Nationwide plan to bolster finances
Lender Nationwide unveiled details of a plan to strengthen its balance sheet by up to £500 million in a move seen as a financial lifeline for mutuals.
The UK's biggest building society has created a new type of special share that will allow it to raise money from external investors without compromising its mutual status.
Nationwide has been ordered to bolster its finances by the City regulator, with the Prudential Regulation Authority (PRA) demanding earlier this year that it must hold more capital as a buffer against financial crises.
The group must also increase its leverage ratio, which measures its capital as a percentage of its assets, to 3% by the end of 2015.
Nationwide's financial performance has been robust, with the group last week unveiling an impressive 155% surge in half-year profits to £332 million.
But u nlike other banks that can issue shares, it is difficult for mutuals to raise capital without threatening their status and customer-owned business model.
Embattled rival the Co-operative Bank is being forced to hand over control to investors including US hedge funds to plug its £1.5 billion capital shortfall.
But Nationwide said its plan will not put its mutual status at risk and hopes it could be a blueprint for other societies as a way to raise funds.
Graham Beale, chief executive of Nationwide, said it will "contribute to the sustainability of our business and will strengthen our ability to act as a compelling alternative to the banks".
It is set to offer so-called core capital deferred shares (CCDS) to investors.
This will help replace permanent interest bearing shares (PIBS), which no longer count towards regulator demands for financial reserves.
Traditionally societies have relied largely on retained earnings to beef up their financial reserves, with help from PIBS, but the new financial instrument provides another additional avenue for fund raising.
And it does not affect the group's mutual status, because investors will only get one vote regardless of the amount of CCDS they buy, putting them in line with members.
The dividend payable will also be capped.
Adrian Coles, d irector-general of t he Building Societies Association (BSA), hailed Nationwide's announcement as a " a landmark event which over time is likely to benefit the building society sector as a whole".