UK building societies 'will struggle to survive huge funding gap'

BUILDING societies face a struggle to survive as retail funding continues to dry up, the Moody's ratings agency has claimed.

It warned a 300 billion funding gap would force a fresh wave of consolidation among mortgage lenders over the next two years, with mutuals particularly affected.

Savers took out more money than was deposited in building societies last year as competition from government-backed institutions, including National Savings, made it harder to attract savers.

The shortfall in retail funding and the continued difficulty in borrowing money on the wholesale markets will make it hard for some building societies to survive without cheaper government funding, according to Moody's.

Marjan Riggi, senior credit officer at the agency, predicted that some lenders would be broken up as the fight to secure retail deposits intensified.

"The continued scarcity of wholesale funds, together with the perceived safety of government-owned banks, has already increased competition for deposits in the UK, leading to margin compression for a number of lenders that don't benefit from government ownership or lack the scale necessary to compete," Riggi said.

The scheduled withdrawal of schemes introduced by the government in 2008 to support the mortgage market after funding on wholesale markets dried up would leave lenders with "a considerable funding challenge", he added.

"We believe that, as the UK government gradually disentangles itself from the extraordinary support of the banking system, many of the smaller lenders will have to either consolidate with stronger entities or be at the risk of break-up or distressed exchanges," he said.

His comments followed a warning earlier this month from the Council of Mortgage Lenders (CML) that the collapse of wholesale funding markets had left a 300bn gap in mortgage funding. The hole has been temporarily plugged by the government's special liquidity scheme, which ends in 2012, and the credit guarantee scheme, due to expire between 2012 and 2014.

The CML said the removal of government support would not be offset by deposits from savers and that a failure to plug the funding gap would lead to mortgage lending remaining restricted and more expensive for years to come.

The Moody's note came ten months after it downgraded a number of building society credit ratings, citing exposure to credit risks in commercial and residential property lending. The Nationwide's rating was reduced from B to C-, with the Chelsea, West Bromwich, Coventry, Newcastle and Skipton societies among the other mutuals downgraded.