UK Building Societies: Good 2023 Results; Margins to Weaken in 2024
Banking OrganizationsSummary
Morningstar DBRS has released a commentary discussing five mid-size UK Building Societies (Coventry, Yorkshire, Skipton, Leeds and Principality, collectively “the Societies”) 2023 earnings.
Key highlights:
-- The Societies generally reported growth in net profit in 2023 largelly driven by net interest income (NII) growth, which benefited from mortgage lending growth and increased net interest margins (NIM) in a higher interest rate environment. We note deposits costs visibly increased as Societies have been paying out higher deposit yields to their customers, who are also members, compared to the UK market average. Overall, we consider the Societies’ NII and NIM have likely reached a peak in 2023.
-- Asset Quality is holding up with modest signs of deterioration reflecting a resilient UK economic environment.
-- In a bid to consolidate their market positions, two Societies have announced the planned acquisition of mid-size banks since the start of 2024: Nationwide will acquire Virgin Money UK (reinforcing Nationwide’s position as the largest building society), and Coventry taking over the Co-operative Bank (securing Coventry’s position as the second largest one).
“Looking ahead, we expect the Societies’ net interest income to be pressured by increasing competition in the UK mortgage market as well as lower margins.” said Vitaline Yeterian, Senior Vice President, Global FIG at DBRS Morningstar. “In addition, when the Bank of England’s base rate reduces, it will be key for the Societies to actively manage their interest expense down (through deposit pricing) to mitigate the impact of lower rates on interest income.”
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