Exodus of savers from Nationwide
Nationwide has admitted low interest rates has seen an exodus of savers over much of 2009, with a whopping £5.6 billion of retail deposits withdrawn during the six months to September.
The UK’s biggest building society’s financial results for the period show a profit of £143 million – down 62% drop from the £274 million profit it reported a year earlier.
The society remains the UK’s second largest savings provider, with a total savings balance of £122.7 billion. However, despite attracting many savers during the banking crisis at the end of 2008 – when it was regarded by many as more financially secure than many of its rivals – Nationwide says competition in 2009 has seen a £5.6 billion drop in deposits.
In comparison, between September last year and this April, just £0.1 billion was withdrawn by savers.
Nationwide says the savings market is currently subject to “competitive distortion and uneconomic pricing” as institutions attempt to vie for savers’ money with competitive returns despite the low-interest rate environment. Savings providers that benefit from “actual or perceived” government guarantees are most to blame for these distortions, claims Nationwide.
National Savings & Investments – which offers its customers a 100% government guarantee – has recently grabbed headlines by making it into the best-buy tables, despite it traditionally offering unfavourable rates.
Nationwide says it has “elected not to chase market share” as, unlike many institutions, it is able to raise money from the wholesale money markets as well as from retail deposits. Around 70% of Nationwide’s funding comes from retail sources.
“We have been prepared to accept an outflow of savings balances rather than pay too high a price for short fixed-rate retail funds,” it says in its financial statement.
Low interest rates are not the only reason savers have been ‘jumping ship’ from Nationwide – the society says high levels of household debts means the size of the market has been contracting. Debt-free savers, meanwhile, have been increasingly rejecting cash accounts in favour for the high return potential of investment products with equity-linked returns.
Nationwide says it continues to be perceived as a “safe harbour” by savers.
Elsewhere, Nationwide reports it now has an 8.3% share of the mortgage market, making it the third largest lender in the UK with residential loan assets of £128.8 billion. The average new mortgage customers borrows 63% of the value of their property.
“Our approach to new lending has remained cautious striking an appropriate balance between our desire to support existing members, first time buyers and the wider economy, with the need to maintain a prudent lending risk profile,” says Nationwide.
However, it has seen the number of borrowers missing payments increase, with 0.66% of is total book three or more months in arrears, up from 0.64% in April. But Nationwide’s specialist mortgage lender – which focuses on buy-to-let loans – has 2.39% of its book in arrears, up from 2.45% in April.
The society’s outlook for 2010 is gloomy, given rising unemployment and low interest rates are preventing many households from savings.
“The market is therefore likely to show a very low level of savings balance growth for the rest of this year and well into 2010,” it says. “This accentuates the need for sustained recovery in long term wholesale funding markets which will be necessary to support availability of credit and the repayment of government-sponsored funding schemes due to mature during 2011/12.
"While we have now seen early signs of renewed activity in long term wholesale markets, there is still a long way to go before we can feel confident about their recovery.”
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.