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
Monday, 15 June 2009
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.
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.
Wednesday, 3 June 2009
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?
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?
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