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More building societies will merge, says KPMG

More building societies will be forced to merge as the industry continues to be hit by the downturn, according to KPMG.

In its building society Database 2009, KPMG revealed that the 53 societies held total group assets of £370.5bn, up from £354.2bn in 2008.

The auditor has warned that only 15 societies have reported group asset growth of greater than 10 per cent over the last year, compared with 36 in 2008. Only eight out of the top 18 mutuals enjoyed asset growth, and five made profit losses.

KPMG partner Simon Walker says: “More consolidation is inevitable, although the days have gone when a society suffering a loss had to merge, long-term profitability is essential to survival.”

Walker says the threats to building societies profitability come from several sources, including credit losses, but he says for some societies the margin pressures are structural, due to the legacy of past lending policy, which he warns may take many years to unwind.

KPMG also warns that continuing low interest rates will have the biggest impact on building societies’ attempts to increase profitability.

Walker says: “This will reduce returns on reserves, and reduce to almost nothing the margin on instant access accounts and taking the rate on tracker mortgages which were sold extensively in the years before the credit crunch well below the cost of funding them.

“Similar issues exist with some commercial loan and social housing portfolios where interest rates have been set at a fine margin above LIBOR or in some cases base rate.”

KPMG says some mutuals will choose to sure themselves up using the debt conversion method piloted by West Bromwich earlier this year, but says it is unclear how easy it will be for other societies to follow this lead or indeed if they want to do so.

The report says: “Some societies may respond to the need for fresh capital by disposing of assets and businesses acquired or built over the last decade. Others may enter joint ventures with providers of capital or access to markets, while some will wait to see if the regulator offers further new forms of capital instrument that they might be able to issue.”

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