Commitment to mutual status

A STRONG commitment to mutual status cost the EBS building society £5.7 million in 1996. Maintaining interest rates set for its borrowing and saving owners in early 1996 will cost the society upwards of £7 million, this year.

The exact cost will depend on the amount of new business it can add to its existing customer base and on any decisions to extend benefits for members.

With strong capital ratios - a capital adequacy ratio of 15.8 per cent at the end of 1996 compares with the Central Bank minimum requirement of 9 per cent - the EBS has plenty of scope for more benefits.

"We have a lot of leeway," the chief executive, Mr Pat O'Reilly, agreed but, because any benefits given have to be sustained year after year he was not prepared to do anything too "dramatic" that could not be sustained out of earnings in the long term.

The EBS would not like its capital ratio to go below 11 per cent, Mr O'Reilly said. The society was concentrating on its existing customers. It argued that in some other institutions, existing customers suffered when lenders offer once-off, one-year special discounts in a bid to boost their market share.

"Our existing customers own us so why should they have to subsidise a few percentage points growth in our market share?" he asked.

Mortgages were 20-year products and deep discounting for one year could mislead customers because they might not be getting good value from the lender over the whole life of the loan, he warned.

Consumer authorities might have to examine what was happening in the market on products with long life spans, he said.

"What really counts is the price over the length of the mortgage. This decision is critical for the customer at the front end because of the cost of making changes. Ideally it should not be influenced by a short-term gimmick."

Admitting that the EBS offered special one-year rates like the other financial institutions, he said: "We have to be pragmatic to grow in this market but we concentrate on our existing customers."

The EBS was firmly committed to remaining a mutual society and to expanding in the market. It would be interested in a suitable acquisition but had decided against buying a mortgage book in Britain.

With a 6.7 per cent rise in costs in 1996 against a 5 per cent drop in income, the EBS would have to contain costs effectively if it were to offer further benefits to members.