Comment: A blow for mutuality triggers lending battle

`Just as the price war will drive the stock market value of converting building societies lower, it will also reduce the costs of taking them over'
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The Independent Online
Hard luck all you building society carpetbaggers. Nationwide, the only substantial building society categorically to have ruled out conversion, is doing its utmost to spoil the fun. Judging by yesterday's initiative, it may well succeed. Others were quick to dismiss the cut in mortgage rates and increase in savings rates as little more than another short-term marketing ploy but the truth is a touch more serious.

The move is costing Nationwide around pounds 200m of profits a year, or roughly what it would have needed to pay out in dividends had it converted and floated on the stock market. As it is, the money is going to customers in the form of the lowest variable mortgage rate in 30 years and some of the most competitive saving rates around.

If others respond in like manner, as they surely must, then that in turn must reduce the potential value of their shares, quite dramatically according to some estimates drifting around the City yesterday. The carpetbaggers, and the plain old plodding building society member hoping to pay for the summer holidays with a building society windfall, lose out accordingly. But as with all price wars, the consumer makes hay.

Here are the benefits of mutuality, declares Nationwide's chief executive, Brian Davis. If other players match Nationwide, savers and borrowers will be pounds 2bn a year better off, equivalent to 1 percentage point off the basic rate of income tax. By remaining mutual, Nationwide is able to deliver dividends to its customers that would otherwise have gone to outside investors.

It scarcely needs saying that Nationwide would probably not have done this but for the desperate lemming-like rush to convert among other societies. Had everyone remained mutual, things would have carried on in much the same complacent, faintly lethargic manner as before.

Nationwide has been under pressure to demonstrate to its customers that remaining mutual is capable of delivering better rewards long-term than the transitory windfall gain of a handful of share certificates. In the process, it has almost certainly unleashed a vicious price war that in turn will substantially reduce the sort of valuations that Halifax, Alliance & Leicester and Woolwich can expect to command when floated next year.

Perhaps the most surprising thing about all this is that it has taken so long for realistically pitched saving and borrowing rates to get through to the market place. The answer is only in part the feather-bedded and uncompetitive nature of the old mutual cartel, now fast being dismantled. The big high street banks with their easy access to cheap sources of capital could always have been much more aggressive in the high-margin housing market than they have.

Only belatedly have they seemed to catch on to the possibilities. Just as the price war will drive the stock market value of converting building societies lower, it will also reduce the costs of taking them over. Maybe more of them will now follow Sir Brian Pitman's lead at Lloyds Bank.

The next move for thwarted Green

It was a highly frustrating day for Michael Green, a man used to operating in secret and on his own. Proof of his anger came in the form of reports that a witchhunt had been launched to discover how details of Carlton's debt financing plans leaked out. If the leak helped to scupper plans for a pounds 1.8bn bid for MAI, however, the Independent may have done Carlton and its shareholders a favour, for in the end the arithmetic of the deal just didn't stack up for Carlton - there would have been too much dilution involved.

With the company's debt financing plans now shelved, MAI and United News & Media are free to continue up the aisle toward the altar, secure in the knowledge that the man most likely to spoil their defensive merger has decided - or has been forced - to step aside.

Where to now for Carlton? It is plainly wrong to suppose that Mr Green will simply return to his present businesses, oblivious to the radical restructuring of the media sector raging around him. That is simply not an option for a man of Mr Green's ambitions and ability. But strategy, though important to any business, doesn't pay the bills, and the cost of strategy comes high indeed right now. For the time being, he's going to want to step back from the fray and wait for valuations to adjust back to more realistic levels.

Longer-term, however, it will not be enough, as his own main shareholders will doubtless be telling him, to remain stuck at a relatively low market rating as his competitors carve up the media sector all around him. So if not MAI, then what? The options are numerous and intriguing. Mr Green is clearly interested mainly in television, but newspapers attract him too. He met Lord Stevens of United News & Media last summer, but failed to make headway. He met David Montgomery of the Mirror Group last week. Here again the discussion turned on television and a joint venture to run United's Express titles. If Mr Green is interested in the Mirror, he's not letting on.

On the television side, HTV and/or Scottish, in which Mirror holds a large stake, are mooted as likely targets. Either of them would ensure that Carlton remains the largest ITV company. Further afield, there are any number of international targets the analysts like to tout. A current favourite is CLT, the Luxembourg broadcaster.

Mr Green's challenge is to prove to his supporters and detractors that he has not lost his touch, and that he can, just like Granada's Gerry Robinson and MAI's Lord Hollick, articulate a strategy and stick to it. If he does not, he might himself become exposed to the unwanted attentions of ravenous, risk-taking media companies.

A sting in the wise woman's tail

Kenneth Clarke must be over the moon about his appointment of Kate Barker, the CBI's chief economic adviser, as one of his "wise women". She said yesterday that the Chancellor can cut interest rates by another half point and still hit his inflation target. But this welcome view came with a sting in the tail. Ms Barker thinks Mr Clarke will miss his ambitious forecast of 3 per cent growth in 1996 by a mile. Indeed she doesn't think the economy will grow at 3 per cent until the second quarter of 1997.

By then, a consumer spending spree should be in full swing thanks to further tax cuts and windfall building society gains. This will also be the period in which the maximum effect of a further swift move to cut interest rates will be felt on activity.

The second quarter of 1997 also happens to be the last moment to which the Government can defer its moment of destiny at the polls. The election must be held at the very latest in May. By then, however, Ms Barker thinks rates will have risen again by a quarter point because of the strength in activity. No prizes for guessing which part of this particular forecast Mr Clarke will not be following.

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