In recent weeks a series of ambitious initiatives has seen the Yorkshire Building Society not only cement its place as one the largest societies in the UK, but also establish itself as one of the most exciting and fastest growing mutuals.
Yorkshire Building Society is in fact now the second largest society, following its takeover of the struggling Chelsea Building Society last year and the Barnsley society in 2008 and it will grow even larger with the proposed merger with the Norwich & Peterborough society, which is expected to go through in November.
Only the Nationwide is bigger than the enlarged society. Given that the Nationwide sometimes seems a reluctant mutual, the Yorkshire could, if it wished, reasonably claim to be the largest building society that is strongly committed to mutuality.
But the three mergers are not the only recent deals involving Yorkshire. It has also just bought the mortgage book of Egg from Citibank. (The main area of business for Egg, initially set-up by Prudential, was its credit card operation, which has been acquired by Barclays). Egg’s mortgage customers automatically become members of Yorkshire on completion of the transaction.
Yorkshire says the deal gives the society greater scale in the savings and lending market. Egg brings with it a strong mortgage book of high quality and with low loan to value on prime residential properties.
Despite these deals, Yorkshire has also benefited from strong organic growth. Unlike some banks, the society has grown lending in recent months and actually doubled mortgage lending in the last year. Gross mortgage lending of £718m in the first half of 2010 has grown to £1.5bn in the six months ending June this year. The society is looking to grow mortgage lending further and has just entered the buy-to-let market for the first time, through its broker business, Accord Mortgages.
Following its raft of mergers and acquisitions, the Yorkshire Building Society has been left with a strong balance sheet. Arguably most important of all, it has a core tier 1 capital ratio of 12.7%. This is very comfortably within the margins imposed by the Basel III capital adequacy rules. It also makes it, argues the society, “among the strongest of any UK financial institutions”.
Its operating profits have risen from £57.5m in the first half of 2010 to £73.1m in the six months ending June this year, while its core operating profit increased from £53.2m to £90.2m. Whole year profits last year stood at £115m, with assets of over £30bn. Some 99.7% of mortgages are funded by savings balances and reserves, so it has avoided the mistakes of Northern Rock and others of dependence on short-term borrowing on the money markets for its lending business.
The society appears in a good position, too, in terms of the quality of its loan book: the number of borrowers in arrears has fallen from 1.84% as at last December to just 1.80% as of June. This compares with a figure in excess of 4% declared by Northern Rock prior to its worst debts being passed to a ‘bad bank’.
The society’s financial position has already improved as a result of the first of its expansion deals. Iain Cornish, the chief executive, explains: “The strong performance in the first six months of 2011 reflects the increased efficiencies delivered through the merger with Chelsea and our continued commitment to adopting a prudent approach to our business. Whilst the economic climate remains challenging, we are confident that the Yorkshire is very well placed to continue to grow and prosper.”
While the society seems mostly focused on organic growth for the time being, it does not rule out further acquisitions where opportunities arise. The society says that a cost of 56 pence per £100 of assets, it is one of the most efficiently run societies. But it is clearly keen to further grow scale to bring down those “to generate enhanced benefits for members”, as it puts it. The society says it is achieving £27m of annualised savings through its merger with Chelsea.
Yorkshire has moved in recent months from being one of many medium-sized competitive providers in the financial services market, to becoming one of the largest. Its expansion has been welcomed, both because of the decline in the last two decades of some of the largest and most missed mutuals and also because it is in a position to challenge the big banks for business.
Andrew Hagger of Moneynet observes: “The UK desperately needs increased competition amongst financial services providers as consumers look for a trusted brand to deliver on both rates and service.” Hagger welcomed the acquisition of the Egg mortgage portfolio. “On the face of it, this looks like a smart move from Yorkshire and will certainly raise a few eyebrows amongst its competitors,” he said.
“The acquisition of a new £2.5bn savings book will enable one of the most competitive mortgage providers in the UK to expand its lending activities to a much wider audience. Yorkshire dominates the mortgage best buy tables and was the winner of the Moneynet 2011 award for overall mortgage provider of the year.
“It’s been a rocky few years for building societies, but Yorkshire BS is proving that the sector still has plenty of fight left in it and that it has the vision and determination to be a serious player on our high streets.”
A welcome aspect of Yorkshire’s rise is that it is unapologetic about its mutuality. On its website the society stresses: “The Yorkshire is committed to remaining a mutual organisation. This option enables us to provide value for members over the longer term. Being a member of a mutual organisation means you, the customers, are the owners. We answer to you, and this gives a greater understanding of your needs.”
The society adds: “In the mid-1990s, we conducted a major review to make sure that we’re giving our members the best value possible. We considered all the options open to us – remaining mutual, being acquired or converting to a public limited company. The views of members and staff, as well as the financial community and regulators, were sought.
“The results highlighted three major requirements for success – competitive products, a high level of security and first-class customer service. The review confirmed that maintaining our mutual status was the option that gave the Society the best opportunity to meet our members’ needs over the longer term.”
Hopefully this clarity will discourage future generations of carpetbaggers from seeking the society’s demutualisation. The Yorkshire stands on the threshold of being a substantial force in the financial services sector.