Annual report and accounts 2009 (PDF) - Coventry Building Society

DIRECTORS’ REPORTBUSINESS OBJECTIVES AND ACTIVITIESThe Society’s principal objective is the provision of a range ofpersonal financial services including mortgage finance forhouse purchase and improvements, savings, investmentaccounts and insurance.The directors consider that no activities carried out during theyear were outside the powers of the Society.BUSINESS REVIEWThe Society performed strongly in 2009, achieving excellentresults for a mortgage lender in difficult economic conditions.This success was based on strong fundamentals of securefunding, the ability to attract and retain retail savings,continued operational efficiency and strong asset quality. Thisunderlying strength enabled the Society to continue lendingand in doing so achieve record mortgage market share,affirming the board’s belief that the Society has the rightbusiness model for these difficult conditions.External environmentThe financial crisis and resulting worldwide economicrecession continued to define the market environment in2009, damaging confidence and creating pressure on theoperating models of all financial organisations.At the start of the year, the UK housing market facedparticular pressures. A shortage of mortgage availability,with many lenders unable to fund their usual level of newloans, combined with the impact of the recession, broughtabout falling house prices and sales.The Government, faced with the twin imperatives of stabilisingthe financial sector, and in particular those failing banksdeemed systemically important, and lessening the impact ofthe recession, intervened on an unprecedented scale. Thesums of public money deployed to support the financialsystem resulted in a level of national debt that is likely to be akey influencer of economic policy for many years to come.The support for Royal Bank of Scotland and Lloyds BankingGroup involved a substantial investment of public funds andhave, together with ongoing responsibilities for Northern Rockand the lending arm of Bradford & Bingley, taken significantelements of the UK banking sector effectively into publicownership.Confidence in UK financial services, once seen as a worldleadingindustry, has been severely damaged and the longterm impact of regulatory attempts to prevent a potentialrecurrence are yet to be understood.The Government’s actions to reduce the impact of therecession appear to have been effective in the short term butat a cost to the public finances which may define the economyfor many years. The Bank of England Base Rate hasremained at an historically low 0.5% since March 2009 andthis attempt to stimulate spending was backed by aQuantitative Easing programme of £200 billion as the Bankattempted to improve liquidity across the market.Monetary measures were backed by fiscal policies includingthe temporary reduction of VAT to 15% and specific action toprotect a housing market that at the start of the year wasshowing significant reductions in house values and overallmarket volumes.Collectively these measures appear to have helped prevent acollapse of the housing market. Prices rose in the secondhalf of the year, though the lack of volume indicated that ashortage of supply was a major factor in this. Repossessionsin the industry were also less than initially expected as the lowinterest rate environment and proactive approach taken bymost lenders enabled more people to remain in their homes.Nevertheless, the board believes the outlook for the economyin general, and house prices in particular, remains uncertain.The lack of volume in the housing market was also a result ofthe reduction in the capability of many lenders to fundmortgages. The wholesale funding market remainedrestricted and as a consequence the retail savings marketwas very competitive and the relative cost of retail funds wasexpensive.The difficult market conditions exposed weaknesses withinthe building society sector too. 2009 was marked by thefailure of Dunfermline, the merger of Yorkshire and Chelseabuilding societies and the introduction of a new debt for equityscheme to recapitalise West Bromwich Building Society. Thelatter raised particular questions about the dilution ofmutuality amongst building societies and, overall, the futureof the sector was questioned more during 2009 than at anytime during the financial crisis. Credit ratings were reducedwith some building societies being marked down significantly.Impact on Coventry Building SocietyDespite the difficult market, the Society performed verystrongly, based on the consistent application of a simpletraditional building society model of attracting and retainingnew savings balances to support responsible lending.The Society’s strength is its ability to maintain this traditionalapproach without recourse to new or increased levels of risk.This has meant that the Society has avoided the pitfallsexperienced by some competitors which have restricted theirability to lend.9