Over recent weeks and months building societies have been publishing their financial results for 2015. The overall picture is one of strength, with robust profitability helping societies to bolster their capital positions, enabling them to continue to grow their share of mortgage lending.
Average profitability at building societies has recovered since the financial crisis and in 2015 increased to reach the highest level for 15 years, at 0.45% of mean assets. This is due to strong margins and a decline in the amount set aside for loan defaults, and is despite an increase in expenditure due to investment in new services and technologies.
Building societies, which are owned by their customers, do not aim to maximise profits to return to shareholders. Even so, societies need to retain a reasonable level of profit as this is their main source of new capital; they cannot readily issue shares to raise capital in the way that a publicly quoted bank can.
Capital can be considered as the buffer to absorb the various losses that might arise in the course of a financial institution’s business, and it provides the funds that can be invested to support the building society’s strategy, including new mortgage lending.
The result of the recent trend of strong profitability at building societies is therefore a stronger capital position. This is shown in the chart below which shows the gross capital ratio for the sector. This ratio is defined in building society legislation, so has been reported consistently for some time. The average gross capital ratio across the sector is now the highest for 20 years, at 7.01%.
Another measure of capital position is the Common Equity Tier 1 (CET1) ratio which was introduced after the financial crisis and is reported by banks and building societies. The 2015 average for building societies that have reported this figure is 18.4%. By comparison, the average CET1 ratio at the big five banks was 12.5%.
High share of mortgage lending
As a result of their strong capital position building societies have accounted for 75%
of the increase in mortgage balances across the UK, compared to a 20% share of the outstanding stock.
About the financial results reported in this article
Building societies have financial year ends throughout the calendar year, with around two thirds having financial years ending on the 31 December. The aggregate sector results presented here cut the year off at the end of January, as these figures have done in previous years.
This year a number of societies have transitioned to new accounting standards (mainly FRS 102). They have therefore restated their prior year accounts to ensure comparability. However, at an aggregate sector level the difference is not significant and the prior year has not been restated.