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Building societies to merge?

Housing downturn could well trigger building society mergers, says finance expert

As debts from mortgages rise and profits from lending fall, a wave of mergers among building societies could be triggered, according to a senior analyst at KPMG.

The KPMG Building Societies Database 2008, due out this week, says that while the 59 remaining societies have weathered the storm comparatively well so far, the second longer and slower-paced round of the credit crunch is now under way, and this poses more problems for societies.

Richard Gabbertas, Financial Services Partner at KPMG, said: "It's inevitable there will be some more consolidation as market conditions worsen. Given the consolidation in the banking sector, it would be surprising if there wasn't more in this sector," he added.

It is thought that transactions would involve smaller players being taken over by Nationwide, the sector leader, or other top 10 societies.

These deals could yield cash windfalls for customers of the smaller societies. Chelsea, the fifth largest society, announced plans in June to take over Catholic, the 57th by asset size, and have offered some payouts.

The KPMG review, covering financial results in the year to April 2008, says that societies' prime mortgage books have so far shown little sign of stress in the market downturn, although some bad debt charges have already started to rise, particularly in non-standard subprime lending.

Nationwide last week announced it was opening a savings operation in Ireland to widen its retail deposit base and access to European Central Bank funds available for financial institutions in the eurozone.

KPMG also forecasts that greater liquidity requirements and a desire to preserve capital ratios will see societies limit their share of new lending and lose market share to banks this year and probably in 2009.