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Building Societies Face Grim Future, Warns Kpmg

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Building societies face grim future, warns KPMG

Daily Mail and This is Money

25 August 2009, 10:03am

Many of Britain's building societies are likely to fall by the wayside over the coming years as the wave of emergency takeovers gathers force, a KPMG report predicts.

It believes further defensive deals are 'inevitable' in the UK's mutual sector due to spiralling losses from soured loans.

The taxpayer-sponsored rescue of the Dunfermline Building Society is just one of six mutuals to have been swallowed up since last year.

KPMG warned that profits margins are likely to continue sliding over the coming year due to rising competition for precious retail deposits.

However, it is not all bad news: the report also predicts some smaller, relatively profitable societies will merge to increase their market share, although the report's author Simon Walker highlighted these are unlikely to pay windfalls to their members.

He also gave short shrift to claims from the embattled Chelsea Building Society that fraud losses are building up across the mutual industry.

'Whilst mortgage fraud has been a common issue in the buy-to-let market, most societies lending policies and procedures limit its potential impact,' explained Walker.

Chelsea Building Society last week revealed a £41m mortgage fraud and has hinted this could impact on the sector as a whole.

But the Building Societies Association was swift to shoot down its warnings that losses from crooked loans are multiplying.

There are now 53 societies compared to 59 a year ago: Barnsley, Catholic, Cheshire and Derbyshire were taken over by rivals, Dunfermline was part-nationalised, while Britannia was consumed by another mutual - the Co-operative - from outside the building society sector.

At least seven societies have reported 2008 losses - Chelsea, Newcastle, National Counties, Stroud & Swindon, Chesham, Darlington and Chorley & District - while a further six had profit collapses of more than 80% last year.

The three main reasons for this were the collapse of the Icelandic banks, which some societies heavily invested in, the cost of insuring savers' deposits through the Financial Services Compensation Scheme and rising mortgage arrears.

West Bromwich Building Society managed to narrowly escape collapse in June by converting some of its debts into usable cash; however, it is unclear as to whether other struggling societies can and will follow suit.

The Financial Services Authority also announced in June that it is launching a crackdown on societies that risk collapse by branching into riskier investments, but many fear this may come too late.

Savers are far from convinced: they withdrew more money from societies in June than at any other time since records began, a total of £2.2bn over the month. In comparison, societies enjoyed a net inflow of £419m over the same period last year.

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Just pay less on the deposits than you charge on the loans - it's not rocket science! :unsure:

All very well as long as the loans are good and secured on non-bubble assets, and as long as your competitors aren't tempting your depositors away with their high-risk, high-return model (for which they'll tap you via the FSCS levy, when the bill falls due).

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Guest happy?

As with most Daily Mail stories the detail is inaccurate. Neither the merger of the Catholic nor that of the Britannia has anything to do with the current financial circumstances - the Catholic's merger was planned prior to the situation as was the merger of the Britannia with the Co-Op - indeed the latter required a separate act of Parliament to be possible something which took about four years to organise, it is a merger not a take-over.

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Just pay less on the deposits than you charge on the loans - it's not rocket science! :unsure:

I would say it is not so much what rate you pay/charge...it's what is the probability of the loan being paid back. :o

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