Bath Building Society and the Wider Market
Review of 2009
Despite continuing uncertainties in the consumer financial market, Bath Building Society has an optimistic but cautious view of the future.
The Wider Marketplace:
Since the onset of the credit crunch in the late summer of 2007, financial markets have been uncertain, and at times in complete turmoil.
The collapse of the Northern Rock in 2007 was a sign of worse to come. The financial crisis reached a calamitous peak with the collapse of the investment banks, the near meltdown of the UK financial system and the dramatic rescue of RBS, previously touted as the largest bank in the world, and HBOS (Halifax Bank of Scotland). In 2008 the FTSE fell by a record 34 per cent affecting investments and pensions, mortgage lending in the UK was down by 60 per cent and UK house prices fell 25 per cent from their peak. With repossessions rising sharply in the final quarter of 2008, and public debt ballooning, 2009 promised to be a very tough year.
Although it has been tough for many financial institutions, some of the worst fears of the pessimistic commentators at the end of 2008 have been avoided. The stock market has rallied in 2009, house prices, much to everybody’s surprise, have started to slowly come back up, and the panic which engulfed the market in the autumn of 2008 is receding into history.
The position of Building Societies:
Building societies, whilst having fared better than the banks, have not been immune from pressures in the market. The downturn has seen the fall of several societies including the Derbyshire, Cheshire, and the Dunfermline and most recently the Chelsea looks as if it will be swept up by the Yorkshire following its well known problems lending to Icelandic banks and with mortgage fraud. Others, however, have fared better. Bath Building Society is among a group with a positive story to tell.
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How building societies have fared in the downturn is due largely to their exposure to a range of problems. Societies with large exposures to Icelandic banks, subprime mortgages, mortgage contracts which track the now historically low Bank of England Base rate, and with large amounts of their funding coming from the money markets have found the going tough. A common complaint amongst all building societies has been the trigger of the Financial Services Compensation Scheme to protect the depositors with the Bradford and Bingley and Icelandic banks, the burden of which fell disproportionately on building societies.
Whilst the trading climate has been difficult for societies, and many have seen dramatic reversals of fortunes, some building societies, including Bath Building Society, continue to make good profits.
Bath Building Society’s Position:
Like a number of smaller societies and indeed some larger ones, Bath Building Society believes it is well positioned to continue to weather the storm. A cautious approach to mortgage lending and a wide variety of funding channels, mortgage and savings propositions, have proved beneficial in difficult market conditions. Diversification into property letting has also been helpful as the rental market has held up relatively well in comparison with the house purchase market.
Bath Building Society’s range of niche mortgages includes ‘complex prime’ lending, buy to let, holiday let, self build, and the renowned Parent Assisted and Buy for Uni mortgages. Its very individual approach to underwriting has helped greatly to protect it from some of the difficulties experienced by other players who have relied on computer based lending decisions in recent years
Whilst some lenders have struggled for funds, Bath Building Society has been helped by having a wide range of customer types and business channels which fund its lending business. Specialist deposit products include SIPP pension funds, business accounts, client accounts and qualifying time deposit accounts.
The Society has traditionally put a lot of store on high standards of personal service, a commodity which has become prized as banks have become more impersonal and remote. In the current climate not having call centres, and having a flexible approach where customers have access to decision makers has given it a competitive advantage.
Dick Jenkins, Chief Executive for Bath Building Society knows his arrears customers by name, indicating the low level of arrears and the individual approach that is taken to customers having difficulty paying their mortgages
The Future:
Commenting on the future, Dick Jenkins explains, “Some of the clever tricks used by building societies and banks have turned out to be not so clever in retrospect. At Bath Building Society we keep things simple, and take a safe approach.”
“History shows that the Bath Building Society has a resilient business model, and the prudence we have shown historically is now what customers want to see across the entire industry. What we have been doing for years has suddenly become fashionable again.”
“That said, even though we are in relatively good shape in the current market, this is no time for complacency. A huge number of risks remain for financial services organisations.”
“I think the market is in a state of limbo waiting for the general election. Whichever party forms the government one of the big questions is how quickly and how deeply a new Government could cut into public sector finances. This would have a knock on effect on unemployment and arrears - the “double dip” phenomenon that economists fear. It’s no surprise, politically, that the major parties don’t want to disclose their hand too early but, of course that adds to the uncertainty”
“We’re still in a climate which is difficult to predict. I feel confident that the worst is behind us, although putting right the public finances is a Herculean task and will take years. But when talk changes from the survival of banks to the injustice of bankers’ bonuses, as it has done over the last 12 months it is indicative that the economic climate is improving.”
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