Britain’s building societies have long established themselves as boring, sensible and democratic alternatives to the major banks. However, the first few months of 2024 have raised questions over these hallmarks.
As major lenders enjoyed bumper profits on the back of interest rate hikes from the Bank of England last year, they found their coffers full of spare cash.
Whereas listed banks distribute excess capital to shareholders via dividends and buybacks, mutually owned building societies tend to do this by reinvesting in the business or offering their members better rates on savings and loans.
In the case of Nationwide, the biggest society, it paid £344m – roughly 15 per cent of its annual profit – directly into around 3.4m eligible customers’ accounts last June.
However, in recent months societies have started using their extra cash for more adventurous pursuits – big-ticket acquisitions and boardroom pay hikes.
How to spend a spare £3.7bn
For a firm that has for years tried to differentiate itself from the “big banks” – most recently with “Branch Promise” adverts starring Dominic West that were banned by the regulator for misleading customers – Nationwide is looking increasingly like its FTSE 100 rivals in both scale and strategy.
Its deal, seen by some analysts as cut-price, to acquire Virgin Money for £2.9bn surprised the City when it was unveiled in March. Bankers and advisers are expected to take home £80m in fees for pushing the transaction through.
The move to buy a FTSE 250 bank is unprecedented among mutual lenders and is set to grow Nationwide’s assets by a third, creating the UK’s second-biggest provider of mortgages and savings and the country’s largest branch network behind Lloyds.
Following the resignations of Natwest chief Alison Rose and Starling boss Anne Boden last year, Nationwide’s CEO Debbie Crosbie has emerged as Britain’s foremost female banker and is vying to take over a business currently run by her old boss at Clydesdale Bank, David Duffy.
In a sign that Nationwide’s deal was no one-off, Coventry Building Society – the second-biggest mutual – agreed to buy The Co-operative Bank for £780m earlier this month.
The move is set to create a combined group around the current size of Virgin Money, ironically, and throw Coventry into the business banking market by adding Co-op Bank’s more than 93,000 small and medium-sized enterprises.
While Co-op Bank and Virgin Money are arguably easy takeover targets, both struggling with cost pressures and lack of scale, analysts note shifting sands in the high street challenger sector that have encouraged more risk-taking.
“Building societies, like their banking peers, need to evolve their strategies to safeguard market share and address evolving consumer expectations,” Matt Britzman, equity analyst at Hargreaves Lansdown, told City A.M.
“These expectations now demand more comprehensive digital offerings, a wider range of products and competitive rates.”
The UK’s biggest banks all grew through M&A – a fact that a string of their subscale challengers are slowly coming to terms with. Since January, Tesco Bank has become part of Barclays, while Sainsbury’s Bank has also opened the door to takeover offers.
Both Nationwide and Coventry, the latter at its annual meeting last week, have faced criticism for their decisions not to put either plan to a vote among their more than 18m combined members.
“The directors are obviously keen that societies should become as near as possible to banks,” said a spokesperson for the Building Societies Members Association, established in 1982. “Banks with little in the way of accountability.”
They said the group “totally opposed” both deals and that Nationwide and Coventry’s directors would be their “main beneficiaries”. “It looks extremely likely that others will follow suit, particularly the Yorkshire and Skipton,” the person added.
Both Nationwide and Coventry have said they conducted member surveys that showed support for their respective takeover bids.
Robin Fieth, chief executive of the Building Societies Association, told City A.M. that the trade body welcomed the two deals, which offer “an opportunity to provide mutual banking services for businesses and the re-establishment of cooperative banking in the UK”.
Millionaire CEOs
Societies’ members weren’t the only ones enjoying a slice of last year’s bumper profits. Their top brass are now earning just as much as, and in some cases, more than, their “big bank” counterparts.
Coventry’s CEO Steve Hughes’ pay packet broke the £1m barrier in 2023, rising £119,000 to just under £1.1m. Even still, this figure pales in comparison to his peers.
Last June, Nationwide revealed that Crosbie had received an impressive £3.5m for her first 10 months as CEO, including a £1.7m “replacement award” to cover the forfeiture of variable pay awards from her previous job at TSB.
This figure was considered the biggest ever pay packet for a building society boss but was surpassed earlier this year when the third-biggest of the group, Yorkshire Building Society (YBS), revealed that chief Susan Allen, who joined from Barclays last March, earned £4m in her first 10 months.
On top of £1.5m in fixed and variable pay, this figure included £1.7m to compensate for lost earnings from leaving her role at Barclays and £832,000 to make up for a “lost incentive opportunity” in 2022 when there was no permanent CEO.
Still, the hefty sum technically made Allen the highest-paid domestic CEO of a UK lender last year – Barclays and HSBC’s group bosses were handed £4.6m and £10.6m for 2023, respectively.
Bonuses for rank-and-file employees at YBS are capped at 10 per cent. For her performance in her first 10 months at the firm, Allen received a 102 per cent bonus of £770,000.
In contrast, YBS’ previous permanent CEO before Allen, Mike Regnier, earned £3.3m last year in his current role as UK boss at Santander.
“The trend towards higher executive compensation, as seen with Susan Allen, reflects the need to attract and retain top talent to drive innovation and strategic growth, much like their banking counterparts,” Britzman said.
So, should we really be surprised? With the banker’s bonus cap gone and investors waving through mega pay deals for FTSE bosses, YBS easily defended Allen’s payout as “common practice” and won 93 per cent approval for its remuneration report at the AGM last week.
Societies have seized the opportunity to compete with the big banks while they still enjoy a healthy earnings tailwind. With little standing in the way of their M&A, they look set to be gobbling up market share for years to come.