David Kuo: New changes for banks will affect building societies

Investment Insider

The decision by regulators to force Britain's banks to beef up their balance sheets could have some unintended consequences for building societies.

While banks can go begging to shareholders, building societies cannot just ask members to stump up more money. They could try to raise money by issuing bonds. However, the debt market is drier than the moon's surface.

Building societies, it seems, have nowhere to turn. However, a saviour in the form of the private equity firm JC Flowers may be just around the corner. JC Flowers, which was founded by Wall Street guru Christopher Flowers, is pumping £50m into Kent Reliance in exchange for a 40 per cent stake in the building society. However, Flowers could have much grander plans in mind for Kent Reliance.

The building society has transferred its business, assets and liabilities into a new bank, which will be a wholly owned subsidiary of the society. The new structure could provide a handy vehicle for Flowers to mop up other societies in this highly fragmented sector.

However, more consolidation may still be needed. It is reckoned that the private equity firm may be running its slide rule over Skipton, West Bromwich, Principality and Norwich & Peterborough. These are the UK's fourth, sixth, seventh and ninth largest building societies. A combination of the four with Kent Reliance would catapult the group above Yorkshire to be the UK's second largest.

The structure of a new Kent Reliance raises interesting questions. How would such an entity fit in with the clear-cut divide that currently exists between building society and banks? At present, building societies maximise value for its members, which means that interest rates are carefully pitched to satisfy both borrows and savers. Banks on the other hand, aim to maximise profits.

There will likely be changes to the way that investors perceive retail banking in future. Gone will be the days of exceptionally high yields if investment banking operations are taken away. That said, the quality and reliability of the earnings could improve if banks revert to their traditional role of 3-6-3 banking – pay savers 3 per cent, charge borrowers 6 per cent and be on the golf course by 3pm.

David Kuo is director of financial website fool.co.uk

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