Nationwide calls time on fresh bailouts of rival societies

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The Independent Online

Nationwide has called time on any further deals with rival building societies after coming to the rescue of three of its smaller competitors during the financial crisis, The Independent has learnt.

The decision has been taken because of the potential negative impact on the society's members were it to step in to rescue another struggling rival. It comes at a time when wafer-thin margins have left many societies in difficulties while the Financial Services Authority wants them to raise more capital.

In its recent financial stability report, the Bank of England also raised concerns about the health of the sector and warned that building societies have found it harder to reduce their debt levels than the major UK banks. The report said: "Cyclical challenges have put further downward pressure on building societies' earnings during the course of the crisis. The low interest rate environment has squeezed interest margins, an effect exacerbated, in some cases, by contractual limits on societies' ability to raise interest rates on existing loans."

It has cited consolidation among building societies as one way to ease the difficulties. But it admits that "in the near term cyclical pressures and the fact that most large societies have recently been involved in mergers are likely to limit the scope for further consolidation somewhat".

While Nationwide's financial strength remains robust, Britain's biggest building society has not been immune from the margin squeeze, and 2009 profits fell by almost a half compared with the previous year.

It also suffered an outflow of deposits while mortgage lending fell by a third as it warned that it expected "lower levels of profitability" to continue through 2010-11.

Nationwide, led by its chief executive, Graham Beale, has been an active consolidator in the past three years merging with the Portman building society in 2007, before the financial crisis hit. Subsequently it added the Derbyshire and Cheshire building societies and effectively rescued the Dunfirmline as the sector was buffeted by the banking crisis.

Now the crisis has ended there has been a furious battle for savings deposits as the big banks seek to repair their ravaged balance sheets and reduce their reliance on wholesale funding, which remains expensive and difficult to obtain.

This has put pressure on building societies, which have been struggling to compete with the sort of rates that have been on offer.

Central bankers are worried that the sector has to refinance £22bn of fixed rate bonds – 16 per cent of total liabilities – and many may have no choice but to simply shrink their businesses and reduce lending given the competition for deposits.

Nationwide declined to comment on the effective end of its M&A activity, but one City source said: "There is a feeling that they've done their bit. You have to realise that their first duty is to their existing members and other societies shouldn't see them as a prop."

Conversion to banks and mergers among the remaining societies have sharply reduced building society numbers over the past two decades. In 1990 there were 101. This had fallen to 67 by 2000, and there are just 50 presently. The Bank of England says the industry could "coalesce" around a small number of stronger, larger societies, but this is only likely to happen in the long term.

Nationwide is, in terms of its assets, more than twice as big as the other 49 combined. The Yorkshire, Coventry and Skipton building societies, which are the next three biggest, have all done at least one deal with a smaller rival in the last couple of years.