Societies may ignite war in mortgages

A PRICE war could develop in the Irish mortgage market if First National and the Irish Nationwide building societies decide to remain mutual societies, according to a report from Goodbody Stockbrokers.

If these societies opt not to convert into public companies and retain their mutual status, they could, with the EBS which has committed itself to mutuality, cut profit margins to offer customers cheaper mortgages.

The three societies could then become "strong price setters" in the market, according to analyst Mr Oliver O'Shea.

A decision by the societies to remain mutual and return profits to members could reduce the profitability of mortgage lending for the banks, Mr O'Shea suggested. Because mutuals do not have to generate profits for shareholders they could offer members lower mortgage rates and higher deposit rates at the expense of lower profit levels.

In Britain, the societies which have opted to remain mutual have announced "mutuality benefits packages" for borrowers and savers. Benefits have included lower mortgage rates and higher deposit rates relative to the rates generally available in the market.

Last year the three largest Irish building societies generated capital of £45 million of which £31 million was surplus to their needs, Mr O'Shea calculated.

As customers become more aware of the differences between mutuality and profit maximisation, building societies will be forced to decide between retaining their mutual status and converting to public companies.

But societies which commit to the mutual status will have to show tangible evidence of its advantages in order to protect their franchise against conversion-minded societies, Mr O'Shea warned.

In Britain a typical society could reduce its margin to a minimum of 1.1 per cent, which would support annual asset growth of 8 per cent and capital expenditure equal to 20 per cent of the fixed asset base. But distribution and capacity constraints are expected to prevent the mutuals reaching this minimum level.

In the Irish market he estimated that EBS needs a minimum margin of 2.1 per cent while First National needs 2.3 per cent and Irish Nationwide 1.6 per cent.

A reduction to these margin levels would represent a serious threat to profitability in the mortgage lending market, though this threat would be diluted by the societies "lack of market dominance", said Mr O'Shea.

Non-mutuals with a cost income ratio of 45 per cent or lower will still be able to generate actable though lower returns, he forecast. EBS, which has introduced a scheme to give members some benefits of mutuality, could not on its own emerge as a dominant price setter.

To decide if their society should remain mutual or convert, members must compare the value of a conversion payout with the possible longer term advantages of mutuality. Mr O'Shea advised.