Nationwide profits halve after clause in mortgage deal costs it £450m

ationwide Building Society has missed out on about £450 million in annual profits because of the way it worded mortgage contracts.

Britain’s biggest building society reported a near halving of underlying annual profits to £212 million, and said that it would have been three times as much but for the clause. About 530,000 of its borrowers are paying a standard mortgage rate of just 2.5 per cent because of the clause that means customers who revert to its base mortgage rate cannot be charged more than 2 percentage points over base rate.

By contrast, borrowers with rival lenders typically revert to an interest rate of 4 per cent or more when they reach the end of their fixed-rate deals, which is 3.5 percentage points above base. Nationwide introduced the ceiling in 2001 to qualify for a government-sponsored measure of quality. The so-called CAT scheme never caught on but Nationwide continued to include the promise in some new mortgage deals until the middle of last year.

The credit crunch pushed funding rates far above the base, making what had been a cost-free promise before 2007 extremely expensive for Nationwide. Graham Beale, Nationwide’s chief executive, conceded that customers who reverted to the capped rate were not in a hurry to remortgage. “In the current market, it’s highly attractive,” he said. “Obviously people will eventually pay off their mortgages but it will take time to wash through.” He added that the promise could hit profits for years to come.

Nationwide described the fall in profits from £393 million the previous year as a strong performance during difficult trading conditions, with margins under pressure because of the low base rate. Nationwide, which has 15 million members, also said that waiving a rule that could have allowed it to put a floor on a different tracker mortgage rate had cost an additional £100 million.

The society, which regularly reported profits of £700 million or more before the downturn, said that it could operate on much lower levels for several years, but that eventually earnings would need to rise again to provide the capital to expand its lending book.

Nationwide wrote off £549 million in bad debts in the year to April 4, up from £394 million in the previous year. Defaults by commercial property borrowers worsened from £171 million to £299 million, although it improved between the first and second half of the year.

Among personal borrowers, those more than three months in arrears increased from 0.64 per cent of borrowers to 0.68 per cent, but the default rate still compared favourably with average industry level of 2.2 per cent.

The number of savers leaving the lender slowed, with net outlows of £6 billion in the first half falling to £2 billion in the second, and Nationwide attracting net inflows in the past two months of the financial year.

Mr Beale said that the destabilising savings products from state-owned bodies including National Savings & Investments and Northern Rock had fallen away and that Nationwide’s new savings product Champion had proved popular.

The lender said that it expected broad stability in the housing market in the next 6 to 12 months after the double-digit recovery in house prices over the past year.

“Unless there is a significant spike in interest rates, which we are not expecting, a major dip in prices is unlikely to occur over the next year,” Mr Beale said.

Nationwide lent £12 billion in new mortgages during the year, representing a market share of 8.7 per cent, down from 9 per cent in 2008-09.

Mr Beale said that the society planned to reduce costs to less than 50 per cent of income from 61.3 per cent, but that it was too early to say what that would mean for jobs or branch numbers or staff pension reforms.

The building society also revealed its treasury division had moved into private equity investments, and that it had written off £7 million from a portfolio of unlisted investments.

Mr Beale said that the portfolio was worth £200 million at its peak, had made money overall for the society but that the operation had been closed to new investments three years ago.

Nationwide boycotted the disastrous rush by building societies to demutualise in the late 1990s, a trend that almost without exception led to loss of independence and often a total collapse.

The business is now bigger than all of the other building societies combined and in recent years has implemented rescue mergers of weaker societies, including the Derbyshire and Cheshire. It also bought part of the Dunfermline society after its collapse.

Mr Beale called for a more level playing field with high street banks and argued that building societies faced disadvantages in capital, in banking licences and in the way that they contributed to the Financial Services Compensation Scheme.

Standing square for the mutuals

Graham Beale is Mr Mutual. Not only is he chief executive of Nationwide, Britain’s biggest building society, but he also bangs the drum for the sector as chairman of the Building Societies Association.

A chartered accountant, he joined Anglia Building Society as an auditor in 1985 and rose through the ranks when it merged with Nationwide in 1987. In 2003 he reached the main board as finance director. He was promoted to chief executive four years later.

His background in corporate finance served him well as he soon embarked on several rescue mergers with societies that landed in difficulties as the credit crunch hit.

Now 51, he trumpets the virtues of mutuality and campaigns energetically whenever he sees banks being treated more favourably than building societies by lawmakers or regulators.

Married with a son and a daughter, he likes travel photography and walking his boxer, Oliver.


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