Personal Finance: Building Societies in Tough Situation

The Birmingham Post (England), August 2, 2003 | Go to article overview

Personal Finance: Building Societies in Tough Situation


Byline: Peter Axon

Building societies have been familiar faces on the high street since Victorian days.

They have consistently served as a homely port of call for our hard-won savings, besides giving young people the chance to put their feet on the first rung of the housing ladder.

However, the onset of the millennium has been a time of considerable change for building societies throughout the UK.

Furthermore, their future also calls for meticulous planning, in order to cope with intense, competition from within the financial services industry and the demands of the the free market economy.

The imminent merger of the Staffordshire and Portman and the Derbyshire and Clay Cross societies underlines the constant pressures that exist within the movement.

Indeed, building society ranks have shrunk dramatically. Two decades ago there were 230 societies now there are only 65, but their assets total pounds 175 billion. Moreover, no new society has been launched for over 20 years.

The building society fold has declined as a result of demutualisation (stockmarket flotation or a bank purchase), merger or takeover.

Familier names such as Birmingham Midshires, the Woolwich and Leeds Permanent have either become banks or have been amalgamated into bigger groupings.

Nevertheless, this must not disguise the face that a sound framework of regional building society operations has been built up around 'greater' Birmingham.

The Coventry and West Bromwich remain the bigger players, while the Black Country still has the smaller Tipton & Coseley and Dudley societies.

The Portman and Staffordshire building societies intend to merge but, in reality, this amounts to a takeover by Portman. But this will only proceed if Staffordshire members give consent.

A 'yes' vote would likely trigger windfalls of at least pounds 100 each for its 287,000 members -although qualifying bonuses will be subject to savings tax at 20 per cent.

However, Portman's membership will not be given a vote nor receive any special payments from the proposed deal. Meanwhile, the Staffordshire vote is expected to go ahead later next month.

The merger will create a society with combined assets of pounds 13 billion, making it just pounds 1 billion smaller than the third largest society, the Yorkshire. As the Portman is mainly based in the south, there is no branch overlap and interest rates will eventually be harmonised.

However, some city financiers reckon this amalgamation could be a prelude, whereby assets are to be fattened up for a potential demutualisation a few years down the line. Similarly, the tiny Clay Cross building society, the third smallest, announced that it was to be swallowed up by its county rival, the Derbyshire. This news came about only a few days after information about the Portman-Staffordshire tie-up.

It's only a couple of years since the Derbyshire acquired the assets of the small Ilkeston Permanent building society, formerly in the south of the county. So things appear to point towards a well conceived regional rationalisation programme.

Again, members of the Clay Cross are most likely to give bonuses averaging pounds 100. They retain membership of the new society, which is the predicted pattern for future mergers.

Only when societies lose their mutual status, by converting to a bank or by being bought by a bank, are larger windfalls likely. But, it must be remembered, members who have signed away their windfall rights will not get anything.

Survival for the smaller societies could well like in forging 'geographical partnerships'. Some societies already club together to curtail certain overhead costs, but opportunities may be available to launch joint investment products, such as bonds. This ploy could help sustain robust savings balance sheets and full mortgage books. …

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