We said no to other merger pleas, says Yorkshire

Iain Cornish said that building societies and other financial

institutions had asked about a link-up during the financial crisis, as members confirmed the Yorkshire's deal with loss-making rival Chelsea by an overwhelming majority, but declined to reveal more details of the approaches.

Mr Cornish also said the backdrop to the building society sector had been "fundamentally altered" by the crisis and said the enlarged Yorkshire would see its capital base boosted by 200m despite the short-term hit to its capital ratio.

The deal, which was approved by 86.68 per cent of shareholding members and 85.44 per cent of borrowing members, creates a 35bn mutual with more than 2.7 million customers.

The Chelsea brand will be kept on but becomes part of the Yorkshire group, which rescued Barnsley Building Society in 2008, and has left the door open to further acquisitions.

A handful of members objected to the merger at yesterday's special general meeting at a hotel near the Yorkshire's Bradford headquarters, with one complaining that Chelsea was "riding on the coattails of Yorkshire's strong position" and highlighted the small mutual's financial problems.

Chelsea, which recorded a 26m loss for the first half of last year, has struggled to maintain adequate capital.

It was hit with a 41m charge after falling victim to fraud on buy-to-let and self certification mortgages and had to make a 44m provision for failed Icelandic banks.

Mr Cornish said the Chelsea had been hit by an increase in mortgage arrears, a ratings agency downgrade and the knock-on ability to finance itself from the wholesale money markets but insisted its problems were "small" when compared to those of parts of the banking sector.

"Its core traditional building society business has great potential in combination with ours.

"The Chelsea's board has been very clear that continuing on a standalone basis was a viable if difficult option, a judgment with

which I agree, but that merger with the Yorkshire represents a better option for members."

The enlarged group will have a capital ratio of 10.2, compared to Yorkshire's previous level of 12.3, although Mr Cornish said this was partly distorted by a "fair value" adjustment, which had to be made.

There is "no exact timetable" to restore the ratio to the previous level, Mr Cornish added, but he hopes it will be done within one to two years.

He also said that stress testing of the larger group had been carried out which took into account worse economic conditions than seen so far.

Mr Cornish made a blunt appraisal of the effects of financial crisis on his industry, saying the economy is fragile despite the return to growth and that the mortgage market, while it is recovering, remains weak "by any historical standards".

"We are now starting to see signs of recovery and we are more

optimistic about the future, but the impact on our markets and on

building societies has nonetheless been profound, and the legacy of the last two years will be with us for many years to come."

Mr Cornish also repeated his concern over the influence of state-backed banks on the weak savings market.

"Over the next two to three years we face intense competition from a banking sector which includes failed institutions operating with the advantage of massive taxpayer support, as well as competition from National Savings which will be raising funds to support the ballooning public sector deficit."

Yorkshire had "not been immune" from the effects of the financial crisis but Mr Cornish said he expected profitability to improve regardless of the Chelsea deal.

The path to integration

The merger now needs formal approval from the Financial Services Authority, which is seen as a formality, and the two societies would then come together on April 1.

Integrating the Chelsea is expected to take between 12 and 18 months, said Iain Cornish, chief executive of Yorkshire Building Society.

The enlarged mutual's headquarters will be in Bradford, where Yorkshire employs 1,300 staff. Chelsea's head office is split across two sites in Cheltenham and employs 700. One site in Cheltenham will close and some roles will move north. Chelsea members approved the merger last week.

Analysts believe the bulk of job losses will be in Chelten-ham and there could be a rise in staff numbers in Yorkshire.

The combined business will employ around 3,200 staff before any cuts, with a network of 178 branches. Only 11 branches, in the South, are within a mile of each other and a "handful" are likely to close.

Bonuses will not be paid to members of either board as a result of the deal.