Chief executive David Cutter said, "Skipton, in common with all building societies, has a substantial and stable retail funding base. We also have high levels of capital and liquidity, which make us strong in the current climate. However, unlike other building societies, we also have a diversified Group of subsidiary investments, which generate profits (even in this difficult economic climate). That is why I'm confident our results will stand out from those of the banking sector and our building society peers. They demonstrate a solid performance during a whirlwind year in the UK's financial markets."
Results
In 2008, the Society's net interest margin reduced by £12.2 million to £69.8 million. This was partly as a result of the competitive rates enjoyed by savers (as demonstrated by a growth in retail balances of 12.9%, from £7.2 billion to £8.1 billion) and partly due to the high cost of securing longer-term funding and carrying above-normal levels of liquidity during the credit crunch.
Lending plans for the year were modest and as a result, the Society's gross lending was down a third from £2.2 billion to £1.3 billion.
In addition to providing in full against the Society's own exposure of £11.0 million to the Icelandic banking system, it has also provided £16.3 million for its share towards the next three years' levy to be imposed by the Financial Services Compensation Scheme (FSCS) in relation to the rescue of savers in Bradford & Bingley and other banks. Group profits in 2008 are almost half what they would have been had the FSCS provision not been required.
David Cutter added, "Whilst we acknowledge the importance of a national safety net for savers and the part it plays in giving them confidence in the UK's financial stability, we believe it unjust that the building society sector, which has an inherently safer business model, is bearing a disproportionate cost for the troubles of some banks which had far riskier models."
Skipton Building Society
A key reason for the healthy state of the Society's business, in relation to many in the banking sector, is its limited reliance on the money markets, as approximately 70% of its funding comes from retail balances. With regard to its non-retail funding, the Society has maintained its level of funding through already well diversified channels, supplemented by a covered bonds programme, established during the year, which will enable it to access further medium-term funding whilst the current market continues.
The uncertainties of the credit crunch led the Society to be naturally cautious in committing funds for lending and, where it did, we sought to lend only to borrowers of higher quality. Priority was also given to our members, recognising their existing relationship and track record.
In the Society, the number of mortgages that were three months or more in arrears increased during the year from 0.20% to 0.38%. At a Group level, the figure increased from 0.41% to 1.14%, but remained well below the Council of Mortgage Lenders' industry figure of 1.89% at the year end.
The increase in consumers' perception of building societies as a safe place for their savings, coupled with a range of competitive products (in particular, the Branch Access Account and limited edition fixed rate bonds) contributed to the Society's retail inflows. In addition, Skipton's investor numbers grew from 521,000 to 565,000 during 2008 and will increase further to over 700,000 following the proposed merger with Scarborough.
David commented, "The Government's hopes of kick-starting the lending and money markets through rate cuts and a variety of funding schemes have not yet worked. Whilst those borrowers who already have mortgages are benefiting, those on whom the housing market relies - new homebuyers - have found it increasingly hard to get a mortgage. We also find it perverse that UK savers, who are the bedrock for the funding of mortgages, are being penalised to help correct the fundamental imbalances in the economy."
The Society opened five new branches in 2008, plus another in early 2009, taking its total to 85. This will grow further with the branches inherited through the Scarborough merger. In addition to face-to-face channels, the Society spent 2008 expanding its online offering, with new savings products added to this channel and the launch of its very well received eMortgage service, where mortgage brokers submit applications via the internet.
The Skipton Group
David explained, "For a long time, the Society has extolled the benefits of having a group of subsidiaries to complement its core business of savings and loans. During good times they provide dividends to the Society, which enable it to deliver better pricing to our members. In more stressed conditions they are assets that allow us to crystallise value to protect the overall Group performance."
As a result, in 2008 the Society sold two of its subsidiaries - Direct Life & Pensions and Amber Select - generating a profit of £9.1 million. In addition, Connells disposed of its remaining holding in the property website, Rightmove, generating a profit of £22.3 million.
Whilst Skipton's major subsidiary Connells saw its operating profits fall from £59.7 million to £10.4 million, this result is a remarkable achievement in the worst housing market in living memory where property sales were down 40% from 2007 volumes.
The future
David concluded, "With so many uncertainties continuing in the general economy, we will not return to the levels of profit seen in 2006 and 2007 for a while, but we are confident that our prudent management of both the core business and our subsidiaries should see us deliver another solid performance in 2009.
"We remain on track to complete the proposed merger with Scarborough Building Society on 30 March 2009. Our experience during the project has reconfirmed our belief that the two organisations are a close fit, in terms of commitment to mutuality, business diversification and of course geography. The reward will be a stronger mutual with the opportunity to serve a larger audience, which can only be good news for our customers and staff.
"With regard to future mergers, we will consider these so long as our existing members are not compromised and there is a long-term benefit for the combined business."
