Graham Beale was emphatic. “We are not lender of last resort for the mutual sector,” the chief executive of Britain’s biggest building society, the Nationwide, insisted yesterday as he announced the details of his two rescue deals.

Nationwide is taking over the Derbyshire Building Society and the Cheshire Building Society, bringing £12 billion of additional assets and 95 extra branches under its wing.

Yet any notion that these are entirely conventional and commercial transactions has been dashed by the terms and structure of the deals. Unusually, the 925,000 members of the Derbyshire and Cheshire societies are being denied a vote on the deals and will be getting no windfall payments. The deals are being rushed through by way of a clause in the Building Societies Act, under which society boards can forgo the normal process of consulting their members if they get the blessing of the Financial Services Authority (FSA).

Normally, a building society merger can take 15 months, according to Mr Beale, who recently completed the takeover of the Portman Building Society, a deal struck before the credit crunch hit. This way, both regional societies will be taken over by the end of the year.

While emphasising that the deals were the responsible thing to do and that they were good for stability in the building society sector, Mr Beale insisted that there was a credible commercial case for taking over the two societies. They were attractive franchises in their respective counties and ultimately would create extra value for Nationwide’s existing 14 million members.

In the short term, however, the two rescues will weaken Nationwide. Its core Tier 1 capital ratio – the most commonly examined measure of financial strength – will be eroded by 0.34 percentage points. However, Mr Beale expects to be able to regain that deterioration from retained profits in the current financial year.

Despite pressure from regulators to get a deal done, Nationwide did not automatically agree. “We made it clear to the FSA we could walk away,” Mr Beale, who has been chief executive since April last year, said.

Nevertheless, Nationwide has taken on some hard-to-quantify risks. The Derbyshire, in particular, appears to be exposed to falling house prices and the souring economy, with £1.4 billion lent to sub-prime and near-prime borrowers in Britain. An unnerving 9 per cent of these borrowers are more than three months behind on interest payments.

Mr Beale conceded that this figure was very high. The Derbyshire made a £17 million first-half loss and there could be much worse to come. However, Mr Beale, advised by Morgan Stanley, is satisfied that Derbyshire’s reserves of £288 million are sufficient to cover the likely losses: “We are confident that the reserves they carry will cover the risks they have on their balance sheet.”

Cheshire looks less exposed, although it has suffered the embarrassment of taking the most junior tranche in a major syndicated debt transaction backed by industrial estates. It expects to lose £11.5 million of the £12.5 million loan. First-half profits slumped to £1 million.

The plan is to absorb the two societies with minimal disruption. Their brands will be retained, alongside their branches.

“We’re very happy to have one of their branches sitting next to one of our branches,” Mr Beale said, further evidence that the bottom line was not the sole consideration in this deal. In the commercial sector, the prospect of savings from branch closures and job losses is what drives bank mergers.

Mr Beale played down speculation that many other building societies were close to throwing themselves on the mercy of bigger beasts, such as Nationwide.

“We’re not talking to anybody else,” he said. “We’re not aware of any other approaches.”

The numbers

Nationwide
Ranking in UK building society sector (by total assets) No 1
UK ranking (by mortgage lending assets) No 2
Total assets £179 billion
Employees 18,318
Members 13,400,000
Borrowers 2,500,000
Savers 10,700,000

Derbyshire
UK ranking (by total assets) No 9
UK ranking (by mortgage lending assets) No 26
Total assets £7.1 billion
Employees 818
Members 485,000
Borrowers 89,000
Savers 424,000

Cheshire
UK ranking (by total assets) No 11
UK ranking (by mortgage lending assets) No 29
Total assets £5 billion
Employees 758
Members 442,000
Borrowers 44,000
Savers 401,000

Source: Nationwide

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