Whatever your views about building societies versus plcs, you have to admit that societies have proven themselves not only to be a pretty resilient lot, but also one of the UK’s great success stories.
From their humble beginnings in 1775 as ‘terminating’ societies (which, for the anoraks among you, means they were wound up as soon as all their members had been housed. The last terminating society – First Salisbury – was dissolved in March 1980), building societies have grown to become a key component of the UK financial services sector.
Data produced annually by KPMG confirms there are currently 63 building societies which, between them, have an 18 per cent share of the mortgage market and a 19 per cent share of the retail savings market. The average margin for the top 22 societies, which is a good indicator of the real value they are able to deliver to members, was 1.01 per cent. This compares very favourably with plc lenders, many of which operate on margins nearer 2 per cent.
One of the ways in which societies have been able to continue operating on such margins has been by keeping costs under tight control. Among the top 22 societies, the average cost per £100 of assets managed is 83p, an improvement on 85p last year. As a result, nearly 57 per cent of societies recorded increased profits in the year 2004/5.
In the chairman’s speech at the last Building Societies Association (BSA) annual lunch in November, Phillip Williamson confirmed this raft of key statistics are continuing their positive trend. He reported that net retail savings inflows between April and September last year were 20 per cent higher than during the equivalent period in the previous year and that, on the opposite side of the balance sheet, building societies also enjoyed a 10 per cent growth in assets to £247 billion during the 12 months to April 2005. Societies now have 2.75 million borrowers on their books.
Most importantly, however, building societies still enjoy the type of reputation many other financial institutions can only dream about. Consumers have trust in building societies, whereas they can be suspicious of the motives of the big banks. An NOP survey showed that 80 per cent of building society customers were satisfied or highly satisfied with the service they received, whereas the corresponding number for the banking sector was 69 per cent.
Consumer preference
One of the contributory reasons for this consumer preference for building societies has been the approach taken to branch closures. In the period 2001 to 2005 the banks closed 865 outlets whereas building societies closed just 65, demonstrating why societies have a reputation for being more consumer-minded. Intermediaries are probably more aware than most of the importance of this feel-good factor. Very rarely do clients express concern about being recommended to borrow from a building society.
There is no denying, however, that the mortgage market in which we all operate is more competitive than it has ever been and building societies cannot afford to rest on their laurels and assume happy customers in the past will automatically translate into happy customers in the future. All financial institutions, regardless of their status, know only too well that if they don’t keep on evolving and ensuring their products and services meet their customers needs and expectations, they will fall behind in the battle for market share.
We are currently seeing a raft of new mortgage lenders enter the market, or announce their intention to enter the market, and new products and services are continuing to proliferate at a faster pace than ever before. Building societies are not only mindful of the increased level of competition in the market, but also the need to tailor their services to the needs of their different distribution channels.
For example, we have recently launched our dedicated intermediary service which has been branded West Brom for Intermediaries. West Brom for Intermediaries isn’t simply a new badge; it’s a completely separate business with its own products, services support, online technology and staff, dedicated to servicing the needs of intermediaries. Last year, intermediaries accounted for 75 per cent of our new business. During the year ahead, the intermediary sector is projected to account for 80 per cent of new business. It is, therefore, easy to understand why we place such importance on ensuring we meet the needs of the intermediary market.
Carving a niche
This multi-distribution strategy has also been adopted by a number of other societies, some of which have decided to take the acquisition route, such as Britannia when it acquired non-conforming lender, Platform. We have also seen societies such as the Yorkshire launch its homegrown intermediary lender, Accord Mortgages, and more recently the Derbyshire has launched its specialist lending business, Salt. We also decided to extend our distribution capability by purchasing the franchised mortgage advice operation, Mortgageforce.
The challenge, of course, is not in launching new brands and businesses, but in carving out a niche for them in what is, at the moment, an overcrowded market. Having a clearly differentiated proposition is critical and simply rolling-out ‘me-too’ type products and services is a potential recipe for disaster.
Service is key – some would argue the most important ingredient – in any proposition for brokers. Few lenders can boast they have been able to provide a faultless service without any hiccups from time to time and most would admit maintaining a consistently high quality service is the most demanding challenge they face. One of the major service developments taking place at the moment is the launch of online trading platforms for intermediaries, which enable brokers not only to obtain product information and Key Facts Illustrations (KFIs) online, but to also submit applications, receive immediate offers and track cases.
Online propositions
A number of societies are developing online propositions and we have recently launched our online platform, which not only enables brokers to get product information, but to also obtain KFI’s, decisions-in-principle (DIPs) and submit applications online. Importantly, our system has been designed so it interfaces seamlessly with our ‘back office’ system, which will ensure a fast and reliable service for brokers and clients.
Technology is, however, only part of the solution to providing intermediaries with a high quality service. Skilled underwriters and trained administrators are equally as important and brokers have made it clear that, although technology does help speed up processing times and enhance efficiency, there are still a large number of occasions when good old human intervention is essential. We are spending just as much time developing our people as we are on new technology, as we recognise the importance of ensuring brokers will always have skilled staff to deal with.
Well represented
Historically, building societies have been accused of being more risk averse than other lenders, but an analysis of current mortgage products shows this simply is not true. Societies are well represented in every product sector from prime lending to self-cert, buy-to-let, equity release, non-conforming and unsecured lending. At West Brom for Intermediaries, for example, we not only have a highly competitive prime and buy-to-let product offering, but have also ventured more recently into non-conforming lending and we anticipate other societies following suit.
Some industry commentators forecast the demise of societies following a spate of mergers and demutualisations in the late 1980s and 90s. However, these predictions have not come true and, although there have been some mergers in recent years, they have tended to be few and far between. We do not see mergers as being a key part of our future growth strategy.
Looking forward, Basel 2 is a key development on the horizon for societies, who are considering ways in which they can make effective use of surplus capital. Competition from capital effective lenders is expected to increase after Basel 2 and some societies may be tempted to diversify into other forms of capital intensive activities such as commercial finance and asset finance, as well as stepping-up activities in the buy-to-let, equity release, shared ownership and other niche market sectors.
Efficient
Societies have good reason to be proud not only of their heritage, but also the way in which they have responded to the challenges of operating in one of the most competitive housing markets in the world. Building societies are among the most efficient companies in the UK and their investment in technology, staff, training and infrastructure continues apace.
At a time when new lender launches are hitting the headlines, it’s easy to view building societies as the ‘old guard’. However, nothing could be further from the truth. In May 2006 building societies accounted for gross advances of £4,613 million and they are continuing to compete aggressively against both banks and specialist wholesale lenders. Most importantly, building societies remain a firm favourite with borrowers, which has to be good news for intermediaries.
