Newcastle Building Society has had to raise £10m in capital to protect itself from up to £43m of losses from investments in Icelandic banks.
The society, which is the latestmutual lender to slip up in the financial crisis, has issued permanent interest-bearing shares (PIBS) in a private placement to bolster its buffer against losses.
Expected losses from exposures to Iceland will force the society to post a loss for the year. Newcastle said it had assumed that recoveries would be minimal, but that its capital position could improve if it got more money back than expected.
Newcastle's tier one capital ratio will be about 10 per cent after absorbing the losses. The Financial Services Authority and rating agencies were kept fully informed, the society added.
"The FSA has reviewed the society's capital position and is satisfied that it has the capital and strategic plan in place that would be necessary if the society were to apply for access to the Government's recapitalisation and guarantee schemes," Newcastle said.
Newcastle is the biggest society in the North-east, with assets of £4.8bn. It is the second building society to be caught out by Iceland's bank meltdown. Barnsley was forced to surrender to the Yorkshire in October by losses of up to £10m in Iceland. The fear of runs on the Cheshire and Derbyshire societies after they racked up losses forced them into takeovers by Nationwide. Britannia is in talks to sell itself to the Co-operative Bank. The FSA has been watching the mutuals closely after criticising the sector in May for sloppy risk controls.
Colin Seccombe, Newcastle's chief executive, said: "This additional strengthening of our capital, coupled with our well-funded balance sheet, leaves the society in a very strong position. We operate with high levels of retail funding and benefit from a diversified income base including through our Strategic Solutions division. Our existing members can continue to have full confidence in the long-term future of the society."
PIBS pay a fixed rate of interest, usually at a premium to government bonds, but come low down in the order for repayment if a society hits financial trouble.Reuse content