By Daniel Hunter

A new report from KPMG predicts that building societies are entering a renewed period of potential growth and success which could lead to them fulfilling a new regional banking role by the end of the decade.

KPMG’s 22nd annual Building Societies Database, which analyses the performance of the UK’s 47 building societies as at April 2012, highlights that the sector has remained resilient despite difficult market conditions, with 23 societies increasing their profit for the year.

This year’s report also shows that the total group assets of the 47 societies have grown to £315.4 billion, compared to £306.2 billion in 2011’s analysis. This increase of £9.2 billion reverses the prior two year’s contraction of £13.3 billion.

“I expect building societies to play a big role in the future of banking in Britain," Richard Gabbertas, financial services partner at KPMG, commented.

"In many respects it is their time to shine. By 2020 we could see building societies fulfilling a new role as regional banks, capitalising on their attractiveness to smaller businesses and to customers who value their service proposition.

"They will be able to look to supplement their range of straightforward savings and mortgage products with current accounts for personal and small business customers alike.

“Building societies are largely unencumbered by legacy problems, whether portfolios of bad loans or regulatory issues, and the fact that their products are primarily simple and transparent point to the future success of the sector.

"Additionally, as the expiry date on free banking fast approaches, building societies are well placed to enter the more mainstream banking market given they are already equipped with much of the necessary infrastructure such as branches, trained staff and experienced treasury and credit risk teams.

“On the whole building societies had a better financial crisis than the banks and have been less affected by other consumer storms including PPI mis-selling. At a time where trust in the banking sector is at an all time low, building societies stand out as a group of financial institutions whose mutual culture instinctively puts the customer first. Building societies do not have a culture of profit maximisation, nor are their senior executives highly remunerated, making them increasingly appealing to many consumers.”

However, while the outlook for building societies looks positive, KPMG warns that the sector still faces a number of challenges.

“Like the banks, building societies are confronted by regulatory challenges, primarily the post crisis drive for higher capital ratios as they face particular difficulties in raising fresh core tier one capital," Richard Gabbertas concluded.

"Also, building societies are not immune to the ongoing difficult market conditions, including low interest rates and suppressed mortgage activity. However, their recent performance suggests they are well equipped to weather this storm for the foreseeable future.”

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