In its 2008 year end results, the building society revealed a pre-tax loss of £48.8m, down from 2007’s £47.8m pre-tax profit. It had to provision for £65.2m of potential bad debts, as well as a £10.9m write-down of property portfolios and an FSCS charge of £12.2m.
This comes after yesterday’s rescue package that saw the mutual work with holders of its £182.5m of subordinated debt, converting it to a new instrument, which will qualify as core tier 1 capital. West Bromwich’s tier 1 capital ratio now stands at 11.6 per cent, up from 6.8 per cent.
The society also revealed an increase in retail share balances of £1bn, taking total retail balances to £6.5bn, an increase of 18 per cent over the prior year. Also, its wholesale funding ratio was reduced materially, from 32 per cent to 19 per cent. As a result, it says its residential mortgages are now fully funded by retail savings.
West Bromwich chief executive Robert Sharpe says: “During a period of severe and unprecedented economic turmoil, we have carefully managed and refocused our business, driving through a programme of cost reduction to improve dramatically the efficiency of the society, and has increased its core tier 1 capital base substantially.
“We are already seeing the benefits of the steps we have taken to return to our core activities. Despite the loss we have announced, we have a strong capital position. This, combined with our strategic refocusing, means that we are well positioned for the future.”
The rescue scheme developed by the FSA, being used by West Bromwich, offers a new capital instrument for building societies. Essentially, societies can offer their existing investors the opportunity to convert tier 2 subordinated debt into ‘profit participating deferred shares’, which are deemed tier 1.
These shares are similar to the permanent interesting bearing shares currently offered by mutuals, but instead of paying a fixed coupon the new PPDS may pay up to a fixed percentage of profits as a dividend.
If the society makes a loss, the share allocated to the PPDS is, first, set off against any positive balance on the PPDS reserve account before the share value is reduced.
The share value will then be rebuilt in time using the PPDS’ future share of profits. They will not offer any dividends until the original amount has been finally rebuilt.