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West Bromwich Building Society today laid bare the dreadful state of its finances just hours after securing its future.
The mutual posted losses of £48.8 million for the 12 months to the end of March against a £47.8 million profit the previous year.
It came just hours after the lender struck a £182.5 million debt deal to bolster its balance sheet and save it from collapse. The debt will be converted into profit participating deferred shares (PPDS), that raise its core tier 1 capital ratio — the key test of its financial strength — from 6.8% to 11.6%.
The near-collapse of West Brom, the UK's eighth-biggest building society, came after a string of risky investments in commercial property and buy-to-let lending turned sour.
The Financial Services Authority said other building societies should consider converting debt into PPDS, which instead of paying a fixed coupon to the holder pays a percentage of profits. In the case of West Brom, the payment is up to 25% of profits.
West Brom chief executive Robert Sharpe, who joined in October, today pledged to go “back to basics” and concentrate on retail savings and prime residential mortgage lending.
The society, which has 350,000 customers, 850 staff and 46 branches, was forced to set aside £65.2 million for potential bad debts last year — 60% on commercial property loans and 40% on residential mortgages.
It also took a £10.9 million writedown on its property investments and put £12.2 million into the Government's Financial Services Compensation Scheme.
West Brom, which axed 200 staff in December, increased retail balances by £1 billion to £6.5 billion last year. It attracted another £800 million from customers in April and May.
It now uses the wholesale money markets to fund 19% of its lending, down from 32% a year ago. It plans to reduce it to below 10% this year.
Reader views (1)
A PPDS is not the answer as they simply encourage the Mutual society to make as much profit as possible out of the depositers and mortgage holders to keep the holders of the PPDS bonds happy.
Thus the concept of mutuality is sacrificed on altar of bond holders return.
So the Mutual as a Mutual no longer serves it core purpose being the interests of the members but those of the bond holders instead.
No suprise then that the FSA encourages this route - I have long suspected that the FSA is not on the side of the little people but of the institutions themselves.
Another nail in the coffin for depositers and borrowers.
Joe
- Joe, Kiev, Ukraine, 12/06/2009 11:31
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