The annual Building Societies Database 2009 from KPMG, which summarised the financial performance of building societies as of April 2009, has revealed that the low interest rate environment will lead to a narrowing of margins and threaten profitability.

Simon Walker, partner at KPMG Financial Services, said margins have been squeezed by low interest rates and building societies are earning less from their money held in reserves.

Walked added that profitability will be further reduced due to Financial Services Compensation Scheme levies, credit losses surrounding non prime lending and falling fee and commission income sales.

The report added the mutuals will struggle to attract liquidity as the savings market will remain expensive and competitive until bank base rate rises.

The growth of building societies will be further affected if regulators require mutuals to hold more capital. As a result of increased capital demands, Walker said a small number of mergers will occur in the coming months and societies may be forced to dispose assets and businesses.

Walker added that the way forward for mutuals may be to outsource their back office operations to enable them to focus on branches, products and customers.

He explained: “Societies will need to cut costs and focus on their customer-facing activities if they are to prosper in this new environment. It is not surprising that societies are once again discussing the possibilities of outsourcing their whole back offices.”