London: The UK building society sector will continue to see one or two mergers a year as the mutual lenders face pressures from low profitability, says KPMG, the professional services firm. The sector, down to 48 societies after a wave of mergers and takeovers in the financial crisis and downturn, will have a “continuing trickle” of deals, said Richard Gabbertas, a partner in KPMG’s financial services consultancy. Consolidation moves will be a result of “who is better placed in a low base-rate, low profitability, capital-constrained world”, rather than being focused on societies of a particular size, he added.
The comments came as KPMG publishes its annual Building Societies Database, a study of the sector’s financial performance, which underlines the increased concentration of the sector. Long-standing sector leader Nationwide comprises 62 per cent of the sector’s total assets, while Yorkshire and Coventry — second and third by asset size — have grown significantly bigger than their peers following takeovers. Last week members of Norwich & Peterborough, the ninth largest society, voted overwhelmingly for a takeover by Yorkshire. In 2010, Yorkshire took over rival Chelsea, while Coventry acquired Stroud & Swindon.
Thinner tail : “The tail [in the size rankings] is getting thinner,” said Gabbertas, with Nationwide more than 100 times larger by asset size than the 11th biggest society, the Progressive. Despite challenging market conditions including the high cost of attracting savers’ deposits, KPMG says that 28 societies increased their profits last year and only four reported losses — down from six in 2009. Many societies shrank their mortgage books, including most of the biggest mutuals. Nationwide’s assets fell by £2.5 billion (Dh14.88 billion) last year, while shrinkage across the sector was £11 billion, or 3.5 per cent of total assets.
“Building societies continue to be constrained in their lending by the cost of retail funding and by capital [pressures],” said Gabbertas. “The outlook for the mortgage and savings market remains competitive, with low consumer demand for borrowing and strong competition for retail deposits from banks.” Margins will increase “slowly but steadily” as high-cost funding matures off societies’ books and from “measured, profitable new lending”. “Longer term, however, societies need to focus on finding a route to profitable growth, as shrinking to profitability can only be a short-term strategy,” says KPMG.
