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Building Societies offer better value and stability than banks

Building Societies offer better value and stability than banks

Building Societies have consistently offered customers a “better deal” than banks, research by Cass Business School has found.

A report, entitled ‘An analysis of the relative performance of UK banks and building societies’, found that building societies had consistently outperformed banks across a number of financial indicators since 2000.

The research found that building societies typically had a lower net interest margin than banks, as they tended to offer higher savings rates and/or lower mortgage rates to their customers, as a way of providing value rather than maximising returns to shareholders.

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As at the end of 2014, the average building society had a 2.8 net margin, compared with 3.1 per cent for the average bank.

Robin Feith, chief executive of the BSA, said: “The findings in the Cass Business School report help demonstrate the diversity that building societies bring. The sector offers choice and competition for consumers.”

Results also showed that the stability of building societies was significantly higher than that of banks over the sample period, with the majority having strong Tier 1 capital ratios – between 10 and 30 per cent capitalised, compared with banks that were between 10 and 20 per cent capitalised.

The cost-to-income ratios which indicate efficiency showed that overall, building societies were just as efficient as banks. On a ‘Z’ score, which measures the distance from the likelihood of insolvency, building societies were almost 50 per cent less likely to be declared insolvent. By contrast, the report gave banks a lower probability of 14 per cent.

Andrew Gall, economist at the BSA, added: “Because building societies have a very different purpose and their own legislation, this affects how they behave and the risks they take on.

“They add to the competitive mix of the market and also add to the stability of the market because the firms are affected by events in different ways.”

The total number of authorised banking institutions fell from 600 in 1985 to 298 by 2013. Of these, 141 are UK incorporated, 78 are incorporated in the European economic area and 79 are incorporated outside the EEA.

There are 44 building societies in the UK. The largest is Nationwide, and the smallest is Penrith, based in the Lake District, according to BSA figures.

Adviser view

David Hindle, an IFA at Derbyshire-based Sterling Asset Management said: “This research will be meaningful for younger investors, but later-life clients tend to be very loyal and value the relationship they have had with their bank or building society.

“Building societies are more stable because of the mutual ownership aspect in how they are run, while banks have to respond to shareholder pressure driving them forward.”