Will Northern Rock be re-mutualised?

Northern Rock branch Image copyright PA
Image caption Northern Rock was nationalised in 2008

Those arguing for Northern Rock to be returned to the mutual sector as a born-again building society - and there are many of those in Parliament, from all parties - will feel their case is reinforced by today's results from the biggest building society, Nationwide.

Nationwide's underlying profits were up 30% to £276m.

Its charge for mis-selling PPI credit insurance is a pimple at £16m compared with the grotesque carbuncle of the billions of pounds the banks will have to pay in PPI compensation.

And Nationwide's balance sheet, on paper at least, is stronger than that of any of the big banks, with loss-absorbing core capital equivalent to 12.5% of risk-weighted assets, 2.5 percentage points higher than the banks' capital ratios.

There has also been a significant shift in attitude towards the mutualisation of the Rock at HM Treasury.

Just a few months ago, the Treasury was telling me, in no uncertain terms, that what mattered most was that the taxpayer should receive the maximum possible financial return from the eventual privatisation of the Rock. And that mutualising the Rock flunked that test.

They said (and I paraphrase here) that returning the Rock to its building society roots was a lovely idea for sandal-wearing, vegan, financial hippies. But at the Treasury, where they dine on the raw red meat of harsh financial reality, they were under no illusion that the only realistic option for the Rock was for it to be sold to a proper bank or financial investor.

That's not what the Treasury is saying now - probably because ministers have discovered that those sandal-wearing, vegan, financial hippies throng the backbenches of their parties (even the Tory party) and seem to be bossing around even the influential Treasury Select Committee.

So there is a lot of work going on to evaluate whether the revealed desire of the Coventry Building Society or the Yorkshire Building Society to buy the Rock could be made to work. And my strong sense is that the Chancellor, George Osborne, is prepared to bend over backwards to facilitate the transfer of the Rock to one of these.

Which, before you get too excited, doesn't mean that it will actually happen. Because it is still not clear how building societies that - by definition - can't raise equity capital from investors are going to finance the takeover.

There has been a vast amount of talk - for as long as I can remember - about creating a financial instrument (so-called mutual paper) that would serve as a proxy for equity capital for building societies and that could be sold to investment institutions or even retail investors. The problem is that even if the regulatory obstacles could be cleared, the finance raised in that way would almost certainly be prohibitively expensive for societies.

So I remain slightly sceptical that - even with the goodwill of the Treasury - a way will be found to remutualise the Rock.

I also note, in passing, that the Independent Commission on Banking pointed out in its interim report that, if the Treasury wants to make its top priority the creation of a new bank to challenge the market dominance of the Big Five banks, then it could do worse than crunch the Rock together with the banking assets called Verde being sold by Lloyds (see my note of yesterday for more on this).

Merging the Rock with Verde would help to solve Verde's significant funding problem - in that Verde has more loans than deposits, and the Rock has more deposits than loans. And the enlarged Verde-Rock would begin to look large enough to look like a credible retail competitor to HSBC, Santander, RBS, Barclays and (even perhaps) Lloyds itself.

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