View from City Road: Building societies keep mum

INITIAL reaction to the 0.4-point cut in Nationwide's average rates for savers, soon to be followed by the herd - which is that the building societies have hoodwinked the Government - is understandable.

After all, the authorities fell over themselves twice in the space of three weeks to cut the rate on new National Savings products under the dire threat from the societies of a rise in mortgage rates.

The argument seemed to be that National Savings was draining funds away from the societies because its rates were too attractive. A net pounds 314m flowed out of the societies in June and much the same or worse may have happened last month.

Having duly obliged by lowering its rates, National Savings must be surprised, to say the least, that Nationwide has cut its own.

What on earth was all the fuss about? It looks at first sight as if Nationwide and those that follow it have engineered an increase in profit margin for themselves by bamboozling the Government into cutting its own savings rates.

The fact is that building societies have been a little economical with the truth in protesting about the recent level of National Savings rates.

The central problem for the societies, in their view, has been that profit margins have been too low since Abbey National railroaded an unwilling industry into lower mortgage rates earlier this year.

Since then price pressures on the second- hand housing market have not grown any easier and the need to provide for bad debts out of profits has increased. In the South- east, price falls have meant that losses have been shifting from mortgage indemnity insurers on to the books of lenders.

So the societies, on this argument, need to bolster their profitability. Lower savings rates are obviously a less traumatic alternative to higher mortgage rates.

From a public relations point of view it is better for the societies to blame the Government rather than tell the world that their own profits are too low.

But building societies retain impressive financial strength. While other financial companies sag, Abbey National this week announced a mere 12 per cent fall in pre-tax profits and a 9 per cent rise in dividends, which are covered over three times. If knocking out the competition is this easy maybe the shares should be bought after all.