How building societies help you bank on mutual trust

THE losses announced by Bradford & Bingley this week prompted shares in several banks to fall sharply. Among these were HBOS and Alliance & Leicester, inspiring comparisons with last year's Northern Rock crisis.

The comparisons are misguided, but one characteristic Northern Rock, B&B, Halifax and A&L share is that they used to be building societies, owned by their members.

Does this imply that building societies may be better equipped than banks to deal with the current climate?

HBOS (as Halifax), Northern Rock and A&L demutualised in 1997, and B&B followed suit in December 2000. Fast forward to summer 2008 and Northern Rock has been nationalised by the government, HBOS and B&B are asking shareholders for cash in the form of rights issues, while A&L recently revealed 400 million of credit-crunch-related writedowns.

Of course other former mutually owned groups, such as insurers Standard Life and Aviva, remain strong, but few of the groups that relinquished their mutual status in the past decade can be described as success stories.

Meanwhile, amid all the doom and gloom building societies insist they are better placed than banks to weather the current storm. At the annual conference of the Building Societies Association (BSA) last month, its chairman said the perception of mutuals as prudent and well-capitalised businesses offered reassurance to customers.

One reason the UK's 59 building societies believe they are in a better position is that they are not as reliant as banks on international money markets, so they have not been as exposed to the problems that kick-started the credit crunch, such as the US subprime sector.

"There is now a much greater level of public awareness about the funding strategies of plcs," said Adrian Coles, director-general of the BSA. "This has seen many people turning to their local building society, a trusted brand, as a safe haven."

This has offered mutuals an opportunity to differentiate themselves from their privately owned counterparts, according to Simon Crocker, head of business development at Dunfermline Building Society.

"There is a greater understanding of the difference between banks and building societies and the value of having a liquid funding base. Building societies have been criticised as boring and staid, but in the current climate these are virtues."

Building societies get most of their money from customers in the form of deposits and savings, rather than the money markets.

In fact, they are obliged by regulations to fund at least half of their mortgage lending from depositors. In turn, this has benefited savers as societies have had to offer more competitive savings rates to attract customers.

As if to reinforce the point, the BSA announced record individual savings account (Isa) inflows this week, with savers depositing 1.8m into building societies in April. That followed record figures last year, when the value of savings was double that of 2006, at 16 billion.

Of the top cash Isas currently available, the best rate is from Teachers Building Society, while the top three notice and no- notice savings accounts are all from building societies. Similarly, mutuals offer three of the top five fixed cash Isas and regular savings accounts.

In all, according to Investec Private Bank, building societies offer more best-buy savings accounts than banks, with 34 out of the 50 top-five savings accounts in the past year.

"Building societies tend to offer decent rates across their whole range of products, whereas ex-building societies will have one or two high paying products alongside a few that don't offer much," said Rachel Thrussell, head of savings at Moneyfacts.

"But building societies have a less diverse range of services, typically just mortgages and savings, so they can focus their efforts on those areas."

There are less tangible reasons for people to be attracted to building societies. The main one is trust, particularly among older generations who like the more personal, face-to-face service associated with the smaller regional building societies.

"When the Northern Rock situation blew up people went to building societies in their droves because they trusted them more and saw them as a safer place for their money," said Thrussell.

In practice, your money is no safer with building societies than with banks. Both come under the Financial Services Compensation Scheme, which covers the first 35,000 you hold with a bank or building society.

Are building societies such a good bet in troubled times?

The Financial Services Authority recently warned that the response of building societies to the challenge presented by the credit crunch had been slow.

It said some societies were exposed to too much risk in buy-to-let mortgages and had not prepared for "extreme stress scenarios". The regulator also suggested that some building societies needed to adopt the more rigorous and formal approach taken by banks to corporate governance.

If anything, what the ex-mutuals that have encountered difficulties really have in common is aggressive growth strategies, according to Gordon Arthur, director of corporate communications firm Roundtable Consultants.

"It does not come down to their status, but to the management team and how aggressively they want to expand the business. Some mutuals are more aggressive than others and could realistically get themselves in trouble too," he said.

Building societies vary in how they pass on their value to customers, Arthur said, making it hard to generalise. While Nationwide offers good value across all its products for both new and existing customers, for example, the focus of regional mutuals such as Norwich & Peterborough is on keeping rural branches afloat.

"Mutual managements are typically more conservative so you could argue that they are less likely to overstretch on lending or be exposed to bad debt," said Arthur. "However, while companies like Scottish Widows and Standard Life securitise heavily, the quality of their loan book is fantastic. So while there may be a perception that the way mutuals are funded makes them safer, I am not sure how true it is."

With so many of the bigger building societies having relinquished their mutual status in the past 15 years, Nationwide is now the biggest mutual (having swallowed up Portman Building Society) and more consolidation seems likely, shrinking the sector further.

The smaller mutuals face the challenge of comparison websites, which enable people to find the best deals available anywhere.

This has the potential to affect the loyalty on which regional societies rely, particularly if they do not have their own presence on the internet. While older generations may still be seen as more loyal, evidence suggests they are increasingly prepared to shop around online.

Whether building societies offer a better home for your money in the current climate depends on what you want. If you're looking for a one-stop-shop, from your main bank account and credit card to your mortgage and investments, few building societies can offer that, regardless of how competitive they may be in one or two of those areas.

But if you just want competitive savings rates, good personal service and a range of home loans from a prudent business that's well equipped to ride out global market shocks, building societies remain a solid bet.