Why the latest cut in mortgage rates is not for mutual benefit

Bradford & Bingley’s move says little about the economy, and much about the society’s mutual status. What’s behind the handout? George Pitcher is joint managing director of media consultancy Luther Pendragon.

No sooner had I written last week that it was a good thing that cosy old cartels, like the one that used to fix mortgage and investment rates at building societies, had been broken, than Bradford & Bingley slashes its mortgage rate as if to prove the point.

In a fit of largesse, Bradford & Bingley is also giving back some 50m of its profits to its members. This is all meant to presage yet another price war.

I am heartily sick of price wars, whether the category is groceries, newspapers, forecourt petrol or mortgage rates. If every time price war was declared there really followed a proper discounting battle, by now we would not be paying for anything, because everything would have been put out of business.

The point here is that price wars are either phoney – as when a grocery retailer drops margins on non-core items – or they are about deferred payment. In the case of the latter, the market simply pays the price of the war in higher prices once the war is over.

This is what will happen in what is being dubbed the mortgage price war in the high street, precipitated by Bradford & Bingley’s move.

Mortgages cost a price prescribed by the state of the economy and the interest rates that support it, plus the efficiencies that the lender can bring to bear. That cost will have to be paid at some stage in the mortgage’s life, at a consistent rate of return or one that is weighted to allow for a period of price war.

More interesting than yet another battle of mortgage rates is the effect that competition is likely to have on the way that the lenders are constituted. Should they be mutuals or plcs?

Bradford & Bingley would have us believe that its generosity is a vindication of its mutual status. It is not constrained by the pressures of supplying shareholders with earnings growth and is, therefore, able to return a proportion of surplus profits to its customers.

There is nothing intrinsically wrong with making this a virtue and a boast – I rather like the sanctimonious line that Bradford & Bingley’s chief executive, Geoffrey Lister, wheeled out: “Mutuality is for life, not just for Christmas.” If only one could put one’s mortgage in a sack and drop it off a bridge.

But what we need to know is whether being constituted as a bank or a building society is more sustainable for the market in lending and investing. The recent craze among building societies has been for conversion to plc status, or for acquisition by a bank. Cheltenham & Gloucester went for the latter, offering itself up to Lloyds Bank for 1.8bn, while the Halifax, National & Provincial and Woolwich are converting to clearing-bank status.

The first point that needs making in response to all this banking is that the high street is already heavily overbanked. Hence the waves of redundancies that have been hitting the industry of late.

At the turn of the decade, the retail banks employed some 445,000 – they now employ a rather leaner 370,000. It used to be that a sign of a company’s prosperity was indicated by the number of people it employed. Now the reverse appears to be true.

This contraction of personnel is driven not only by over-supply, but by developments in telephone and on-line banking services. Direct Line showed what could be done with insurance products in a low-overhead, service-driven environment. In the US, telephone combine AT&T is now the largest provider of credit cards.

Against this background, you might wonder why the likes of the Halifax and the Woolwich should want to be banks. That would seem to suggest that Bradford & Bingley’s stand for mutuality is rather shrewd.

But what Bradford & Bingley appears to be doing is to treat the symptoms, rather than the disease. What has presented the society with the wherewithal to dish out to its customers is precisely its problem – it has too much capital. It may like to think that shelling out between 30 per cent and 40 per cent of its surplus capital will solve the problem of a fast-growing capital base, but it is simply postponing that problem, not solving it.

Furthermore, Bradford & Bingley is behaving in a manner from which it would be proscribed by shareholders – and for good reasons – if it was a plc.

By subsidising differential rates with its profits pool, Bradford & Bingley is distorting interest rates – no one can know what those interest rates would have been had the building society not subsidised them. Consequently, a bidder for Bradford & Bingley is always going to have a powerful attraction if it is offering cash in its members’ hands, rather than the rather dubious massage of its loan rates.

The problems facing the high street institutions are to do with an over-supplied market. There is no getting around that. And that means there will have to be further fundamental rationalisation.

No amount of jumping around, changing status and offering whistles and bells on interest rates, bought from a bloated capital base, is going to alter that stark reality.