My blog has moved location

Hi my blog can now be found contained within the Saffron Building Society website, either as a link direct from the homepage or via the links below.

http://www.saffronbs.co.uk/blog/

http://www.saffronbs.co.uk

Good day for the building society sector?

Friday last week was on the face of it a good day for the building society sector, with West Bromwich saved from the wolves have been hounding it for what seems like weeks now and an announcement that building societies will have access to a new method of capital raising that evens out some of the structural disadvantage they have against the banks.

I am genuinely pleased for West Brom, not just because it is a large society with a strong regional franchise, but because everyone had effectively written it off as the next Dunfermline and yet it has managed to prove its critiques wrong.

What they did was swap subordinated debts for new profit participating deferred shares (PPDS). The first question my wife asked me is what is subordinated debt?
Well they are long term loans usually with a fixed rate of interest payable. The loans cannot usually be recalled before their end date and they are used by companies to boost capital to use for growth. Whilst they are long term, they do at some point get repaid and therefore can only be treated as secondary capital. Primary tier 1 capital or permanent capital has to be actual funds with no repayment date in the future, such as retained profits and this is where the PPDS come in. They have no repayment date, the capital that pays for the PPDS is therefore permanent, so better quality than subordinated debts. This permanency has had the effect of increasing the capital ratios of West Brom and therefore suring up its balance sheet for the future.

So everything is great then? Well as I have said I am genuinely pleased, however for me personally there is one issue with this scheme. As a mutual we are not driven to maximise profits for shareholder return and can therefore return some of our profits to members by way of quality products and also through building up capital which earns a return that again gets ploughed back into product development and other member initiatives.

However a society which has issued PPDS, now effectively has a perverse anomaly in its objectives. One group of investors want profits maximised so that they receive a strong profit share on their deferred shares and the other group (saving and borrowing members) want better returns and service that detract from profit.

This balancing act will requires skill from the relevant board. For me serving only one master (our members) is what makes mutuality come alive, so maintaining that mutual advantage will be key for those societies that issue PPDS.

Green shoots or just early summer madness?

While the recent warm weather has seen my garden bursting into life with gusto, I wonder if the same can really be said about the economy. Having just returned from a weeks holiday in France, where the effects of the weak pound became acutely apparent to me in terms of the sheer cost of things in Europe for us now on a £1 = 1 Euro basis, I have been surprised to find my inbox and various data feeds littered with evidence of green shoots, or at the very least claiming that the plant is not dead.

Firstly the FTSE, the pound and the commodity markets have all had a bit of a positive rally. Looks like I bought my Euros too early and my diesel too late but never mind.

The service sector has today reported a return to growth since the decline commenced in April last year and the CIPS Purchasing Managers Index leapt in May by the biggest chunk in its history, from 48.7 to 51.7, with 50 plus representing a positive number.

Human Resources magazine’s daily news feed today, claimed that the rate of decline in jobs had slowed in May and Nationwide have even recently reported a monthly increase in house prices of 1.9%.

Other green shoots bursting from my in tray on my return, included a survey of CEO’s that stated that a significant majority felt more optimistic than they did at the start of the year.

So are there really emerging signs of recovery or are we all just desperate to spot some? Well I am not sure and I have learnt the hard way that predicting things is a fools science. I hope there is some light now at the end of the tunnel. If house prices stop going backwards lenders will feel more comfortable in lending again which in turn will stimulate the market and a bit of upward inflation will pave the way for interest rates to go up a little and allow deposit takers to give some much needed extra interest to savers.

But none of us should un-cork the champagne just yet, there are many theories on whether this will be a V or W shaped recession, i.e. will it bottom out and then start to gradually increase again, or will it appear to have turned only to take another dip before sustained recovery really comes?

Why the long face?

It is, I think, fair to say that the Building Society sector has taken a bit if a bashing of late, but I am struggling to see quite why.

The press have reported on collapsing profits, potential mergers, Moody’s downgrades, counterparty losses and local authorities making decision not to invest with building societies and it seems that all the positives have been overlooked.

Firstly let’s talk about the sector profits collapsing. It goes without saying that in one of the worst recessions in history, most sectors of business will experience some reduction in earnings capacity and for building societies the extremely low interest rates that we currently have been dealt by the Bank of England compound these issues further. However, building societies have faired massively better than banks through the results cycle. At least most societies made a profit which is a stark contrast to the quite astounding losses and write downs seen in the banking sector. In addition we have had to account for huge levies to the FSCS to fund the bank failures, which come straight off the bottom line.

It is true that some societies lost money through Icelandic investments; but then so did many local authorities and had the UK government not underwritten the balances, so would huge numbers of UK savers. These exposures were not purely as a result of poor investment decisions by those societies, after all, how many of us really foresaw the catastrophic melt down that occurred?

The Moody’s downgrade of some societies, which has seen lots of press comment, was inevitable in an extreme economic downturn. In fact the UK as a sovereignty is on the verge of a downgrade, but I very much doubt this great nation will go bust. The tests Moody’s performed were too severe, using house price falls of 60% plus, which if such falls transpired, would make a hell of a lot of us homeowners significantly underwater on our house value to mortgages.

The point around local authorities is sad. Societies and authorities have been working together for years, and had those authorities who lost millions in Iceland, placed more in their local societies, they would be significantly better off now as a result. The problem here is the advisers they use, looking to cover their own back to recover from the Icelandic egg on face, through stressing the need to invest with the government for absolute peace of mind. Firstly what is the point of paying an adviser to tell you to invest only with the government and secondly the incredibly low rates they will be earning from the government will eventually mean council tax rises to restore the kitty to more normal levels.

Having just returned from the BSA annual conference in Harrogate and seen the passion and commitment that exists within the sector for looking after members and maintaining a low risk business model, I personally believe the negativity is completely overdone.

In such stark economic times I cannot be absolutely certain that some societies won’t conclude that they will do a better job for their members through merger with a stronger partner, but one thing I can be sure of is that Saffron will not be one of them and that the sector overall will still be a strong and vibrant part of the financial services landscape in years to come, doing what we have done for many years already, helping people to save, purchase homes and protect what is important to them.

Mail on Sunday article on the health of building societies.

I was surprised to open the Mail on Sunday money section this weekend and find my photograph in it in a section on Building Society Chief’s pay. As I know Jeff Prestridge the Editor, I was a little disappointed that he had not mentioned it in advance.

The mentions of Saffron through the article on the health of the sector were on the whole very positive, but Jeff made a play about my pay increasing in 2008, however this is as a function of 2007 performance in which Saffron had its best year ever. In fact no Director has taken a pay increase in 2009 to reflect the economic climate in which we find ourselves; a fact which the article did not make clear. Directors pay is a matter for the non-executive remuneration committee and our membership vote.

Jeff is quite right in many ways, the UK is facing the worst recession in recent History and Building Societies do face many challenges as a result. There has been the significant levies to the financial services compensation scheme for the failures of the Icelandic Banks and Bradford and Bingley, the low interest rate climate driving lower returns on capital, margin squeeze and of course the potential for mortgage arrears to worsen with unemployment increasing. However societies are fairing much better than banks in these troubled times, which is a testament to their less complex and less risk orientated business models.

It was nice to see Saffron Member Chris Jossaume quoted in the article. He stated that “Saffron seems good at communicating” and felt that our AGM was a useful source of good financial information, in simple laymen’s terms. It was also lovely to read his quote that read “The Society is a cornerstone of the local community”. It was just a shame that it was under the headline “Saffron members are lost for words”, which was true during the section of my AGM presentation which showed the 40 financial firms that had failed or had to be bailed out since the “credit crunch” began, as the article goes on to say.

Unfortunately blunt comparisons sometimes leave important facts out. Saffron’s operating profit was actually better in 2008 than the previous year, but of course with £1.1M put aside to fund the next 3 years levy to the FCSC and the Boards desire to sure up a potentially worsening economy through increased provisions for bad debts, the final pre-tax profit number was reduced. But Saffron is in great shape and the sector as a whole is much more robust that the Mail on Sunday article would have readers believe. But I guess boring, traditional, un-complicated and safe are not words that sell papers. Of course one could envisage some consolidation in all business sectors and it is not beyond the pale to assume that a few societies may decide they can provide a better deal to members through merger over the coming months, but this is not a new phenomenon and should by no means be regarded as a sector in danger. Mutuality has got legs as have building societies. Saffron celebrates its 160th birthday this year and on my watch I fully intend to ensure that it will be doing so in another 160.

My realisation that we haven’t got it quite right.

Savings rates are the subject of pretty much every discussion I hear or partake in at the moment and I guess that is no surprise when a saver with a base rate tracker product who was earning 5.75% as recently as November 2007 and 5% for the lion’s share of 2008, is now receiving a rather derisory 0.5%. On a £10,000 deposit balance that is the difference between £575 annual interest and just £50.

As a Mutual Building Society our primary job is to protect the safety and security of the cash that our members entrust to us to look after, but secondary to that is also the provision of a return that represents value for money. This is not such an easy task with a base rate to work with of just half a percent.

It is fair to say that we have done nothing more than pass on base rate reductions to our savings products and in some cases have decided not to pass them on in full, thereby improving the relationship of many of our savings rates with base rate; however I have heard enough from members over the last few weeks to suggest that we need to do better in their eyes.

No financial institution can have every one of their products continuously representing the “best buys” in its given category as a strategy such as this would firstly see a flood of new business, followed by an eventual inability to make a profit on the margin between savings and lending, but at our AGM last week members were clear that in some areas we have come off the pace too far (or more likely others have upped their game in the pursuit of new funds) and that, coupled with a few letters that have come across my desk in the last few days have confirmed to me that we need to review things and look to help our members where practical.

There is little point in following unrealistic expectations of a full suite of “best buys” for the reason stated above, my job is primarily to protect member’s capital, not chase transient money with rates to make up shortfalls in balance sheets which one could argue is happening elsewhere. However having conducted a long and robust review today, the executive team here concluded that we need to try harder in 3 core areas: our traditional branch based accounts, our ISA range and our fixed rate bond offerings. We also debated a key theme of finding ways to reward the loyalty of our existing members and as a principle will endeavour to make enhanced products available to those already with us.

Over the next week or so we will increase the rate on our cash build 90 account to make it compete strongly with the best of the traditional high street account. We will also be launching a new fixed rate bond with rate incentives for existing members and we have agreed a new 2 year fixed rate ISA that again will be very competitive and without the small print and tie in of many of the offers from the big banks and we will also have a new online corporate account to help local businesses.

We are also looking to work up some branch and online reward products that will allow instant access, but pay a great rate if no withdrawals are made and finally we debated how as a mutual we should be looking to help those members who are experiencing real hardship as a function of the current economic situation. We will seek council from the likes of Citizens Advice to help us with our thinking in this area.

We can’t please everyone all the time, I am fully aware of that, but I hope those members who have taken the time to offer views will see that where practical Saffron listens and takes action.

What a great AGM.

Last night was our Annual General Meeting, which this year we held at the Duxford Imperial War Museum.
I have to admit to being slightly apprehensive as to the mood I would find our membership in, as to be fair the financial services sector has not exactly covered itself in glory in the last 12 months and recently the building society sector too has taken some flack over the Dunfermline issues.

As a breed, CEO’s in the finance industry are clearly not the most popular animal at present, in fact in the popularity poles we had risen to the top in the “disliked stakes” above even journalists and estate agents (no offence to any estate agents or journalists reading this). Therefore I needed in my mind an ice-breaker, so began my presentation with a statement of fact that Saffron made £24,001,115,000 more profit in 2008 that the Royal Bank of Scotland; not a statement that I ever expected to be able to make, but a fact none the less. I then provided an overview of the current UK economic climate and a review of our results for 2008, which seemed to be well received by the members.

Richard Herbert our Chairman then led us through the formal AGM, before handing back to me to finish with some insights into the results of our recent members survey and our plans to develop new product offerings to help loyal members in the current extremely low interest rate environment, followed by a robust Q&A session.

It is fair to say that members wanted reassurance about the longevity of the society and our ability to survive the recessionary storms, which we were confidently able to provide; and there was some robust questioning to the Chairman on executive pay packages, with assurance needed that these packages were designed to promote long term sustainability, not simply short term profit maximisation, which Richard Hebert happily shared.

After the formal meeting though, it was really nice for me and the Board to have time to chat to members about there views on the society and wider economy. I always find myself extremely proud to run a mutual with members who take an active interest in their society and for me the insight and feedback they provide really does help to shape what we do next.

One key theme that came through was a desire from members to receive personal notification when we change or launch a new product and whilst not cost effective to write to every one, I committed that we would create a register of email addresses and send an email to all those wanting to know about new initiatives as and when they happen. Anyone who would like to receive such updates, please simply send an email saying “please keep me up to date” to our marketing team marketing@saffronbs.co.uk and they will happily add you to the list.

I also enjoy an increasingly growing personal relationship with some of our members; I was surprised how many of the 70 plus attendees I knew by name or had spoken to or exchanged correspondence with over the last few years. For me this is what it’s all about; fulfilling my role of taking care of our members' money.

Finally it was Richard Herbert’s last AGM as he retired as Chairman last night, but it has been a pleasure working with Richard and he will certainly be missed in the boardroom. Peter Harrison, our current Vice Chair will take over as the successor at a Board meeting later this week, and will no doubt continue the diligent and prudent steerage of the board that Richard has provided over the last 6 years.