The Dunfermline Building Society (DBS) has lined up a £30m capital injection from the Building Societies Association over and above a £25m funding package secured from the Scottish goverment as it seeks to shore up its capital position.
The group must have its refunding package in place by Tuesday when it is expected to unveil losses of £26m for the year to December 2008.
The sticking point is that both the promised capital injections are conditional on the UK Treasury also lending its support — and there remains a lack of certainty as to whether the Treasury will deliver. One insider said: “The ball is now very much at the Treasury’s feet. They need to have demonstrated they will support us before then . . .
“I genuinely don’t know what their intentions are. I am hopeful, however, that common sense will prevail. If they don’t support us, given the two offers that we have on the table, it would be illogical.”
Building Societies Association members including Yorkshire, Nationwide and Chelsea are understood to be subscribing for £30m in permanent interest-bearing shares in Dunfermline Building Society — which the group would, over time, repay with interest — but has said its offer is conditional on the Treasury also pledging a smaller sum.
The Scottish government is willing to contribute £25m on condition the UK government permits it to do so in a way that does not contravene state-aid rules. Altogether this implies Dunfermline Building Society has £55m of capital support in the bag and only needs £5m from the Treasury.
A source said he was surprised, given the urgency of the situation, that the Treasury is still refusing to talk directly to the Dunfermline’s board. Instead negotiations are being conducted through the FSA. The source said: “We believe the Treasury thinks we need a capital injection of £60m to give us sufficient headroom.”
The additional capital cushion is required under a “stress test” scenario — meaning in the event of markets and asset prices weakening considerably from current levels. “They want to take a very pessimistic view of the future and we’re not going to argue,” said a source.
Dunfermline Building Society, which has assets of £3.3 billion and 312,000 customers, is expected to show an operating profit of £1m to £2m for the year to December 2008.
However the need to make a £32m provision against its commercial property book, as a result of reduced valuations, and a £3m to £4m levy by the financial services compensation scheme will translate this into a loss of £26m.
The source rubbished suggestions the society is near insolvent. “Our liquidity is very strong. We have reserves of £120m.” These are retained profits from previous years. The source said the current board, led by chairman Jim Faulds, resents the way it has been “vilified in the media”.
He said the society’s woes — which stem from a 2002 decision to push into commercial property and an overspend on an IT project — owe their origins to decisions made by a previous management team led by chairman Sir John Ward and chief executive Graeme Dalziel.
The society’s future is also expected to be debated in the House of Commons, with Willie Rennie, MP, putting down a motion for a debate of the Treasury’s handling of the situation.
A source said reports that auditors Deloitte have refused to sign off the institution’s accounts are erroneous.
This article was written on Friday, 27 March 2009 but as never published in the hard copy of The Sunday Times as it was overtaken by events. On Saturday, 28 March 2009 it emerged that HM Treasury, which had refused to talk either to me or to the Dunfermline was seeking to mount a rescue break-up of Dunfermline Building Society.