The operating model of building societies continues to be based on proximity and personal service. Local branches play a key role in maintaining brand profiles and customer and community engagement. As such, over the past five years, the number of building society branches has decreased only moderately: 6% for the 10 largest societies; 11% for the sector.

By their nature, building societies score well on social factors as they are mutual institutions owned and run for their members. Material efforts are made to build strong relationships with local communities, supporting causes that are important to members and employees. “With customers and regulators increasingly focused on ESG considerations, we believe that the focus of building societies on member needs and long-term sustainability can be a competitive advantage,” said Pauline Lambert, executive director in Scope’s financial institutions team and co-author of a report out today.

The asset quality of building societies remains better than that of large UK banks with more diversified business models, owing to the building societies’ focus on extending loans secured by residential property funded largely by their members. “We consider the focus on mortgage lending to be credit supportive as the historic loss rate is much lower than for other types of lending such as unsecured consumer and corporate loans,” said Álvaro Domínguez Alcalde, an analyst in Scope’s financial institutions team and co-author of today’s report.

Competition from the largest banks has increased since the implementation of UK ring-fencing rules, as the banks target further lending growth to narrow the gap between their market shares in mortgages and current accounts. “With additional competition from mid-tier players and larger building societies, the increased supply of mortgage credit put pressure on margins throughout 2019 and early 2020. While there has been some recovery since, the average interest rate on new mortgages remains at relatively low levels,” said Lambert.

Despite the challenging operating environment, the performance of building societies overall has been resilient. Returns have declined in recent years but are above the levels seen in 2010-2012. Building societies do not seek profit maximisation nor do they have a responsibility to pay dividends to external shareholders, focusing instead on retaining excess profits to build up buffers to absorb losses in stressed conditions. As their mutual status limits access to external capital, earnings remain important for sustaining sound solvency positions.

Download the report here.