Crunch issues face societies

BUILDING societies have changed out of all recognition within a generation from the worthy local institutions that channelled the savings of local people via a chain of rather dingy offices to a queue of hopeful home-buyers embarking on one of life's great adventures. Interest rates were controlled by a cartel, and mortgages were often carefully rationed and doled out only to those deemed to be the most deserving.

Change was forced upon them by the abolition of their cartel and the entry of banks into the mortgage market, in return for which they were allowed to go out and borrow some of the money they needed on the money markets and to compete with the banks in offering personal loans. On the whole, they have managed the change rather well. However, the process shows no signs of stopping.

Now there are only 80 survivors out of 800 a quarter-century ago, and the remainder meet this coming week in Birmingham to plan their future with several fundamental issues to resolve.

First is the question of whether they want to remain independent mutual societies, with members but without shares that can be bought and sold. Abbey National chose to convert to a bank to secure greater freedom to diversify into general banking, and Halifax is following the same route after swallowing the Leeds.

Many others are considering merging or converting to banking status, although a substantial number of smaller regional societies are determined to stay close to their traditions - and try to hold the balance between borrowers and savers without the need to pander to shareholders demanding profits and dividends.

But the decisions may be taken from them, if Abbey National's attempt to bid over the heads of the National & Provincial's board and appeal direct to the members with promises of free cash and shares succeeds. Once the principle of hostile approaches is established, the classic defence of mutual societies becomes a liability.

Building societies also face a serious threat to their marketplace. In the boom years in the late 1980s, they began to make massive profits in place of the small discreet surpluses that used to be the norm. With the surge in turnover in the housing market and the vast growth in house prices, lending portfolios and profits soared. But unlike almost all other industries - cars, electricity, banking and retailing - they now face a permanently lower level of activity in their staple activity, as well as depressed prices.

Profits may have peaked, and margins are certainly narrowing as more and more societies compete to offer cash-backs and discount mortgages with 50 per cent or more off for the first year, or 10 per cent off for the first five years.

If new first-time buyers stay on the sidelines, this is a zero sum game. However, it is rather like the broadsheet newspaper circulation war - once it has started, no-one dares to be the one to call a halt.

The housing market also still seems to be a prime target for the Bank of England in its war against inflation, although it is clearly highly vulnerable to a further round of interest rate rises. For reasons of his own, Kenneth Clarke has spared the housing market this month, but even a half-point rise in base rates would certainly trigger a round of increases in standard mortgage rates.