Belfast Telegraph

Friday 22 August 2014

Goodwill towards mutuals should come from policy, not warm words

The Nationwide, Britain’s biggest building society, cannot turn to the stock or bond markets to boost their capital strength, unlike the banksPeople generally feel relatively warm about mutually owned organisations — from the Co-op to John Lewis — especially in a post credit crunch world where the obsession with profit at all costs suddenly looks so crass.

And as that sort of attitude has been most damaging in the world of financial services, it is hardly surprising that one aim of the new Government is to “foster diversity, promote mutuals and create a more competitive banking industry”.

The problem is that mutuals themselves have so far had little success in persuading the powers-that-be to turn the theory of promoting their business model into practical policy.

In appealing yesterday to regulators to “avoid the unintended consequences that may arise from a ‘one size fits all' approach to regulation,” Graham Beale, chief executive of Nationwide, Britain's biggest building society, was just the latest senior figure from the mutual sector to plead for a little understanding.

Nationwide's latest half-year results underline the problems facing all the mutuals in this market. In the current era of low interest rates and constrained funding markets, the margins for a business that effectively matches savers with borrowers are paper thin.

Indeed, the society's profits — down by almost a half on the same period of last year — would have been lower still were it not for some extraordinary one-off gains.

No business likes shrinking profits, but for the mutuals, dwindling returns present a particular challenge just now. Like the rest of the financial services sector, building societies are under great pressure to improve their capital strength.

Unlike banks and other plcs, however, they do not have recourse to the stock or bond markets for capital raising purposes. Capital reserves must mostly be bolstered from those dwindling profits. Worse, the building society sector has an additional challenge. Not only do regulators want everyone to hold additional capital, they also want it to be of higher quality.

For this reason, Nationwide and others will no longer be allowed to include permanent interest bearing shares (Pibs) when they calculate the value of their reserves. Pibs are the closest building societies get to issuing share capital and might have been a valuable tool for mutuals trying to improve capital strength.

However, unlike shares, where companies have the option of paying no dividend in more difficult times, Pibs carry a fixed coupon. For this reason, regulators have decided they should be regarded as core capital.

British mutuals, and many of their counterparts in Europe, are now in a frantic race to come up with some sort of hybrid instrument acceptable to regulators, before the Basel Committee on Banking Supervision publishes its new rules for capital requirements for the industry.

Their efforts have so far been frustrated. If the Government really wants to “promote mutuals” it might start by going into bat on this issue for institutions such as Nationwide.

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