Progressive Building Society - Reducing Savings Rates to increase profits?

The Progressive Building Society, Northern Ireland's last remaining local building society, has announced that it will be reducing its savings rates with effect from 1st September. It cites the recent reduction in the Bank of England's base rate from 0.50% to 0.25% as the catalyst for this move. I suppose a reduction was inevitable but a reduction in excess of 0.25% smacks of unfairness to those members who are savers. It appears that the directors of the Progressive Building Society may have decided to increase the Society's margins. I see that their 7 day notice postal account has suffered a reduction of 0.35%. A similar reduction will apply to many ISA account owners.

The Government seems to believe that a reduction in base rate will cause people to spend money rather than save it and that as a consequence the economy will be given a fillip. I wonder if they remember that they are also exhorting people to save more for their retirement! I can't imagine that I am the only person who has spotted this contradiction.

What happens to, "the Progressive," if savers remove their money enmasse? It won't happen of course. Apathy rules more's the pity but it would be nice to see a bit of saver power.

 

Savers' Protection to Reduce.

The strength of sterling against the beleaguered euro brings advantages, most obviously for the holidaymaker who frequents the Eurozone. Not so pleased are the UK exporters who find that their products are becoming less and less competitive. Now savers are being hit.

The Financial Services Compensation Scheme will be reducing the protection it affords savers from £85,000 to £75,000 with affect from 1st January 2016. This reduction is required under the terms of the EU Deposit Guarantee Scheme because the limit of protection is defined in euros, [€100,000] and £85,000 is now worth comfortably more than €100,000. The six month lead in period is deemed sufficent for the million or so savers who have managed to squirrel away more than £75,000 in an account covered by the scheme to organise their finances in such a way that they can retain last resort protection for all of their funds. Appropriate dispensations will apply to fixed term accounts so that monies can be withdrawn even though the maturity date for the account does not occur before the end of the calendar year. Whether savers withdrawing funds from fixed rate bonds will manage to achieve equivalent interest rates is doubtful. The fruits of prudence have shrivelled away rather.

 

 

 

Happy Birthday VAT.

Value Added Tax is one of the blessings that has been bestowed upon us by virtue of our membership of what is now called the European Union. We have now had this tax on our taxed earnings for forty years. Initially imposed at 10% we are now experiencing a 20% hit. For someone who is lucky enough to be taxed at the current maximum rate (50 %) that effectively means that on what are deemed to be ,"luxury," non essential items their marginal tax rate is 70%, exclusive of their national insurance contributions. To put this another way good old value added tax is being extracted from the residual pounds in their pockets at an effective rate of 40%.

 

Consumers don't like paying this tax and suppliers don't like acting as unpaid tax collectors, but this is a tax which will inevitably remain even if we manage to extract ourselves from Europe's clutches. It is just too successful. It raises almost one pound in every seven pounds that flows into the Government's coffers.

 

Who do we have to thank for coming up with inventing the concept of Value Added Tax? Why none other than our continental cousins, the French, ( a nineteenth century German economist may also have had a hand in it). Maybe the Entente Cordiale should not have been signed?

Progressive Building Society Reports.

This is the reporting season for Building Societies. The Progressive Building Society is the larger by far of Northern Ireland's two local Building Societies. With assets of £1,628 million it is some thirty eight times larger than its regional neighbour the City of Derry Building Society. This places it at number ten in the Building Society size rankings. The City of Derry is the smallest of the forty six societies.

 

In common with most of its competitors the Progressive is having to make substantial provisions to cover potential losses on its mortgage book. In 2012 these provisions amounted to £7,170,000, up from £5,842,000 the previous year. That said the Society was still able to increase its reserves by £1,376,000. New mortgage lending was up almost 18% to £125 million and net mortgage assets had a very modest increase from £1,290 million to £1,307 million. Unlike its smaller rival, savings balances fell, (by £14m) and this is reflected in the overall assets which saw a decline from £1,655,242,000 to £1,628,432,000.

 

What may be an interesting development is in the change of directors during 2012. Mr Michael Parrott was co-opted onto the Board during the course of the year and as required he is now offering himself for election. Mr Parrott is a Chartered Public Finance Accountant by profession, but of much more relevance is that he is the Deputy Chief Executive and Finance Director of Market Harborough Building Society (assets £410 million). Is it possible that this move presages a further, "consolidation," in the Building Society movement?

 

City of Derry Building Society - The Smallest Building Society

The minnow of the Building Societies Association, the City of Derry Building Society sent out its 2012 Summary Financial Statement to its members ths week. The BSA website discloses that as of 31st December 2011 the Society had a total of 432 borrowers and 2063 investing members. With the Edinburgh based Century Building Society having merged with its much larger competitor, the Scottish Building Society, the City of Derry now has the honour of being the smallest building society in the UK.

The financial summary shows total assets as of 31st December of £42,608,000, up from £41,302,000, (plus 3.16%). Gross mortgage lending rose slightly and the total mortgage balance (excluding provisions) rose 2.6 % to end the year at £31.55 million excluding all provisions. Yet again the directors have thought it prudent to allocate the bulk of the year's profits as a provision against losses on the mortgage portfolio. It would seem that total provisions now stand at some £710,000 (excluding deferred mortgage indemnity insurance income). Members are told that no mortgage losses have crystallised as yet and that, "the Directors are confident that loan provisions ....... will reduce as the local housing market stabilises." Earlier in the Financial Statement it is reported that house prices in Northern Ireland are, "now averaging approximately 45% of their 2007 peak."

It will be interesting to see the full annual accounts for 2012. These will disclose the total number of mortgages where repayments are more than twelve months in arrears. The 2010 accounts disclosed seven such cases with the arrears in these cases totalling £74,946. In the subsequent year's accounts the number had increased to eleven with arrears of £109,228. Perhaps what would be even more elucidating would be knowing the total number of mortgages experiencing arrears and the directors' estimate as to what percentage of mortgages/chargees are in negative equity and by how much.

Pensioners exit Cyprus?

Many British pensioners were tempted and encouraged by a very favourable tax regime to retire to Cyprus. Those of them who were resident there for tax purposes were able to have their pensions paid free of UK tax and avail of a Cypriot tax rate which could be as low as five percent. The present financial crisis may well cause them to reconsider their decision. Tight fiscal controls have been imposed on personal accounts and the tax treatment of the future must inevitably be more severe. The calm financial waters of their initial halcyon days are now decidedly choppy. Hopefully most if not all of them will have been sufficiently canny not to have placed more than €100,000 (the equivalent of our £85,000 protected sum) with any Cypriot Bank.

Many British pensioners who retired to the Cypriot sun may now be reconsidering their decision. They will be worried about their savings, worried about the taxation of their income, worried about the cost of living and worried about being unable to realise their assets. It will be interesting to see how many will decide to or indeed be forced to retrace their steps back to Blighty.

Cyprus has been a tax haven for many. A large percentage of its GDP came from its now ravaged financial sector. Its economy will suffer and its British retirees will suffer.

Ulster Bank Computer Problems - Again!

I woke up this morning to hear that Ulster Bank Limited and its parent, RBS, had had overnight computer problems with customers being unable to withdraw money from ATMs and avail of telephone banking. This brought back memories of last summer's debacle when Ulster Bank customers' accounts were affected for weeks on end following on from a computer upgrade on 19th June.

One would have thought that the Bank would have put suitable backup systems in place to ensure that customers would not suffer down time again. It appears not. Thankfully however the present glitch appears to have been corrected within a few hours. It will however cause certain customers to question their loyalty to the Bank. Is the Bank's computer software prone to malfunction? To err may be human, but we are talking about machines here!

I checked my account with the Ulster Bank on line this morning. I was able to access it without any problem and unfortunately there were no strange seven figure credits.

Ulster Bank's Operating Loss Up £56 Million.

The Ulster Banks parent, RBS, published its annual results for the year ending 31st December 2012 this morning. As befits a multi billion pound Company the report extends to over three hundred pages. A physically impressive tome it may be, but the figures presented by Mr Hester hardly merit that adjective, - well maybe with a large dose of sarcasm. The, "Shreds," successor tries to see positive elements in the columns of figures. He points to the operating profit before impairment losses. But you do have to take account of impairment losses. They may, strictly speaking, be non recurring items, but they seem to be becoming a regular feature in the accounts. The bottom line, and isn't that what we should be concentrating on, shows a loss attributable to shareholders of £5,971,000,000.

The index to the report points us to page fifty for the constituent figures for Ulster Bank. Unfortunately they don't provide a little nugget of hope for the Group. Before impairment losses the operating profit has declined from £400m to £324m - a decline of 19%. What then of the infamous impairment losses? Well they have declined from £1384m to £1364m. Hoorah! However after you factor these into the figures we find that the Ulster Bank's operating loss has increased from £984m to £1040m. Hardly an A*performance. The fallout from the property crash is still affecting the figures.

Mr Hester is reported as saying that the Royal Bank Group will be ready for sale by 2015. Is he being overly optimistic? On the evidence of the present figures it might be difficult to share his confidence.

First Trust Bank Shrinks its Network

One could be forgiven for thinking that Northern Ireland's Banks are in a competition to see which of them can close the most branches.

In January the Bank of Ireland announced that it would be closing nine branches. Not to be outdone, First Trust Bank have now stated that they will be closing six branches by the end of June. Among the branches nominated for this programme of, "rationalisation," is that in Limavady. It is reported that the customers from that branch are to have their accounts transferred fourteen miles down the road to the Crescent Link branch of the Bank in Londonderry. That will be convenient! Despite the increase in online banking people do still need to go into their local branch. A twenty eight mile round trip is not an option for many people.

It must now be accepted that our Banks will no longer be providing province wide branch networks. The local bank manager is becoming an endangered species.

Shrinking Bank of Ireland Network

Another week. Another announcement from a Bank that it would be closing branches. This week it was the Bank of Ireland which wielded the cutting blade. It has decided that nine of its Northern Ireland branches need to be pruned. This will reduce its branch network here from 44 to 35, a twenty percent reduction. The closing branches apparently represent seven percent of the bank's business across Northern Ireland. Two of the branches facing closure are in Londonderry. The remaining branches are Ballyclare; Ballymoney; Carrickfergus; kilkeel; kilrea; Larne and Rathfriland.

I suppose I should declare an interest in this matter in that I do have an account with the Bank of Ireland although it is dormant.

Presumably the Bank of Ireland branches which are closing are the least profitable branches, but there are always going to be some offices which are less profitable than others. If one continues with a policy of closing the least profitable branches you end up with one branch. Is that what the Banks are aiming for? I suspect that it might be, They all want us to convert to Internet banking. They would like to kill off the cheque. They don't really want the small personal customer unless they can sell some product to him or her.

The closure of a rural bank branch is like the closure of a school or a post office. It hits at the very existence of the community. It reduces the independence and self sufficiency of the village or small town. In pure economic terms it may presently make sense for the Bank of Ireland and its ilk to close branches, but they are cutting away at what remains of their goodwill. It does seem rather inequitable that the steady branches should be closing because of the huge Bank losses engendered by the corporate divisions of our banks.