Societies face a mutual test

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AS LLOYDS BANK and the Cheltenham & Gloucester Building Society stand at the altar, struggling to overcome the strictures of the High Court, the other building societies are furiously trying to work out what they should be doing.

Arguably the most delicately poised is Alliance & Leicester, the country's fourth biggest society. It has already bought a bank, Girobank, and is chaired by a former clearing banker - Fred Crawley, who spent more than 40 years with Lloyds.

A&L and Girobank's combined 5.5 million customers were formally brought under one corporate umbrella last month. In the next few weeks, the society is due to unveil the logical conclusion of that process - the Alliance Account, which will combine telephone banking, cash machines and the ability to deposit or withdraw cash at the 400 A&L branches and the 20,000 Post Offices.

Peter White, A&L's chief executive, frankly predicts that the next few years will see a big fallout within the industry, with mergers accounting for the bulk of the consolidation. 'Some of the little local building societies with a loyal customer base will survive, but the middle-range ones will have to fight very hard for their independence,' he says.

Mr White also predicts that a few of the bigger institutions will want to expand the range of financial services they can offer by converting to plc status: hence the significance of C&G's attempt to reverse into the arms of Lloyds. If those two secure a clear legal ruling in their favour, it will ease other back-door conversions. But if, as now seems more likely, the authorities only accept some sort of one-off deal, stand- alone conversions such as Abbey National's will be the only alternative.

Mr White has strong views about this: 'You should either remain a building society and accept the restrictions or you should convert to a plc,' he says. If you do so, he adds, you should be bound by the ordinary conventions of incorporation - including the risk of being taken over. 'Abbey National's five years is up (the period during which it was protected from takeovers). It's now arguing that protection for five years shouldn't exist,' Mr White adds drily.

However, he recognises that stand-alone conversions are an option only for the biggest societies. 'You have to have a strategic reason for going the plc route. It is also quite time-consuming and costly,' he points out. For these reasons, he prefers to exploit the advantages of mutuality. 'You can take longer-term decisions. You haven't got analysts examining your figures every three months, and you don't have to pay dividends out of retained earnings,' he says.

What Mr White does not add is that some in the City believe A&L, with an asset base of some pounds 20bn, is simply not big enough to go it alone. The Halifax, the market leader and more than three times its size, is large enough, although publicly it remains committed to mutuality. Nationwide, at pounds 35bn, has already indicated that it plans to switch status at some point, while the Woolwich, at pounds 25bn, plans to stay mutual.

'All the top three building societies are flexible. They're not about to get left behind,' says Robert Villiers, building societies analyst at UBS.

He believes the rest of the industry will be forced to contract through mergers and acquisitions. However, a merger of equals is very difficult, as the efforts of Leeds and National & Provincial showed last year. Even when there is a sound strategic fit, there may be insurmountable cultural obstacles. Mr Villiers therefore expects that there will be far more 'acquire and expire' mergers, with the strong building societies mopping up the weak.

So where does this leave A&L? Mr White says that the acquisition of Girobank in 1990 meant it switched emphasis from products to customers. 'Alliance & Leicester is very relationship-driven,' he claims.

The rationale is fine, but frustrated investors might view things differently. A&L recently incurred criticism from the Building Society Ombudsman for failing to warn members about obsolete accounts.

When it threatened to secure a court ruling preventing the Ombudsman from investigating such cases, it was swamped by protests. The society subsequently backed down but its behaviour raises questions about its proud boast of being relationship-driven.