Executive Summary

The building society movement is undergoing significant change. By the end of 1997, its flagship society, The Halifax, and four other of the top ten societies, will have followed the Abbey National, Cheltenham & Gloucester and the National Provincial, all of which have already merged with, or converted to, banks. When completed, this will have transferred an estimated 75% of the total assets previously held by the building societies sector into banking. There remains six large and around 60 small societies facing a crossroad. Straight ahead lies mutuality; another direction signposts the road to conversion to PLC status; and the third points to merger with fellow mutuals or other desirable alternatives. The mutual societies still have considerable financial muscle, and the ability to wage a drawn out and destructive margin war which can seriously disrupt the profits of the existing and new banks, whilst enhancing further the popularity of the societies with their members.

Key Note forecasts net new mortgage lending by UK building societies will increase by 26.1% between 1995 and 1997, reaching £11.6bn. Then it will fall dramatically to £6.2bn, as figures from the newly-converted building societies disappear from the sector and are recorded within banking. By the year 2000, net new advances from the remaining building societies are forecast at £7.8bn. Building society net receipts will suffer from the same effect. In 1996, these are forecast to reach £2.6bn, which, as a result of competition from National Savings and the effects of `carpetbagging', is considerably lower than the record £6.75bn attained in 1995. Inflows are forecast to increase again in 1997 reaching £3.7bn as the bank base rate rises to around 7%, in accordance with economists' forecasts. The following 3 years will see a dramatic decrease to £1.5bn, rising to £1.6bn as figures from the converting societies are moved into the banking sector.

Key Note believes the future of UK building societies must be assessed against that of a UK financial services industry which is facing a period of significant change. Already, traditional boundaries are starting to disappear and over the next 5 years, the momentum will increase as technology expands to allow new methods for the direct marketing of mortgages and pensions; banking and investment over the Internet, and via digital television; the increased use of cards instead of cash; and better encryption which allows the secure transfer of value in and out of personal accounts via the Internet and from home over a digital television network.

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