Nationwide rounds on rebels

If the building society loses its fight to stay mutual, analysts predict a rash of bids for the remaining societies

NATIONWIDE building society will use the announcement of its 1998 earnings on Wednesday to send a clear message to its members: they are benefiting from mutual ownership and should vote to preserve it.

Britain's fourth-largest mortgage lender is holding a vote on whether to maintain mutuality or abandon it through a share issue or takeover. The result will be announced on 23 July.

Nationwide has no shareholders so pays no dividends and can offer lower mortgage and higher deposit rates than banks. Its managers have insisted this is worth more in the long term than the estimated pounds 1,000 to pounds 2,000 members would receive in a share distribution.

"The members clearly have to take a view on whether they want to be part of a society that might give them a price advantage on certain products or whether the members get a windfall," said Lloyds TSB chief executive Peter Ellwood. "What I hope they won't do is get preoccupied with the individuals."

The individual he was chiefly referring to is Michael Hardern, the eccentric freelance butler who stood for the board of directors last year, lost and is running again. Mr Hardern's main demand is that members receive a windfall by converting to a bank, but he and four other pro-conversion candidates garnered only 30 per cent of the votes last year. This year, it is not clear which way the vote will go.

The earnings are likely to reflect the price of mutuality. Last year, pre-tax profit fell 33 per cent to pounds 264.8m because Nationwide narrowed its lending margins by about 30 basis points. The margins have eroded further in the past year so profits are likely to have fallen further. The upside is that the society will probably show it has won a bigger share of the mortgage market.

Analysts are certain that chief executive Brian Davis will say again that Nationwide has reduced its margins in order to benefit its members and that will be lost if they vote against mutual ownership. Nationwide's standard variable mortgage rate is now 8.1 per cent compared with 8.7 per cent at Halifax and Abbey National. The building society has said it will not raise its rates after this week's rate rise unless rivals do.

If members vote against mutuality, bank stocks could soar because Nationwide and other building societies may be taken over and their cut-rate mortgages could disappear. "It could mean you see a bid, and it may put others in the sector in play," said Ian Poulter, an analyst with Williams de Broe. "I don't know which other building societies would be of interest to the banks but there could be bids."

Nationwide members have seen the enticing share performance of building societies that have converted. An estimated 700,000 members will be eligible to vote this year who joined too late to qualify last year. It is thought virtually all joined in search of a windfall.

Furthermore, there are separate voting resolutions this year on the composition of the board and ownership of the society, so members may not be deterred by Mr Hardern's odd behaviour, which some analysts say is the reason he lost so badly last year.

Mr Hardern suggested last year that Nationwide could make all Britons members, then borrow to make a pounds 1,000 pay-out to all of them. That would cost about pounds 60bn. He advocated appointing boxer Frank Bruno or a Spice Girl to the board.

If Nationwide converts or is taken over, analysts expect takeover bids for other mutual lenders such as Bradford & Bingley Building Society and Britannia Building Society.

Copyright IOS & Bloomberg.