Nationwide to merge with two smaller societies

Mortgage lender Nationwide today announced mergers with smaller mutuals the Derbyshire and Cheshire building societies.

Both groups had asked the Nationwide to consider deals following the identification of financial issues.

The Cheshire has assets of £4.9bn, 45 branches and more than 440,000 members, while the Derbyshire has assets of £7.1bn, 50 branches and 485,000 members.

Nationwide intends to retain the brands and branch networks and said it will not be making any special payment to members of the two societies.

Both groups expect to report losses for the first half of 2008.

Derbyshire's £17m deficit reflects its exposure to sub-prime and commercial loans, while the Cheshire fell into the red by £10.5m because of a one-off write-down on a single commercial loan.

Nationwide chief executive Graham Beale said: "The Derbyshire and The Cheshire have independently concluded that a merger with Nationwide is in the best interests of their savers and borrowers given the financial issues faced by both societies."

He said the core parts of the societies were in good shape and that it was in a "unique position", given its size, to offer support.

The deals create an organisation with almost 15 million members, around 1,000 retail outlets, £191bn of assets and £122bn of retail deposits.

The deals, which will not be subject to votes by members of the societies concerned, are scheduled to be completed by the end of this year.

It is expected that the Derbyshire's head office in Duffield and the Cheshire's head office in Macclesfield will be retained as operational sites within the Nationwide group.

However, the Swindon-based firm warned some back office and central group functions of the two societies will no longer be required.

Nationwide added that its own performance for the first four months of its financial year had been strong and in line with expectations. The proportion of its prime residential lending three months or more in arrears at the end of July was 0.31 per cent, similar to the figure seen in April.

The society has been one of beneficiaries of the downturn in the financing and mortgage markets because savers have deserted banks and smaller building societies in a "flight to safety".

Nationwide opened 1.5 million new savings accounts in its last financial year - equivalent to 4,000 a day - with almost £1 in every £5 saved in the UK going into a Nationwide account.

However, the mutual's share of the new mortgage market shrank to 7.1 per cent - compared to 11 per cent a year ago - as it looked to focus on quality rather than share. Nationwide funded the lending entirely through retail deposits, which trebled to £9.1bn.