Building society Nationwide said today that its pre-tax profits plunged 69% to £212m in the year to April. Like every financial institution in the country, it’s suffering from rising debts and higher costs – but it also reckons it’s getting a raw deal from the Financial Services Compensation Scheme, the insurance plan for savers left high-and-dry. Nationwide has been forced to stump up £241m of its own money for the scheme, putting a huge dent in its bottom line. Scant reward for being one of the few financial firms not to tap the Government for extra capital...
Nationwide’s gripe is that FSCS contributions are calculated based on an institution’s share of the retail savings market, as opposed to their risk profile more generally. In theory this might make sense: the bigger your share of savers’ funds, the bigger the cost if you go bust and the Government ends up footing the bill. However, Nationwide says that it unfairly penalises ‘low risk retail funded institutions’. Whereas building societies that prudently base their lending on retail deposits end up paying a bigger share, the likes of Northern Rock – who borrow on the wholesale markets to lend and thus represent a far greater systemic risk – end up paying a much smaller amount. This is ‘illogical and unfair’, says Nationwide. And we’re inclined to agree.
Since profits would have been down even without the FSCS bill, this is clearly not the only problem Nationwide is facing at the moment. However, none of them seem terminal. Falling interest rates mean its returns from mortgages have been shrinking fast, but this should be a temporary phenomenon. The integration of the Portman, Cheshire and Derbyshire building societies has pushed up costs – but given their relatively distressed state, they should make money in the longer term. And although bad debts are on the rise (as they are everywhere), Nationwide’s average for borrowers more than three months in arrears is just 0.6%, well below the industry average of 2.39%.
So all in all, Nationwide seems to have done a pretty decent job of surviving the turmoil intact – which CEO Graham Beale ascribes to its ‘naturally high capital and prudent lending practices’. Compare and contrast this with Abbey, Alliance & Leicester, and Bradford & Bingley: all three are set to disappear from the high street altogether, after new owner Santander announced today that it would re-brand them under its own banner. So why should the likes of Nationwide be punished for their relatively cautious approach?
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