By Daniel Hunter

The UK’s building societies sector is getting back to ‘business as usual’ following the stresses of the financial crisis according to accountancy firm KPMG’s Building Societies Database which tracks the financial performance of the mutual sector, now in its 23rd year.

2012 saw healthy results for most building societies, who are now well-placed to benefit from an upturn in the economy and increasing demand for mortgages.

Of the country’s 46 building societies, 35 grew their assets in the 2012 financial year. Although assets across the sector as a whole fell by £2.1bn to £313.3bn, this reduction was due to a £5.4bn decrease in Nationwide Building Society’s assets. If the impact of Nationwide is excluded, sector total assets grew by 2.8% to £122.6bn.

Nationwide still dominates the sector. With its assets of £190.7bn, it represents nearly 61% of the sector on its own. In contrast, the smallest building society, the City of Derry, has assets of £42.6m meaning that Nationwide is over 4,400 times its size.

“2012 saw a strong set of results from the building society sector. Indeed, some societies are in rude financial health," Richard Gabbertas, Financial Services partner at KPMG, commented.

"With demand for mortgages likely to increase and interest rates set to remain low, the future looks positive. However, one long term shadow being cast over this is the possibility of an increase in capital requirements under Basel 3. If the leverage ratio moves from 3% to 4%, as seems possible, then the arithmetic would indicate that we’d see a contraction in balance sheets and more expensive mortgages.”

In such a varied and diverse sector, it is no surprise that profitability performance was mixed. Twenty-six societies posted a profit increase in 2012 while 20 reported a fall. KPMG’s analysis shows that where a society has succeeded in improving its net interest margin, profitability improves at a bottom line level — of the 26 societies reporting an increase in profit, 19 also reported an increase in net interest margin.

The sector’s heavy reliance on customer deposits for its funding has continued, with the total deposits held by individuals increasing by 1.1% from £218.1bn to £220.5bn. Meanwhile, lending has also grown, with mortgage balances up from £246.1bn to £256.4bn in 2012 and the average society posting an increase in Loans Fully Secured on Residential Property of 6.7%.

Commenting on the outlook for savers and borrowers, Simon Walker, partner in KPMG’s Financial Services practice, said: “While there is much good news for societies’ borrowers, the outlook for their depositors is less good. Now that banks and building societies have rebuilt their funding, competition for retail funding has fallen and savers’ rates with it. The impact of the Funding for Lending Scheme has exacerbated this. The likelihood of savings rates improving in the near future is very low.”

Richard Gabbertas concluded:“The long dark years that followed the credit crisis have prompted societies to think about their futures. There are challenges from the changing ways in which customers buy financial services, especially the use of the internet. But societies are part of the fabric of the UK’s financial sector and what is certain is that they will evolve and adapt to the changing needs of their members. Evolution rather than revolution will ensure that there will still be a healthy building society sector in 20 years’ time.”

Join us on
Follow @freshbusiness