Building societies: ‘We’re not driven by shareholders’ interests’

As the Chancellor prepares to flog off Lloyds shares, we look at why building societies are increasingly trusted over high-street banks

Leeds building society sponsors Britain's most successful rugby league team (Getty Images)

A massive marketing campaign to persuade us all to buy Lloyds shares will be hitting shortly as the Government flogs off its remaining shares in the bailed-out bank. It serves as a strong reminder of how badly we were let down by the high street banks over the financial crisis.

Building societies were also hit by the fall-out but unlike the banks, didn’t turn to the taxpayer for help. Instead, as befits mutuals, they closed ranks.

“It was inevitable that everyone was hugely challenged by the crisis,” admits Robin Fieth, chief executive of the Building Societies Association. “The building society sector saw a number of mergers but, by and large, it looked after itself, as opposed to the banking sector which unfortunately required a lot of state intervention.”

So Nationwide stepped in to take over Derbyshire, Cheshire and Dunfermline, while Yorkshire swallowed Barnsley, Chelsea and Norwich & Peterborough, and Skipton absorbed Scarborough and Chesham.

“Even throughout the crisis, because the sector tends to look after its own, when mergers did happen, if anything members benefited rather than losing out,” Mr Fieth says.

The crisis has, he believes, left building societies stronger. “Societies dealt with the difficult challenges and came back into the market very strongly,” he says, pointing out that the mutuals have been fuelling the housing and mortgage market in recent years.

Since 2012 the building society sector has lent £51.7bn, net of all mortgage redemptions. Meanwhile the rest of the sector, including the high street banks and other lenders, lent just £7.2bn.

“Of course lending is at the core of their existence but most of the building society sector hasn’t needed to raise supplementary capital to return to the mortgage market,” Mr Fieth says. “They felt strong enough coming out of the crisis to be able to lend within their existing capital, even under much tougher capital constraints that all banks and building societies now have to work under.”

There are 44 building societies in Britain when there were more than 100 20 years ago. A wave of demutualisations in the 1990s saw many become banks. Interestingly, none of the societies involved now exists as a separate entity.

The biggest building society is the Nationwide which has around 700 branches and earlier this year announced plans to invest some £300m on its branch network over the next five years.

The smallest is the Penrith, based in the Lake District . It’s chief executive Amyn Fazal actually spent 30 years at the Nationwide before moving from the country’s biggest to the smallest society in 2013. He says he has no regrets: “We’re a simple but fine traditional society with great values.

“We are one of a very small number of towns with its own truly local building society and we are very proud of that. We also have a tremendous amount of staff, customer and professional loyalty, affection and support and we work hard to make Penrith strong and relevant in today’s world.”

Many of the country’s remaining building societies have a similar strong local or regional presence, such as the 140-year-old Leeds building society. It underpins its relevance to the local community by sponsoring the rugby league team Leeds Rhinos, which is attempting on Saturday to win the Super League title at Manchester’s Old Trafford to gain a clean sweep of all three major trophies this season.

The sponsorship reinforces the mutual’s desire, as Leeds chief executive Peter Hill puts it, “to celebrate the strength and sustainability of the building society model”.

One anecdote Mr Fieth enjoys repeating relates to the heart of the crisis. “An individual came into the branch of a society with a cheque for a million pounds that he had just taken out of one of the major clearing banks. ‘I don’t trust them, I want it with you,’ he said. The story underlines the strong relationship and trust people have with their society,” Mr Fieth says.

At the heart of that relationship is the fact that societies are owned by their members. It means the way they run their businesses is different, says Graham Beale, chief executive of Nationwide: “We are more risk-adverse, have a different legal construct and serve a social purpose by providing a safe home for savers and while providing finance for home ownership.

“Profits generated are retained to meet prudential requirements and to invest in new products and services. We are not driven by the need to make super-profits to keep shareholders happy. We also have a strong track record in helping the economy, not damaging it.”

Last month a report by Cass Business School concluded that building societies have consistently offered customers a “better deal” than banks. The report said that even though building societies do not have the same profit motive as banks because they have no shareholders, their cost-to-income ratios are broadly the same as banks - suggesting their operations are just as efficient.

The sector believes it also provides better value to consumers than banks because building societies generally offer more interest to savers and lower costs to borrowers.

But it’s much more than keener savings rates and competitive mortgage deals, reckons Mr Fieth: “The benefit that building societies bring is the ability to think and work consistently for the long-term. They do not have the short-term shareholder challenges that PLCs face.”

He’s confident the sector will remain strong in the next few decades. “While the sector has been reducing in numbers, we’ve been growing in assets and market share,” he says.

“And while I’m pretty sure we will see more mergers because in any healthy market you have organisations merging, they’ll be done in the best interests of building societies’ members.”

And who’s to say that those thinking of risking £1,000 on Lloyds’ shares won’t end up better off by sticking the cash in their local society. Over the long-term the benefits look worthwhile.