More building societies set to merge or issue shares

Published 16th Aug 2009

Two more of the largest building societies – Chelsea and Stroud & Swindon – could be set for mergers or financial restructuring following the surprise departures of their chief executives.

Chelsea, the fifth largest society, is considering whether to seek a merger with another mutual lender or to issue a controversial new type of equity as part of a “full review of strategy” by new chairman – and temporary chief executive – Stuart Bernau.

Stroud & Swindon, the 10th largest mutual lender, which this week announced the resignation of 52-year-old chief executive David Hill, insisted it is not in a “distress situation”, even as one rival said it was “going to have to pull a strategic partner out of the hat”.

The credit crisis has already seen seven take-overs and mergers of societies, as well as a “quasi demutualisation” of the West Bromwich. Further deals have been expected as bad debts continue to emerge and profitability stays low.

While savers’ cash is almost certainly safe with the Chelsea and Stroud & Swindon, their 1m members are unlikely to receive windfalls from any mergers as societies are keen to conserve financial strength.

Chelsea, which posted £29m of losses for 2008 after being hit by the collapse of the Icelandic banks, is due to announce half-year results on Friday that Bernau said would reflect the “challenging” environment.

The Cheltenham-based mutual has 35 per cent of its lending book outside “prime” residential mortgages – mainly buy-to-let and self-certificated.

Bernau said of the strategy review: “One question is: are we best [proceeding] on an independent basis or are we best talking [about merging] to smaller – or bigger – building societies.”

While Chelsea “certainly has sufficient capital”, he said he is “pragmatic” about the idea of issuing profit participating deferred shares (PPDS). These shares – which involve paying a percentage of profits to institutional investors – were first issued by West Bromwich as part of a debt-for-equity swap that spared the mutual from having to be rescued. But PPDS are seen as controversial because of fears that siphoning off profits will lead to less competitive savings and mortgage rates.

Stroud & Swindon, which made a £2.7m loss and cut 10 per cent of its staff last year, said it wanted to remain independent.

Source: ' FT '

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