Nationwide Takes Over Cheshire And Derbyshire

The UK's biggest building society is to merge with two smaller rivals. However, members are being rescued, rather than rewarded...

Nationwide BS, the UK's biggest building society and second-largest mortgage lender, is to absorb two smaller rivals, Derbyshire BS and Cheshire BS. This news comes after rising bad debts left the smaller societies nursing half-year losses of £17 million and £10.5 million respectively.

Although this move is being described as a merger, in effect, the two member-owned organisations are being taken over by the industry leader -- which dwarfs them in size, as you can see by the table below:

Pushed together by the credit crunch

Both the Cheshire and the Derbyshire independently approached the Nationwide in order to improve their financial outlook by merging with the Goliath of the building-society world. Once again, this move has come about because of a familiar tale: the credit crunch has made it difficult for lenders to access the wholesale markets for inter-bank lending.

Unfortunately, the smaller building societies cannot raise enough from retail savings deposits to back their lending, so they have been forced to scale back their operations. 

In addition, some societies have been lending (and buying loans) at the riskier end of the mortgage market, including self-certified, subprime, buy-to-let and commercial loans. As these loans have soured, bad debts have mounted and society profits have plummeted.

No windfall for members

Previous takeovers, mergers and demutualisations have rewarded building-society members for giving up their ownership. What's highly unusual about this society merger is that there will be no windfall of cash or shares for the savers and mortgage borrowers who own the societies. In fact, these mergers will be agreed by board resolutions and not through a vote by the takeover targets' 925,000 members or Nationwide's fourteen million members.

Thus, members will receive no reward for being forced into the arms of Nationwide. In effect, this takeover has been brought about by commercial need, rather than any concrete desire by the smaller societies to become Nationwide's partners. 

Indeed, City watchdog the Financial Services Authority (FSA) encouraged the move, in order to ensure that Cheshire and Derbyshire customers don't lose faith as the housing market weakens and losses rocket.

Despite the usual competition concerns, I've no doubt that the FSA and the Office of Fair Trading will wave through these mergers with no objections. On the other hand, a certain amount of anger and resentment from Cheshire and Derbyshire members is inevitable. In addition, there are sure to be job cuts as Nationwide trims the head offices and branches networks of its weaker rivals.

The first of many mergers?

At present, there are 59 building societies in the UK, but this number is set to shrink. For example, earlier this year, fifth-largest building society Chelsea BS took over Catholic BS, its single-branch rival. In August 2007, Nationwide took over Portman BS, a former top-five society, leading to windfalls of between £200 and £1,000 for 1.2 million Portman members.

What's more, lenders predict that the credit crunch is likely to continue until 2010. If this happens, then growing financial weakness among small and regional societies is likely to lead to further consolidation and more mergers. Then again, Nationwide's boss has indicated that it has no current plans to absorb any more societies.

Learn some lending lessons!

When the credit crunch is over and loans begins to flow more freely, then it is vital that British building societies look back and learn from their mistakes. Moving away from their traditional markets of mainstream mortgage lending and savings has led to some societies losing their independence and regional focus. Let's hope these former stalwarts of the British housing market learn their lesson from this leap into risky and unconventional lending!

Finally, this sort of event has been on the cards ever since building-society-turned-bank Northern Rock got into trouble almost exactly a year ago. Indeed, I predicted such an event on 21 September 2007 in this article: "If things worsened, [...] the Building Societies' Association would ask one of the big boys to come to the aid of a weaker society." It gives me no pleasure to be proved right within the space of a year.

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