Skipton BS bad debts swell to £17.2m

The UK’s fourth-biggest building society, which stopped commercial property lending in 2008, insisted the writedowns were a prudent move and were likely to have peaked.

Impairment losses during the six months to the end of July increased from £3.2m in the same period a year ago and £11.6m in the second half of 2010.

They helped to knock the group’s first half pre-tax profits down to £6.3m from £21.7m a year earlier.

Before impairments, Skipton’s operating profits increased 26 per cent to £25.7m.

The figures reflect a tough time for the building society sector, which is battling increased competition from resurgent banks, the weak housing market, muted consumer sentiment, plus the record low interest rate environment.

However, the mutual reported “modest” growth in its mortgage book, as it ramps up lending after a self-imposed hiatus last year.

It increased gross mortgage lending by more than five times during the first half to £717m.

That compared with total new mortgage lending of £481m for the whole of 2010.

As a result, Skipton’s balance of home loans edged up by £83m from £9.03bn at the end of 2010.

“During the first half of 2010 we deliberately shrunk the mortgage book, mainly to improve the capital position,” said Skipton chief executive David Cutter. “We got to a position to believe the time is right to gradually increase that, hence the £83m increase since the year end.

“We are confident with this year’s plan for modest growth.”

The group’s core tier one capital ratio – a key measure of financial strength – increased to 10.5 per cent from 9.9 per cent a year earlier.

As part of its growth plan, Skipton started lending to the 95 per cent loan-to-value market. It also launched new products to attract savers. As a result, its average savings rate increased to 2.56 per cent from 2.44 per cent at the end of December, despite the Bank of England base rate of 0.5 per cent. Gross ISA balances grew by seven per cent in the period to £2.57bn.

Mr Cutter said: “We are mindful that we need to satisfy demand from our members, both existing and new, but in a cautious manner.

“We take into account a number of factors in terms of the economy. “My personal view is that it will be a long, protracted recovery.”

He said the impairments include a number of large commercial property loans and other specialist lending.

“That’s due to prudent provisioning against various commercial loans that were advanced well before the credit crunch,” said Mr Cutter.

“For the vast majority of borrowers this continued low interest rate environment is beneficial to them but there will be some who are impacted by austerity measures and individual circumstances.

“We do expect the (impairment) loss position to improve. I would be surprised to see that figure increasing.” The number of Skipton’s loans where arrears make up more than 2.5 per cent of the total balance increased to 1.48 per cent from 1.42 per cent at the end of 2010.

Mr Cutter said this was in line with the Council of Mortgage Lenders’ figure of 1.47 per cent in March. “We are pleased the terms of the underlying trend of the arrears book which at a group level has shown a very minor increase,” he said.

The group’s proportion of retail funding dropped to 78 per cent from 83 per cent a year earlier, after it completed an £800m securitisation programme.

Before bad debts and provisions, the core building society reported operating profits of £12.4m during the first half, compared with £5.1m losses a year earlier.

The group said its net interest margin improved to 0.5 per cent from 0.35 per cent a year earlier.

The group’s Connells estate agency arm beat expectations despite the tough market.

It reported operating profits of £16.9m, although down on the £29.6m profits a year ago.

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