Another bite of the windfall apple

Shareholders may have profited by the new banks but customers are leaving in droves.

Sometimes, missing an opportunity to make money can prove more expensive than losing it. For people who sold windfall shares early, this has become painfully obvious over the last two weeks.

A member of Halifax who sold 200 windfall shares when the society was converted in June could could have made as little as pounds 1,460. A tidy profit perhaps.

But someone who hung on to the shares until now might be forgiven for feeling a little smug. Sold now, 200 windfall shares would be worth no less than pounds 1,840. Early sellers have avoided the risk of a crash in the stock market. But that safety has cost them about pounds 400 each.

In the same way, a member of Woolwich who sold 200 windfall shares in July when the society floated would have got around pounds 560. But now the same shares are worth pounds 736. Early sellers have, in effect, paid a 24 per cent fee for their haste.

To cap it all, those people who hung on to their shares are now being offered a second bite at the windfall apple. More than a year after the latest spate of flotations began, the building societies are boasting fat profits - Halifax made pounds 1.6bn before tax - and giant cash surpluses.

How are they spending the extra dosh (if you're a shareholder, this is your property)? Woolwich has made itself popular by seeking approval for a pounds 300m programme to return capital to shareholders. It is paying a special dividend this year of 6.5p. Add this to the normal dividend of 9.5p and the average windfall holder has got over pounds 100 in dividends alone.

Halifax was given a cooler reception for its plans to use some of its pounds 4bn cash pile. No special dividends will be paid upfront - though there was an ordinary one of 17.5p a share. But it has pledged to use pounds 1bn to buy shares back from shareholders by being "in and out of the market" over the next year.

The buy-back will mean there are fewer shares, so future dividends will be spread less thinly. But smaller shareholders have expressed annoyance: why no special dividend? Four million retail shareholders, holding two- thirds of the shares, have little chance of jumping into the market and selling just as Halifax is buying. Institutional investors have a better chance.

City analysts are now wondering aloud whether Halifax, quite literally, has more money than it knows what to do with. As the bank announced its results last week, its chairman Jon Foulds made it clear that buying another bank or insurance company was highly unlikely because prices were too high: it is not only Halifax whose shares have soared in the last year.

Meanwhile, the long-term prospects for the "PLCs" (converted societies) have taken a turn for the worse. Customers have been abandoning the newly converted building societies in huge numbers.

Halifax last week announced that its share of the mortgage market, measured in net lending, shrank from 11 per cent to 6 per cent. Whereas pounds 2.3bn flowed into its accounts in 1996, pounds 615m flowed out in 1997. Alliance & Leicester saw its net lending shrink by 20 per cent to pounds 400m. Woolwich also saw its net lending slip sharply.

The PLCs say this is the "carpetbagging effect" in action. Older borrowers had kept small mortgages running as the windfall approached and had since redeemed them. But shouldn't shareholders still be worried? Halifax's share of the market has slipped to a third of its normal size.

After the windfall feast of last year, all the converted building societies are looking distinctly hungover. Savers, too, are abandoning them. New savings banks - such as Tesco, Standard Life and Virgin - have enticed hundreds of millions of pounds away from the poorer rates at the former societies.

Societies which stuck with their mutual status have profited handsomely as both savers and borrowers have flocked to them. Both Bradford & Bingley and Nationwide have seen record levels of new business. Even Coventry, a much smaller society, has seen its net mortgage lending more than double.

Building societies which have stayed mutual say this proves that the banks have become complacent. They pan the second windfalls as just another example of short-term greed, not long-term wisdom. They point out that the true value of the windfall is small compared with the value of a low mortgage rate over time.

The Building Societies Association claims the PLCs are pushing themselves into a corner. While shareholders are being treated, it claims, customers are being soaked.

The point is illustrated by looking at the profit margins being taken. Where did much of Halifax's pounds 1.6bn profits come from? Both building societies and banks take their profits from customers by using the gap between lending and saving rates - known as the "net interest margin". The table shows the profits taken by the PLCs against the profits taken by the mutuals. The PLCs are in some cases taking twice as much from their customers as the mutuals.

The converted societies say the mutuals will never sustain this competitive edge. They claim that in a few years, saving rates will have to drop while mortgage rates will rise. The PLCs will fight back, with Halifax boosting spending on incentives for borrowers by at least 20 per cent.

But it has now become clear that shareholders who stuck with converted societies are generally happy with their lot - and remarkably loyal. Customers, on the other hand, have flocked away.

The gap between saving and borrowing rates

Mutuals

Bradford & Bingley 1.22%

Coventry 1.20%

Skipton 1.58%

Leeds & Holbeck 1.55%

Chelsea 1.65%

PLCs

Halifax 2.18%

Woolwich 2.03%

Northern Rock 1.88%

Abbey National 1.68%

Source: Building Societies Association