Nationwide has announced it is to merge with two of its smaller rivals, The Cheshire and The Derbyshire. Rebecca Atkinson takes a closer look at the deal and asks what it means for members.

The move will see Nationwide, already the UK’s largest society by quite a long stretch, heighten its position in the mutual sector, towering above its nearest rivals. Once it completes at the end of this year, the merger will bring its membership to 15 million, total assets to more than £191 billion (from £178 billion currently) and retail deposits to £122 billion.

Graham Beale, Nationwide's chief executive, says the merger is in the best interests of savers and borrowers of The Derbyshire and The Cheshire.

“The core member businesses of both societies are in good shape and have a better future as part of a larger organisation,” he adds.

This is the second building society merger in recent years, after Nationwide merged with the Portman back in 2007. Before the merger could go ahead, however, each Portman member was given the opportunity to vote. At its AGM, 93% of savers and 92% of borrowers voted in favour of the merger.

After the member approval, Portman was absorbed into Nationwide, with 75 branches closed and the rest rebranded. In addition, Portman members received a financial windfall from the deal, with savers getting a merger bonus worth 5.75% of their total balance (pre-tax and capped at £1,000). Eligible borrowers received £200 (pre-tax).

Unlike the Portman deal, The Derbyshire and The Cheshire members will not be given the opportunity to vote on whether the merger goes ahead or not, and will not receive a merger bonus.

The brands and branch structure of the two smaller mutuals will be retained, in recognition of their local strengths.

So, why are members not getting a vote?

Rachel Le Brocq, a spokeswoman for the Building Society Association (BSA), says the decision to pass the mergers by way of board resolutions rather than member reflects the current economic situation.

“The Portman and Nationwide merger took a year to go through, but Nationwide wants to offer speed and certainty to members of The Derbyshire and The Cheshire. We are living in uncertain times and so speed is importance.”

Although Le Brcoq acknowledges that a “traditional” building society merger would normally only go ahead following a member vote, this is not the first time the board of a mutual has overridden this and made the decision on behalf of members.

In 2001, the board of the Gainsborough Building Society passed a resolution that allowed it to be incorporated into the Yorkshire Building Society.

Members of The Derbyshire and The Cheshire will, no doubt, be disappointed that they will not receive any financial bonus as a result of the merger.

Nationwide says that no payouts will be made in order to preserve capital and for the benefit of all members.

The fact that both smaller societies will retain their brands and branch networks could also be a factor; the payouts to Portman members were partly considered compensation for the loss of the brand.

Future for building societies?

Nationwide’s double merger may well prompt questions about the outlook for the building society sector.

In a statement, Nationwide says the merger is “prudent” and pre-emptive in light of the “financial issues” the two organisations are facing.

Both the smaller societies undertook financial reviews ahead of the merger being announced, which concluded that the “unprecedented market conditions and poor economic outlook” meant teaming up with Nationwide was best for borrowers and savers alike.

For example, The Derbyshire expects to have made a loss of £17 million during the first half of the year, mainly as a result of its sub-prime business Salt. The Cheshire also expects to make a loss of £11.5 million.

As part of the Nationwide, it is hoped that all members of the two smaller societies will be better protected from the risks the current climate presents. Nationwide also says it is “satisfied” that The Derbyshire and The Cheshire's have enough capital to cover and expected future losses.

How other building societies are fairing during the credit crunch and resulting economic downturn remains to be seen. Britannia, the UK’s second largest mutual, also has sub-prime exposure through its brand Plaform as does Yorkshire Building Society, the third largest, through Accord Mortgages.

Adrian Coles, director-general of the BSA, says it is no surprise to see mergers being announced considering the current difficult market conditions.

He describes the deal as “prudent” but adds: “Overall, the building society sector is coping well with the current difficult conditions in the housing market.”

Coles also points out that no building society member has lost any money since at least 1945.

“I am very confident that building societies will maintain this record for many years into the future,” he adds.

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