Mutual revival for building societies?

Beginning in the cut-and-thrust Thatcherite era, many of Britains biggest building societies became banks and set out on aggressive build-and-buy strategies. Yet, as the partial flop of Bradford & Bingleys (B&B) rights issue showed last week, those self-same demutualised entities are at the forefront of Britains beleagured banking industry.

Beginning in the cut-and-thrust Thatcherite era, many of Britain’s biggest building societies became banks and set out on aggressive build-and-buy strategies. Yet, as the partial flop of Bradford & Bingley’s (B&B) rights issue showed last week, those self-same demutualised entities are at the forefront of Britain’s beleagured banking industry.

Meanwhile, building societies – led by Nationwide, with 50% of the market – are enjoying record growth, spurred by savers of institutions such as Northern Rock closing their accounts.

Northern Rock’s problems, triggered by a cry for help to the Bank of England last October, saw the first run on a UK bank in more than a century and led to its eventual nationalisation in February this year.

And HBOS, born out of the merger of Halifax and Bank of Scotland, asked its shareholders for £4bn in new capital earlier this year;
B&B botched its own attempt at raising money – with more than 70% of its £400m call left to the underwriters, while Alliance & Leicester’s (A&L) shares are valued at a fifth of the level of 18 months ago, dropping out of the FTSE 100.

Last week A&L called on shareholders to accept a £1.26bn offer from Grupo Santander, dramatically down on the £6.5bn rumoured to have been offered for the UK’s seventh-largest banking group by French bank Credit Agricole just last year.

Santander already owns former mutual Abbey, which it bought for £9.2bn in 2004, and intends to merge the two in a move that will see one or both of the brands scrapped.

Gerry Moira, chairman and director of creativity of Euro RSCG London, suggests that such situations highlight the erosion of once-traditional brands after giving up their mutual status. He also believes that the time of mutual “has come” and their patience rewarded “after the tooth and claw Thatcher years of the 1980s, when others rushed to be banks”. He adds: “Nationwide has stuck to its guns with its ‘Proud to be different’ philosophy. It’s a fairly clompy statement but that’s exactly where they should be.”

Since August 2007, building societies have been experiencing record savings inflows, at £17.7bn from August 2007 to date, compared with £7.9bn a year earlier. While the credit crunch, which started just over 12 months ago, has not left anyone unscathed, the constraints of mutuality have given some protection. Societies are legally required to keep at least 50% of their funds in retail deposits from savers. Given the capital to do so, those once prudent building societies diversified and developed a culture of short-term recklessness.

A spokeswoman for the Building Societies Association says: “Recent events surrounding a number of ex-mutuals only serves to highlight the robustness of the building society model. The high reputation of building societies – “tried and tested, trusted and traditional” – represents an attractive offer to consumers in current market conditions.”

In contrast, new B&B chief executive Richard Pym faces an uphill struggle to turn around the brand’s battered reputation, with a business ready to be swallowed and stripped by predators.

Gone are the cut-throat, greed-fuelled late 1980s and 1990s, which saw a rush of building societies and their members demutualising to cash in on the wholesale money markets and aggressive­ly build their business. Such activity was allowed following the introduction of 1986 Building Society Act.

However, in the light of the difficulties of the demutualised institutions, a number of commentators have questioned whether demutualisation was, after all, such a good idea. One industry insider suggests that the likes of Halifax, Northern Rock and B&B built those businesses on greed and at the expense of their brands. He says most of those brands have been, at best, watered down and many are likely to be axed.

Margo Swadley, director at branding consultancy Added Value, says that one of the problems such companies have faced has been retaining the “warmth and friendliness” of a mutual. “It is very hard to scale that, without becoming much more corporate and ‘bank-like’” she adds.

Moreover, she says that as building societies they had become associated with products, such as mortgages and savings, a brand strategy many continue to take. Indeed, those, such as Barclays-owned Woolwich and Lloyds TSB’s Cheltenham & Gloucester, have become the mortgage sub-brands of high street banks, shadows of their former selves.

Yet all is not lost: she says that Halifax and its demutualised rivals are still essentially seen as “societies”, with consumers associating the negatives – somewhat unfairly – on “the big banks”.

Moira also suggests that banking as a whole has taken a knock. He says: “In the wake of the Northern Rock disaster, something that’s for the people and by the people – the socialist ethic of the mutuals – would be very attractive because consumers have realised that things are all joined up. That they [the banks] are all in it together.

“Comparative brand claims ‘we’re not like them’ have been exposed as a lie – when one bank catches a cold they all catch a cold,” he adds, saying that trying to separate your bank brand from the rest of the industry is more difficult than ever. “I know what Nationwide stands for, I know what banks such as The Co-operative stand for, but I don’t know what Abbey is. It’s about having a position, not a positioning, which is what these former building societies lack,” he says.

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