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October 31, 2007updated 04 Apr 2017 1:15pm

Alive and kicking

A new report from VRL KnowledgeBank examines the provision of retail banking services through institutions owned by members, communities or municipalities The global mutual sector has been subject to considerable stress in recent years

By Douglas Blakey

A new report* from VRL KnowledgeBank examines the provision of retail banking services through institutions owned by members, communities or municipalities. The following brief extract considers the areas in which these types of institutions have found particular success.

The global mutual sector has been subject to considerable stress in recent years. Many players have now accepted the need to re-establish their value in the minds of their members – and there is much evidence to show that this is paying off.

Since the 1980s many organisations have converted from mutual status and the members have taken a short-term advantage from realising the value embedded in the balance sheet. In recent years, many mutuals have rearranged their constitution to ensure that conversion will no longer release value to members. But even more important, they have also successfully increased the knowledge and commitment of members to the concept of mutuality.

Today, the enthusiasm for demutualisation seems to have subsided – at least for the time being. Only consolidation is reducing the numbers of institutions, as in countries such as the UK and Germany. More significantly, this has still not arrested the growth in the overall market share of mutuals and community banks.

Against this background, and from a consumerist perspective, it is hard to challenge the raison d’être of the mutuals. They have substance and viability, the support of their increasingly knowledgeable membership, and, in a number of cases, a democratic channel to convert from mutuality should the issue ever arise.

In January 2007, the International Monetary Fund (IMF) published Working Paper 07/2 entitled Co-operative Banks and Financial Stability. While the paper did not purport to represent the views of the IMF, it was nonetheless an erudite contribution to the mutuals debate: the overall findings included a note that co-operative banks are more financially stable than commercial banks. This was found to be attributable to the lower volatility of their returns, which more than offset the lower profitability and capitalisation of the sector.

A separate study by the IMF on the Spanish savings banks published in June last year found that social works funded by money from the cajas benefit 96 percent of the Spanish population. Statistics gathered by Cajas de Ahorros Confederada, the umbrella organisation of the cajas, concluded that social investments by all cajas amounted in 2005 to €1.34 billion ($1.90 billion), equivalent to 21.5 percent of the sector’s net profits, and generated 30,000 jobs.

The IMF stated in its report: “The cajas have been a major force in extending services and in creating a highly competitive environment in the Spanish financial system.”


Comparing the performance A study of the UK market – in which most of the biggest building societies demutualised in the 1990s, including Abbey National (now owned by Santander), Halifax (owned by HBOS) and the Woolwich (owned by Barclays) – by a UK parliamentary group in 2006 attempted to compare the performance of mutuals and demutuals.

The All-Party Parliamentary Group (APPG) published a report in March 2006 entitled Windfalls or Shortfalls? The True Cost of Demutualisation. The group declared that the report was published to discuss and support mutuals, solely in the interest of financial consumers. The terms of reference for the enquiry were to seek answers to the following questions:

• Are former mutuals better than remaining mutuals at providing financial services?

• Is there any evidence to suggest that demutualisation has improved the performance of former societies?

• What effect has demutualisation had on the remaining mutual sector?

• How has demutualisation affected consumer choice?

• Have consumers benefited from demutualisation?

• Did the level of windfalls reflect the economic value of members’ interests?

The group’s findings in respect of questions one and two included the following statement: “The balance of the evidence (verbal and written) received was that mutuals in the building society and life assurance sectors, performed better than their [listed] rivals in a variety of financial performance indicators.

“It was also shown that they pass these cost advantages onto consumers in terms of better rates.”

Turning to questions three, four and five, the APPG noted how diversity has been a strong feature of the UK financial services sector. The group took the view that this diversity had been weakened by demutualisations, to the detriment of the UK consumers. It expressed the belief that demutualisations had restricted consumer choice.

Hitherto, the mutual sector had acted as a check on the listed banks in terms of value and ‘non-financial’ issues such as branch closures and charges on ATM machines. The demutualisation of such a large segment of the building society movement was seen to erode its ability to provide the necessary counterbalances. The APPG also expressed the opinion that competitive pressures are putting an increasing strain on the mutual business model.

The APPG report made the following closing statement: “It can be convincingly argued that there should be an independent expert analysis of the pros and cons of a demutualisation, and that this should be available, by law, for the members in such a case, before the vote.”

While the UK parliamentary group found that the case in favour of demutualisation had a number of significant weaknesses, it did, however, raise doubts over whether the remaining mutuals had “rallied to the cause of mutuality”.


Worldwide struggles Worldwide, mutuals still have a battle on their hands. The US credit unions are faced with continuing pressures over their tax-exempt status and the progressive extension of their catchments. In Germany, the difficulties of the Landesbanken have placed the whole of the country’s banking system under the microscope, although the DSGV, the association of German savings banks, argues that it is well enough organised and sufficiently strong to manage its own problems.

There is increasing scrutiny by listed institutions of any perceived or real unwarranted advantages enjoyed by mutual organisations. In the US, it is hard not to sympathise with a banking system that is both subject to the rigours of meeting stock market expectations and competes with the credit union movement.

Many of the credit unions have the size, strength and product range of the banks with which they are competing – but also continue to enjoy tax-exempt status. Moreover, this type of institution is able to widen the qualifying criteria for membership should the need arise. This debate in the US seems unlikely to subside without some movement.

The EU did rule in favour of the withdrawal of valuable German state guarantees, which were an advantage enjoyed by the savings bank sector and other organisations. However, the sector has come to terms with the increased cost of funding that this created. Developments within the German banking sector in 2007 have had the effect of again placing much of the system under renewed and severe scrutiny.

There remains a continuing viewpoint that the dense branch network and the many locally owned banks in Germany carry inefficiencies and are distorting competition. Closer examination of the system suggests that much of the German savings bank movement operates a network with attributes that would compare well on a global platform.

The Sparkassen have moved collectively to develop international best practice in the deployment of self service, allied to the removal of the cheque and the wider use of electronic banking. This has produced a highly efficient banking hall, which is usually accommodating without being over-engineered. Paper clearings have been eliminated.

With the major commercial banks having contracted their networks to the point where they operate fewer than 1,000 branches each within a country of 80 million people, it is hard to see what consumer benefits would arise from the much discussed market consolidation. The existing municipally owned banks may be the only model through which the smaller towns and villages of the country can be serviced. Such locations might not be viable for a bank seeking to meet the demands of conventional shareholders.

This issue is equally pertinent in the Spanish market, which has an even denser branch network than that of Germany. The cajas or savings banks of Spain are – in a similar fashion to Germany – well developed retail banking operations. Moreover, while they have been reducing in number steadily over recent decades, their share of the market has been rising. Much of this has been driven by the expansion of their branch networks.

* This article is an edited extract from a new report from VRL KnowledgeBank called Mutuals and Community Banks. Written by David Cavell, the report looks in comprehensive detail at the areas in which these types of institutions have found particular success and includes a number of case studies. For more information, please contact Shouvik Sen on +44 20 7563 5615 or via

The UK’s largest mutual looks strong and steady Nationwide’s 2007 merger with rival Portman Building Society will take the asset base of the society beyond £160 billion ($320 billion) for the first time.

Nationwide sees the merger as consistent with its strategy of growing a modern and healthy mutual sector within the UK financial services market. The two societies have pre-merger networks of 1,013 outlets – 860 are operated by Nationwide. Post-merger rationalisation is expected to reduce this to a total of 894, of which 723 will be branches and 171 will be agencies.

The 2007 pre-tax profit of the society was derived from three areas: personal financial services – £324.1 million; commercial business – £224.8 million; and group sources – £119.7 million.

Nationwide’s asset base has risen by over 60 percent in the past five years, while pre-tax profits have all but doubled. Equally worthy of note is its significant progress in reducing its cost-income ratio. Nationwide recognises that one of its obligations to its members is the maintenance of an efficient organisation.

The policy of the society is to ensure that its members receive tangible benefits for their loyalty in the form of preferential terms. Nationwide estimates that it has passed on benefits worth around £660 million during the fiscal year ended 4 April 2007, in the form of preferential rates and fees. The society claims that benefits returned to members since 1996 now total around £5 billion.

The cost-income ratio suffers to some extent from the members’ preferential terms, which in turn deplete earnings. By adding back the effect of improved rates for members (estimated by comparison with a panel of competitor products in the market), there would be a suggested improvement to the cost-income ratio of over 10 percent.

However, the society does pursue cost reduction targets, and the table below illustrates how over the past few years Nationwide has begun to see the fruits of these initiatives. Improvements posted in 2007 were particularly significant.


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