While the mutual sector is able to boast increased mortgage lending, growing recognition and sky-high customer satisfaction levels, the number of building societies has continued to dwindle.
There were 59 building societies operating across the UK at the start of 2008 but that number has fallen to 45 in the last five-and-a-half years.
The latest merger saw the Nottingham and Shepshed building societies come together at the start of July. The new, enlarged society took on the branding of the Nottingham in what would be called a takeover in any other industry.
Initial discussions over a merger were held in October 2012 and the whole process has taken less than nine months to complete. Terms were agreed at the end of November, Shepshed members voted the merger through in April and the regulators subsequently approved the deal in June.
What was the thinking behind this merger?
“The Shepshed had obviously looked at its business plan, looked at the environment and the changing regulatory landscape and though a move was in the best interests of their members,” says David Marlow, chief executive of the Nottingham.
Other building societies have been forced to merge when the smaller partner has ran into some form of financial difficulty. I ask if the regulator had given the Nottingham a nudge to say that the Shepshed would be ripe for a takeover, Marlow says that any discussions would have been with the Shepshed board and the regulator.
Smaller mutuals tend to be top-heavy organisations with executives, branch staff and very little in between. Does Marlow, who has been in charge of the Nottingham since March 2011, think we’re going to see the smallest mutuals continue to disappear in the coming years?
“Every board of a building society has the responsibility to act in the interests of their members over the long run,” he says. “What I would say about smaller societies is that there are so many business models, they are not vanilla at all. I think it’s wrong to see them as a collective as some are more sustainable than others.
“There are some really superb smaller societies, who you look at and think they have absolutely no reason to change. If you look at history, we used to have hundreds of building societies at one point. There has been a steady reduction through mergers and I think it’s inevitable there will be more in the years ahead. The difficult question is to answer when it will stabilise.”
Tina Hayton-Banks is the woman who masterminded the integration of the two organisations. A building society veteran, she was working for the Derbyshire Building Society when that became part of Nationwide in 2008.
This was a much smaller deal but she says that the merger simply posed problems of a different kind.
“Smaller societies are sometimes deemed to be easier to deal with,” she tells me. “But in reality they’re harder because there’s less automation, more bespoke products and culturally things can be different.”
Five years on and the Derbyshire’s systems are still not yet fully integrated into Nationwide’s operations, but the Nottingham was keen for everything to be ready from launch.
“It was always the plan to get everything in place for July 1,” says Hayton-Banks. “That was very tight when you consider the amount of data, mortgages and savings that was migrating over. We were delighted we got it all sorted given others haven’t achieved that.”
What has this meant for the intermediary channel? Chris Parker, head of intermediary sales, says that the small amount of brokers used by the Shepshed had been given access to the Nottingham’s panels.
“The Shepshed was a small lender and only dealt with a handful of intermediaries. They weren’t a competitor to the Nottingham. We saw the big boys and some of the other regionals as our competitors. I’m sure they offered a bespoke service but the volume of business that was intermediated wasn’t great.”
The Nottingham has limited its intermediary channel to a select group of brokers and networks since the financial crisis. It has slowly expanded its panel in the years since and now includes 10 of the biggest networks and clubs.
“During the credit crunch we wanted to keep our doors open and the way we did that was to limit distribution,” says Parker. “We have since gradually increased the number of networks we played with, to make sure we maintained control. That’s still the model now.
“We have about 3,000 individual brokers on our panels, 2,800 are from our corporate partners, it is a reasonably widespread distribution but it is controlled within those 10 networks.”
Parker says that the Nottingham’s lending accounts for 1.5% of these networks’ total mortgages and that the mutual is currently punching above its weight. He says this is down to prudence in the financial boom – you won’t find a self-cert mortgage on its books – and that this means MMR won’t pose a major problem for the society.
“We have always given advice at branch level, we’ve also had advice available when customers have been switching products,” adds Marlow. “We’ve always firmly believed that it was important to offer advice for our core product.”
MMR isn’t the only major change happening next year but Marlow is less than complementary about the government’s intervention in the mortgage market in the form of the Help to Buy mortgage guarantee scheme.
“The basis for the scheme is politically driven as well as economically driven. These things take a long time from inception to delivery and the market has changed quite a lot In the last 6-8 months.
“Maybe some of the drivers that were there two or three years ago now, in the current market environment, have some danger attached.
“We certainly aren’t fans of too big a distortion in the market because they are unnatural factors and they always need to be exited, and if you’re not clear on the exit route then there are risks attached.”
The Nottingham has continued to offer a 95% product throughout the financial crisis. The mutual has restricted this product to the direct channel as it says it has no appetite to lend more than it currently does, but will Help to Buy change this?
“We have been lending over the last two or three years at our maximum appetite and to a high LTV.” Marlow adds: “We have an excellent relationship with our current MIG provider and we will carry on doing what we are doing.
“The government can’t make us change our appetite and the Bank of England and PRA wouldn’t expect us to change our risk appetite based on government subsidy.”
Marlow is more supportive of the equity loan scheme as that addresses supply side issues and the society has also taken advantage of the Funding for Lending Scheme. He says this is not because it needed to release capital, but because others drawing funds would have made its position uncompetitive. He adds that the scheme has actually helped the society do more lending at lower LTV levels.
Sat inside the Nottingham’s new headquarters on the edge of the city centre I ask whether, with the banks still dealing with a myriad of issues, is this building societies’ one big chance to take hold of the market?
“This is definitely a window of opportunity,” he says. “We do see this as unique and we’re working really hard to make the most of it.”
