CML news & views

How have building societies fared since the onset of credit crunch? Mutually-owned lenders have been championed as more reliable and consumer-friendly than the troubled banking sector. But have they not also faced extra pressures, including excessive regulatory intervention and the requirement to shoulder an unfair burden in financial compensation obligations?

The CML’s head of research, Bob Pannell, sought to answer these – and many other questions about the performance of the sector – in a thought-provoking session at our recent annual conference.

Some of the key questions, however, cannot be answered yet. Against the uncertain backdrop of an impending general election, regulatory reform and major re-structuring of banks, it is still too early to say if what we are now witnessing is a permanent transformation of the building society sector.

Support for the sector

In the immediate aftermath of the banking crisis, supporters of the building society model have argued that the sector would escape the worst aspects of the credit crunch. They were financially sound and more reliant on retail funding, it was argued. But has that confidence been misplaced? We have seen intense competition for retail savings, and both banks and building societies have experienced a dramatic slowing of retail deposits this year.

Net receipts for building societies have slumped from an annualised amount of almost £20 billion in mid-2008 to a negligible or possibly even a negative sum in recent months. Competition has tended to focus around fixed-term bonds, and funding costs for all lenders have not fallen by anything like the reduction in either the Bank of England’s base rate or the London inter-bank offered rate (libor).

In effect, building societies have been running hard to stay still in funding terms, and have therefore been unable to make the most of opportunities to build margins, profitability and capital. All lenders have been struggling to balance often conflicting objectives.

But if building societies have faced intense competition for retail funds, how have they fared on the lending side? They might have been expected to benefit from the demise of specialist lenders, many of which have been largely absent from the market for the last couple of years.  But that has not proved to be the case. The building society share of new lending has declined.

Market share

Building societies’ share of house purchase lending has contracted year-on-year for the last six quarters in a row. So far this year, societies have originated just over 17% of all loans for house purchase. Meanwhile, the sector’s share of the remortgaging market has declined sharply from 20% in the fourth quarter of last year to 11% now.

Buy-to-let lending is one area where the share of the building society sector has grown markedly. But the volume of lending in this market is relatively small and the numbers are distorted by the withdrawal of many lenders from the buy-to-let sector.

Building societies may have benefited from upholding a traditionally more conservative approach to underwriting. In 2007, the proportion of building society lending for house purchase at 90% or more loan-to-value (LTV) peaked at 24%, several percentage points lower than the banks. Since then, the proportion of high LTV lending for both sectors has declined dramatically. By the third quarter of this year, it accounted for 9% of bank and 5% of building society lending.

Table 1: Share of house purchase loans >90% LTV, %

Source: CML/BankSearch Regulated Mortgage Survey

In its Financial Risk Outlook 2008, the Financial Services Authority defined “higher risk” mortgages as those which combined an LTV of more than 90% with borrowing at more than 3.5 times income and for a term of more than 30 years. In the second quarter of 2008, the scale of this type of lending by building societies briefly matched the banks. 

But higher risk lending has now been scaled back by all lenders. Today, there is virtually no building society writing business of this sort and it accounts for only around 1% of bank lending.

There is a slight quirk in lending to customers with an impaired credit history. Building societies have tended to lend more to these customers, although the overall percentages are small. Again, though, all lenders have now pulled back from this lending and, in the third quarter of this year, it accounted for just 0.6% of building society loans.

Broadly speaking, building societies and banks appear to have adjusted their lending criteria in the same way, with societies continuing to show a lower appetite for risk.

A more conservative approach to lending by building societies has resulted in lower arrears rates – although the recent trend has been for them to increase.  Possessions are also lower in the building society sector, suggesting they benefit from relatively few – and smaller – losses on loans.

Conclusion

As the CML chairman Matthew Wyles argued in an earlier presentation at our conference, many smaller and medium-sized building societies are showing considerable resilience in what is still a difficult operating environment. 

The CML will continue to work for a healthy mortgage market, built on competition from a range of different types of lenders. We will also work for an appropriate regulatory structure, in which firms with different business models can offer choice and diversity for customers.