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.
Friday, 22 May 2009
Sunday, 10 May 2009
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.
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.
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