respond to such challenges as well.”
Simon Watkins is a freelance journalist
Key points
* The operating environment for the UK’s 46 building societies would seem to be returning to something like the normality of the pre-2007/08 financial crisis days
* Lending by building societies increased last year but not by as much as could have been expected given the ongoing Funding for Lending Scheme
* Building societies have been aware of the possibility of tighter capital adequacy requirements for some time
