Building Societies Face New Problems
By J. D. MARVIN THE whole money set-up has changed since the investment merits of the building societies were discussed in the Spectator nearly a year ago. Then Bank Rate was 2 per cent. and Consols 2f per cent. gave a yield of 3f per cent. ; the building societies were paying 21 per cent. tax free to their shareholders and 1 f to I per cent. tax free to their depositors, re-lending the money to owner-occupiers at 4 per cent. Now Bank Rate is 4 per cent. ; Consols yield £4 5s. per cent. gross ; it is not impossible to get a yield of 4f per cent. from a dated trustee stock ; the building societies have also reluctantly changed their scales. After this year's Budget the Building Societies' Associa- tion advised its members to pay 21 per cent. tax free on shares, 2 per cent. on deposits and to charge a minimum of 4f per cent. to owner- occupier borrowers.
These rates are now rapidly becoming standard. As usual there is a fringe of the movement which bids more for money. At the other extreme the Halifax Building Society, thanks to its great liquidity, can still obtain money at 21 per cent. net. A number of societies have also so far refrained from raising the charge to existing owner-occupier mortgagors above 4 per cent. But the investor can obtain the new rates from societies of high financial status and should lay his plans on the basis that they are what the solid body of the movement now pays.
The decision whether it is wise to have part of one's capital invested in a suitable building society is in some respects easier than it was a year ago. It is no longer necessary to emphasise the advan- tages of a form of investment which cannot fall in capital value since it is repayable at short notice. The investor now knows. The fact that the public, provided £95 millions of investment money for the societies last year shows that they were more frightened by the fall in the capital value of quoted securities than they were attracted by the rising yields on gilt-edged.
THE TAX POSITION
The second main investment point in the societies' favour is that to the shareholder and depositor building society interest is free of income tax. " Income tax paid by the Society " is the phrase which the societies use to emphasise the fact that they do not enjoy tax
exemption. They do, however, enjoy a special tax arrangement. They pay income tax on their members' interest at a " composite rate " which is a statistical estimate at the average tax liability of all building society shhreholders and depositors, taking the no-tax man ' along with the reduced-rate man and the standard-rate man. Last year the " composite tate " was 5s. 3d. in the £. There are reasonable hopes that when the 1952 rate is settled it should be a few pence lower, thanks to the increased allowances in this year's Budget.
The societies enjoy a further advantage. Their profits tax is limited by a spacial clause. Last year when profits tax was a charge deducted before income tax the maximum was 6 per cent. on the gross profit, before charging interest on borrowed money. This year Mr. Butler has discontinued the practice of making profits tax a charge against income tax. He has also cut the maximum liability of the building societies to 2 per cent. of the net profit.
As a result of a decision taken two years ago, when Sir Stafford Cripps was Chancellor, the special attraction for surtax payers has now gone. From April this year the right to avoid " grossing up " building society interest for surtax purposes disappeared.
The net result of all these changes is that the argument in favour of having part of one's capital in a suitable building society is far from weakened. The case is strongest for the investor in the 9s. 6d. tax class. The special attractions to the surtax payer have dis- appeared. But no new avenue of escape has been opened to him. So there is no reason why he should take his money away. On paper the argument is weakest for the low income man who does not reach the 9s. 6d. tax level, because it is part of the " composite rate " arrangement that he forfeits his right to reclaim tax on his building society interest. In practice his group provides a large part of the finance of the societies, because it is the class to which ready access to capital and no risk of a capital loss appeal most strongly.
To all income groups the building societies offer a means of earning a return on capital and at the same time remaining liquid in a period when share markets are risky and unpromising.
CHOOSING A SOCIETY It would be the height of, folly to regard that as the end of the problem. The investor must also address his mind to choosing the right building society for his needs and the right form for his invest- ment. It is almost as easy to choose the wrong building society as to buy shares in the wrong company—almost but not quite. Of the 807 building societies in this country the large majority are soundly conducted. There is a wide choice, but if the investor applies simple rules of common. sense he will soon find whether any particular society satisfies his needs. One must discard the specious argument which says " This society is offering 21 per cent. when the others pay 2i per cent. Surely that shows that they must be a progressive well-managed society able to do better than the average.'' Such reasoning is based on a misconception of what a building society is. It is not an industrial company whose object should be to make a profit for the shareholders. It is a mutual association of borrowing members and lending members. The duty of the directors is to hold the balance fairly between them, rather than to make the utmost profit for the shareholders. A fair balance may mean different things at different times but the directors 'must try to find the rate of share . interest which will attract as much money as they think they can prudently lend and provide an adequate proportion of liquid funds. They have no object in bidding higher.
Secondly, one must satisfy oneself that the society of one's choice is manifestly able to fulfil its undertaking to repay capital in bad times as in good. That involves a careful examination of the balance- sheet to see whether the liquid assets maintained area strong and whether there are substantial reserves. There are societies which are over 20 per cent. liquid and societies whose reserves are over 5 per cent, of total liabilities. The investor may not need these quasi- banking standards ; there is still a wide choice of societies which are 'between 10 per cent. and 12sper cent. liquid and whose reserves are not less than 4 per cent, of the balance-sheet total. At this time most societies are glad to have, additional money and the choice is free.
This year the tests should be more stringent than ever. The liquid assets of building societies consist of gilt-edged stocks, loans to local authorities and cash. Gilt-edged stocks have fallen sharply, even the dated stocks which the societies normally buy. Many boards of directors argue that since the Government stocks will ultimately be redeemed at par the depreciation will in due course be made good. Reject that argument. The investor wants to know that they can pay now—not at some unspecified date in the future. The societies show the market value of their gilt-edged stocks, as well as the balance-sheet figure. The safe course is to deduct any depreciation of gilt-edged securities when calculating the liquid assets. If there is a bank overdraft that also should; of course, be deducted.
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