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.