One up to the mutuals in the battle for savers; COMMENT

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The Independent Online
People who save with building societies outnumber mortgage borrowers by more than six to one. So it is small wonder the Nationwide has decided to stage a tactical retreat on the lending front, now that mortgage demand is picking up strongly, in order to concentrate its firepower on attracting savers.

The move is also in part designed to further Nationwide's increasingly lonely defence of the mutual structure of ownership. By raising mortgage rates, Nationwide can offer keener deposit rates. With luck the effect will be to lure back to the mutual tradition savers who are holding their money with rivals right now in order to qualify for free shares. That's the claimed strategy anyway.

The converting societies' reply to the argument that the lower profit margin permitted by mutuality will allow higher deposit rates is that their savers will have a different kind of stake. Even if the rates of interest they earn are a shade lower than the rates offered by mutuals, they will have shares that pay dividends and offer capital gains.

This misses the obvious point, however. Members of converting building societies will be able to have their cake and eat it - take the windfall handout, keep or sell the shares, then shop around for the best savings rates elsewhere. Lethargy will probably ensure this does not occur on a grand scale, but at the margin it certainly will. This newspaper and most others have been inundated with aggrieved Alliance and Leicester depositors threatening to move their money elsewhere as soon as they get their free shares.

Even though yesterday brought the first sign of an easing in the mortgage war, it also emphasised the pressures that the converting societies are going to face. Part of the raison d'etre for the remaining mutuals will be to cut profit margins in retail banking by giving away to their depositors and borrowers in the shape of more competitive interest rates what converting societies and banks need to pay out in dividends.

The fact that the interest rate cycle has now turned will make matters worse. Mortgage lenders traditionally increase their margins on home loans when the level of base rates is declining. They did so with a vengeance during the housing market slump. But when base rates are rising, building society margins tend to narrow. This is the more so this time round since most building societies are doubly cautious about increasing mortgage rates while the housing market recovery remains so fragile.

All in all, it adds up to a difficult first year for the new plcs. A booming housing market will help but whether any of them manage to retain their present market share on either lending or deposits remains open to doubt. For all the Gadarene rush to convert into banks, there is a lesson in the fact that the banks have been losing market share to building societies pretty steadily for years. Mutually owned building societies may have their drawbacks but they still win hands down over banks in terms of customer satisfaction.