FEAR OF FINANCE

Nationwide Building Society this week renewed both the mortgage war and the private battle going on between the building societies committed to remaining mutuals, of which Nationwide is the largest, and those which, like Halifax, Woolwich, Alliance & Leicester and Northern Rock, have announced their decision to abandon mutual status and convert into a fully-fledged bank with shares quoted on the stock market

The conversion process itself is going very slowly, much to the annoyance of members waiting for their bonuses, and it is several months since the last announcement of plans to convert or merge.

When these conversions are complete, however, the remaining building societies will have only 20 per cent of the mortgage market between them, compared with 67 per cent last year, when Cheltenham & Gloucester was still independent. Late, but perhaps not too late to review the pros and cons of conversion.

The underlying arguments in favour of conversion are that a bank can attract outside capital and grow more efficiently through the economies of scale and a diversity of activities. It is not restricted in the amount of funds it can raise in the London money markets to sustain its mortgage business, while a building society can raise a maximum of 50 per cent of its needs on the money markets and depends on its small investors for the rest.

Mutuals, however, argue that other things being equal they can afford to pay more for savings and charge less for mortgages because they have no shareholders demanding a cut.

Research by the Consumers Association this week also claims that building societies beat banks on all four crucial satisfaction tests. They offer better savings rates, especially for small savers, they pay better rates on Tessa accounts, their mortgage rates are lower and they score higher on customer satisfaction on the operation of their current accounts.

In practice, the issue comes down to hard cash. Members of societies opting for conversion or takeover can expect to pocket anything from pounds 500 to pounds 1,000 in cash or shares to vote the process through. After that, on the evidence so far, they can expect to lose out. What the shrewd investor really wants is an account with every society which converts, and then to transfer their business to the ones which don't.

Some of the committed mutuals have begun to fight back by publishing balance sheets which show they can undercut the converting societies by at least 0.5 per cent, which can be shared between their borrowing and lending members

As of now Halifax charges its borrowers with standard variable-rate mortgages 6.99 per cent, and pays savers with pounds 1,000 in a 90 day notice account 3.05 per cent before tax. Nationwide will charge 6.74 per cent until September, and currently pays 4.2 per cent, although this looks set to be reduced shortly. It will, however, cost Nationwide a massive pounds 200 million a year, almost half their total profits in 1995/96, to demonstrate their competitive edge.

If it can continue to operate a tight ship its lending business should grow and its members could soon see that a windfall is gone for ever, a regular bonus comes up fresh every year. But inevitably the mutuals will be vulnerable to a concerted effort by the banks to knock them out of business, followed by a quick takeover offer. The CA is on the side of the angels but without stronger legal protection the odds are against them.