Good afternoon ladies and gentlemen.
In my address to members at the AGM for the past three years, I have highlighted two consistent themes:
Whilst those remain central themes, the environment has undoubtedly improved compared to the last 2 or 3 years and I am pleased to report that the Yorkshire made excellent progress in all areas of activity, including the integration of Chelsea Building Society, and as a consequence delivered a record financial performance.
Before talking about the details of this, I would like to highlight briefly some of the most significant events in the financial sector and the wider economy:
As a result of some of these factors, 2010 was not the easiest of years for either borrowers or savers, and we have remained very focused on supporting our members to the best of our ability.
Our vision is “to be the best organisation that our customers do business with”. We aim to achieve that by putting financial security, member value and excellent customer service at the heart of everything we do.
We are still in an environment where financial security has to be the dominant concern and we have continued to focus on maintaining very high levels of capital and liquidity, together with a strong and sustainable funding position – in other words we have continued to focus on maintaining strength and prudence on all the things which are the cornerstones of a strong financial institution.
Looking in more detail at the different aspects of our performance last year.
We achieved a core operating profit, which we believe is the most meaningful measure of profit, of £128m, and a statutory profit of £115m, as we built on the positive trends we announced in our interim results in July 2010.
This core operating profit represents an extremely positive improvement from a corresponding figure of around £8m in 2009. Our strong profitability was driven by a variety of factors: the inclusion of Chelsea Building Society from 1st April 2010; a recovery in our net interest margin, which was impacted by a number of suppressing factors in 2009; a fall in provisions related to mortgage losses and improvements in efficiency and the management of our underlying costs.
As a result, the Society’s core operating profit is above the levels we saw before the start of the financial crisis in 2007, which we believe is a considerable achievement, and which has helped strengthen further our capital position.
Capital is the amount of money our regulator – the Financial Services Authority - require all financial institutions to hold to meet any future unexpected losses which might arise. It follows that the more capital you hold, the more resilient you will be.
In capital terms, the Yorkshire is exceptionally robust, with one of the strongest positions of any UK lender.
The best measure of capital strength is something called the Core Tier One ratio, as this includes only the highest quality capital.
As we made clear to members at the time, our core tier one ratio diminished slightly when we merged with the Chelsea to 10.6% on day one of the merger, because their capital position was not as strong as the Yorkshire’s. However, we have successfully restored this to a higher level than immediately before the merger to reach 12.4% at the end of last year, against 12.2% in 2009.
This improvement – which is just one example of the successful integration of the Chelsea - was ahead of our expectations. It was achieved partly by prudently contracting the balance sheet - in particular Chelsea’s balance sheet, thereby reducing the amount of capital we need to have in place - and partly, as I have already said, through strong growth in the Society’s profits which are retained as reserves for the future.
In my address last year, I spent some time talking about liquid assets which is another key measure of financial strength and member protection.
Liquid assets are those assets which can be readily sold for cash, even under distressed market conditions. Most of our liquid assets are held in the form of money in an account with the Bank of England, or in high quality instruments, like government gilts. Liquidity provides a buffer between a lender’s lending commitments and its funding capacity. So for example, if, for whatever reason, a greater than expected number of retail savers or wholesale investors want their money back, a lender can use this liquidity to meet that demand without compromising its ability to remain in business.
The more liquidity that a lender holds, and the greater the quality of that liquidity, the more resilience it has to manage its funding position. As we saw with Northern Rock, a liquidity shortfall can ultimately cause a financial group to fail.
In the run up to the merger with Chelsea, we held an exceptionally high level of liquidity, as shown by our liquidity ratio of 31.9% at the end of 2009. Holding these abnormal levels of liquid assets at that time was a prudent decision to ensure that we could manage down the unsustainable funding position inherited from Chelsea during the course of 2010. Specifically, the Chelsea had built up, through necessity, a large volume of one year fixed rate savings bonds, offered, in our view, at short–term and unsustainably high rates of interest. Our policy has been to aim to retain a material proportion of these savings, but at sustainable and equitable rates, while recognising that as a result some of those savings would be moved elsewhere.
This repositioning has been achieved in line with our plan.It is extremely expensive to hold more liquidity then we require and the excess liquidity we held has been managed down, although still maintained at a prudent level of 21.1%, a figure which is closer to but still above a “business usual” level.
Overall and principally as a result of the merger our assets grew by 32% in 2010 to stand at just over £30bn.
As a mutual organisation our financial strategy revolves around achieving a balance between value for members, profitability, growth and financial strength. We aim to make sufficient profits to maintain a strong capital position, but our next requirement is to deliver as much value as we can to savers and borrowers through interest rates which are attractive, but equally importantly sustainable, and which balance as fairly as possible the interests of both our borrowers and our savers. With a record low Bank of England interest rate, it has been a difficult time for savers - and we have continued to take what steps we can to shield them as far as possible from the impact of low rates, although we recognise that our capacity to do this is limited.
By protecting savers, we do not mean offering headline grabbing savings rates, which in many instances we believe to be unsustainable, or which have to be funded by the unfair treatment of other savers. What we are talking about is providing savings accounts for the majority of savers who perhaps don’t look at their accounts from month to month, or who want to use a branch or who cannot tie up their money for long periods of time.
What we have done for savers is offer consistent returns.
A good example is that of our cash ISAs. At the end of 2010, the average interest rate on our cash ISAs was 2.21% - around five times more than the market average rate of 0.40%. Unlike a number of our competitors, during 2010 we did not cut interest rates on any variable savings products, including Chelsea products.
At the year-end, member savings balances had increased by over 55% to £21.4bn against £13.8bn in 2009 as customers opened 270,000 new savings accounts. Notwithstanding our long-term approach, across all our savings products we still achieved a total of 900 savings “Best Buy” mentions last year.
Members’ savings together with retained earnings now fund virtually all our mortgage lending.
We are also very conscious that one of the core purposes of a building society is to provide mortgages to ordinary people so that they can buy their own home. The Society’s strong financial position gives us the ability to do this, and our gross lending activity in 2010 was tripled to £2.8bn and we are planning to increase our gross mortgage lending by a further 50% this year.
In pressured economic times, however, it is inevitable that some borrowers will find themselves in difficulty. Nonetheless, 2010 saw a fall in the provisions charge we made against residential mortgages to £41m in 2010 from £59m the previous year, with our arrears remaining stable with the number of loans in arrears over 3 months at only 1.84%.
We have continued to develop our arrears management policies, keeping them in line with best practice and seeking to support borrowers facing difficulties whilst also protecting the interests of the membership as a whole.
Across our entire mortgage portfolio the average loan-to-value ratio of all our mortgages at the end of 2010 was just under 56%.
Underlying activity in the mortgage market is at an historical low level and likely to remain so for some time to come. In such a low growth environment, the ability to control costs and maintain efficiency becomes even more important, and we continue to focus heavily on this area. Our management expense ratio, excluding the costs associated with the Chelsea merger, fell to 51 pence per £100 of assets in 2010 from 54 pence in 2009. The more cost-effectively we are able to run the business, the greater our ability to deliver benefits to members.
Our non-interest income, generated by sales of good-value insurance, protection and investment products as well as income from Yorkshire Share Plans, increased to £43m from £31m whilst this was largely due to the Chelsea merger, on an underlying basis our income from this area has been steadily growing for the past five years, a notable result given that a significant proportion of this income is linked closely to the mortgage market which has clearly been subdued in recent years.
Once again we gained recognition for our products and services during the year, receiving a significant number of industry awards and accolades across the Group, including amongst others, Best National Building Society, Best Overall Mortgage Provider and Best Children’s Savings Account.
Turning now to the subject of mergers, the strong financial position of the Yorkshire Group has given us the ability to take advantage, on a highly selective basis, of opportunities within the building society sector.
One such opportunity was the merger with Chelsea which we had just completed when I addressed this meeting a year ago. Another is the proposed merger with Norwich & Peterborough, announced this morning. What both these mergers have in common is that they will strengthen the Group’s long term position to compete and to deliver benefits to current and future members and to offer a competitive mutual alternative to a very concentrated banking sector.
We are clear that to be successful as a traditional building society, particularly at the Yorkshire’s scale of operations, in what is a transformed landscape for financial services:
In this context, the merger with Chelsea Building Society was a transformational forwards step for the Yorkshire and it has delivered many of these things far more quickly than we could have otherwise achieved.
We have made substantial progress on the integration of Chelsea, which is ahead of our expectations and has led to the realisation of many of the anticipated merger benefits:
And from a former Chelsea member perspective
The Chelsea merger has strengthened the Yorkshire’s position as a whole, bringing us new members, extending our presence in the southern part of the country and contributing materially to profitability in 2010.
Turning to Norwich & Peterborough Building Society, we believe this proposed merger also has the potential to strengthen the Yorkshire, albeit on a much smaller scale than the Chelsea merger. It would combine the Yorkshire’s existing strengths with N&P’s strong presence in the east of England, enhancing further our long term position and making us better placed to compete and deliver member value as the merger benefits are realised.
We have been very careful in our choice of merger partners, rejecting those for which the long term benefits are outweighed by the costs and risks involved. In respect of this merger, we have spent a great deal of time completing extensive due diligence on every aspect of N&P’s business. Its underlying traditional building society business is solid and profitable, although overall, the Society has clearly had financial difficulties. In particular, N&P has had to set aside a large sum of money to make ex-gratia payments to customers advised by its former independent financial advisory business to invest in Keydata products. These payments have been provided for in N&P’s 2010 financial accounts.
There are many similarities on how we intend to approach the proposed merger with N&P, building on our successful experience with Chelsea. We have said that we intend to retain the N&P Building Society brand name and there are a number of reasons for this:
This approach mirrors the one we have successfully taken with Barnsley and Chelsea building societies, which continue to operate successfully under the individual brand names
We intend to retain a high street branch or agency in every community where Yorkshire and N&P currently have a presence. Indeed we have made a commitment to retain all of N&P’s 46 branches for at least two years after the proposed merger completes
The proposed merger will also provide opportunities for Yorkshire to develop new products and services for members based on N&P’s capabilities and skills in different product areas, for instance current accounts.
If the merger goes ahead, we will review N&P’s non-core activities and wind down those which do not bring value to members or which are not consistent with Yorkshire’s principles of operating prudently. We will improve the efficiency of our combined operations to save costs, and we will invest in the strong elements of N&P’s business – in particular its branch network. There is however, still a great deal of work to do before the proposed merger can happen. This requires a vote of N&P’s members and confirmation by the FSA. If all goes according to plan, the merger is expected to be effective on 1st November 2011.
The merger with N&P is entirely consistent with our ongoing commitment to the high street. In 2010 we expanded our distribution network, opening 14 new high street agencies, and our total network, prior to the addition of N&P branches, now includes 178 branches and 90 agencies.
The way in which consumers want to deal with financial institutions has changed dramatically over the last 15 years – driven by technology as much as anything – and it will continue to do so. Our challenge is allow customers to continue to deal with us in the way in which they want to and at their convenience. Alongside the branch network we have invested substantially in our internet and telephone operations and will continue to do so, but we are in no doubt that our branches – and the personal, friendly and trusted service which we can provide there – will remain absolutely relevant to our members at important times in their lives.
We continue to believe that it is important that institutions as financially strong as the Yorkshire should play their part in supporting their local communities, and we do just that.
In 2010 our community giving programme, including our Charitable Foundation, donated over £500,000 to more than 2,200 registered charities and other good causes. Total donations made by the Foundation since its inception in 1998 now exceed £4 million, of which almost £2 million has been raised through our unique Small Change Big Difference Scheme whereby members donate the pence on their interest to the Foundation.
Yorkshire has a policy of responsible environmental practices, which we have extended to Chelsea. Last year, the Society recycled up to 90% of head office waste, purchased electricity from renewable sources and had initiatives to reduce the consumption of electricity and water within the Society.
Local communities are important stakeholders to us, but our primary stakeholders are, of course, our members and the ultimate test of the value and benefits we bring, is the feedback from them. Our members continue to tell us that they recognise the quality of our service, with nine out of 10 trusting us to the point they would recommend us to their friends and family.
We go to great lengths to give members every opportunity to have their say in the Yorkshire’s affairs. At the heart of our member engagement programme are the Member Forum and the Member Panel, which we consult on a regular basis. The Panel now numbers 9,500 members and provides an invaluable source of member feedback.
The Forum members are extremely enthusiastic and diligent and regularly challenge me and my colleagues on all aspects of the business. We were pleased to welcome new Chelsea members to the forum earlier this month, and I am enormously appreciative of the efforts all members of the Forum put in, and on behalf of the membership, I want to record the Society’s thanks to them and to all the other members who take part in these ongoing initiatives and who take the time to play an active part in the affairs of the society. I would also like to pay particular tribute to Martin Hawkrigg who sadly died in 2010. Martin was a Forum member since its inception, and a critical friend in the best sense to me and the Society.
This is the last chance I will have to thank publically all my colleagues throughout the Society for all their hard work and commitment in what has been the most transformational and demanding year for the Society in my 20 years here. Throughout my time as Chief Executive they have been inspirational, and the levels of commitment and care which they have routinely demonstrated on behalf of our members is one of the Yorkshire’s greatest strengths. In the last year I have been especially impressed by the professionalism of those staff based in Cheltenham who have done a tremendous job despite the considerable personal uncertainty which they have faced.
Once again, it is very pleasing to report that our latest staff opinion survey continued to record high levels of staff satisfaction and belief in the Society’s direction.
Moving on to our future outlook, we believe the economic recovery will be slow and patchy and we think that house prices may well follow a modest downward trend. In the short term, we don’t see any major change in the current environment of relatively high inflation, low interest rates, elevated unemployment and flat mortgage and savings markets.
As far as the building society sector is concerned further consolidation seems likely for as long as market conditions remain difficult. In the immediate term our focus will be on continuing to successfully deliver the benefits from our merger with Chelsea, to complete the proposed merger with N&P, and to concentrate on developing the Yorkshire.
Our commitment to remaining an independent mutual building society remains unaltered because we continue to believe that it is in the best interests of our current and future members.
In short we will stick to our principles of operating in our members interests, as a building society focused largely on traditional mortgage lending which allows people to buy their own homes, funded mainly by the savings of individual members, as well as meeting our members’ wider financial needs.
We strongly believe that mutual organisations should play an increasingly important role in the financial services market – offering customers real choice and prioritising customer needs, in contrast to a plc model which prioritises profits, and we have welcomed therefore the words of support for the sector from the Government, the Treasury Select Committee and the Banking Commission.
We believe the Yorkshire is a good example of a successful mutual organisation which can deliver for its members and compete successfully against the banks. That allows us to once again look to the future with great confidence.
Thank you.
View the voting AGM 2011 results.
Yorkshire Building Society is one of the largest building societies in the UK. We offer a range of financial products and services including: savings & investment accounts, insurance products, loans, mortgages and more.
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Yorkshire Building Society is authorised and regulated by the Financial Services Authority (FSA).
