Market Watch

Name: Tom Cleary
Company: Mortgage Find

I do not think that building societies have ever enjoyed a better reputation compared to banks than they do right now. In public opinion, they have fared extremely well during the credit crunch and subsequent recession.

By virtue of their perception in the public's mind, I believe they have a fantastic
opportunity to take advantage of the market right now and in the future. Indeed,
the Building Societies Association has just announced that gross lending for mutuals
was the highest in July so far this year. This clearly shows that there is an appetite for
mutuals with the public and brokers alike.

That having been said, it is fair to say that many mutuals will have to change
their business models to survive market pressures and regulatory and capital
requirement pressures, such as Basel II.

Some may find that they cannot compete in the residential mortgage market
but others will certainly find that they can. I remain absolutely convinced that lenders
like Nationwide will remain committed to the intermediary mortgage market and will
definitely continue to enjoy a significant market share.

Other mutuals may try to increase their market share in other sectors. Savings is
one obvious area where they can compete and they could find that specialist mortgages
are the areas where they can add most value to the market place.

I firmly believe that we will still see mutuals in the mortgage market over the next few years but they may not enjoy the same market share as they have enjoyed over the last few years.

Name: Rachel Le Brocq
Company: Building Societies Association

The KPMG report highlighted that many challenges lie ahead, and I am sure that most societies would agree with much of its assessment. However, most of the challenges are not exclusive to the building society sector as they also apply to banks and other mortgage lenders.

Profit levels will be challenged once again this year, and the Building Societies Association agrees that the issues KPMG mentions - credit losses, narrowing
of margins, the Financial Services Compensation Scheme levy - are the key issues affecting levels of profits.

However, banks' profitability will take a hit for many of same reasons, and we
are already seeing this. The profits for the big four banks' UK retail businesses have fallen 78% in the first half of 2009, compared to the same period in 2008. It is likely that many societies will also report subdued profits for 2009 and many balances sheets will reduce in size.

The funding side of the business is incredibly challenging with interest rates at historic lows and wholesale funding continuing to be disrupted. There is very little flow of  funds into the savings market which will directly affect levels of mortgage lending undertaken. In fact savings balances are reducing across the board.

Deposits with banks fell in July by £3.5bn and by £1.5bn at building societies. With funding such a challenge, the BSA expects the entire mortgage market to remain subdued over the remainder of 2009. There will probably be more mergers, though the independents will continue to meet their members' needs.

Name: Simon Jones
Company: Savills Private Finance

I think building societies will not enjoy the same mortgage market share as before and may struggle to compete. Building societies are in a difficult position with the biggest problem being funding constraints.

Due to the general shortage of funds, there is increased pressure on all lenders
to lend. Requests are coming from brokers and the general public who would not
necessarily have looked at a building society before.

However, the ability to raise funds in the wholesale market is not an option at
present. Building societies are being told by the regulator to stick to traditional
lending and only lend what they attract. They will certainly find it difficult to attract
sufficient retail funds to enable them to make mortgage advances and this is bound
to affect them going forward. The ability of some smaller societies to attract savers
has traditionally relied on a fairly small and largely loyal customer base but this may
not be enough.

Mutuals may have to change their business models to survive market pressures
and regulatory and capital requirements. Some may find they cannot compete in
the residential mortgage market. They may also find it hard to cope with internet
banking and high profile marketing by major banks and mutuals which makes
it very difficult for the smaller players to compete, both in terms of pricing and the
sheer muscle of advertising and marketing departments of the larger lenders. It only
takes a click to move funds away and this is a serious worry for the societies.