Norwich and Peterborough Building Society

Dear Mr. Sargeant,

First, as to your question about sleeping at night. No one faced with trying to guide a business with 1,000 staff through the current market difficulties sleeps well every night - and I am no exception. I can say, however, that on my watch the Society has not been involved in any of the bad lending, misjudged investments in foreign banks or major frauds that have hit the banks or any of our peers, but that has provided no shelter to our income which has fallen by over a 1/3rd in the current year due to the adverse movement in interest rates following the collapse and rescue of the banks. As a result, we have had to reduce costs. We have done so twice at our Head Office but have now had to reduce the branch network. I am truly sorry to disrupt customers such as yourself and to lose excellent staff, but our overwhelming priority is to ensure that the Society's financial condition remains sound and our savers money safe.

Secondly, the cost of our logo/brand change. The Society worked on this project across 2 years - 2007/8. The discreet cost of the work on the research and design was spread over that period. Implementation was achieved through normal recurrent stationery re-ordering and branch re-decoration work. All these costs were found within the Society's normal annual marketing budget of around £4m; other marketing activity was held back to make way for the project. That part of the expenditure in 2009 had no impact on our decisions on branch closures. It remains our intention to roll the re-design out as we do normal marketing and branch work over the next few years.

On the question of consulting customers. The Society has a legal requirement to give 90 days' notice to customers that it intends to close the branches. During that time we will confer with customers about alternative banking arrangements available to them and you are welcome to discuss your requirements with the staff at either Colchester or Clacton. You are also welcome to express your views at the Society's AGM, which will be held at 18.00 on 26th April, 2010 at St. Andrew's Hall, Norwich and where a vote will be held on directors' remuneration and re-election in the normal way.

Thank you for your email dated 14th May.

I have previously explained that Moody’s have decided to take a very pessimistic view about the outlook for the UK housing market. In doing so, they have downgraded the ratings of 9 nine societies, including N&P and several retail banks.

We are surprised and disappointed by their action: when we saw analysts from Moody’s in February, they commented that they saw our positions as stable but had a negative outlook on the UK mortgage lending industry. To see such a changed opinion in such a short period is very volatile. I can assure you that we have not changed our lending book during that time.

If you the wish to examine in detail the make-up of our lending risks, you can see these fully laid out in a document we publish each year called ‘Risk Profile Disclosure’. This document can be found on our website.

This gives a full breakdown of our buy-to-let, non-conforming and commercial lending, as well of our prime residential lending. Our strategy as a traditional building society has always been to focus on good quality lending with detailed controls on assessment of borrower affordability.

Finally, sticking to the facts rather than opinions, you will be pleased to know that our arrears, while rising as we might expect under these economic conditions, continue to be low at less than 1/3rd of the industry’s average. At the end of the day that is what will count.

The following graph provides a comparison of our arrears levels with the industry as a whole:

Source: Council of Mortgage Lenders.
Arrears measured as amount owed greater than 2.5% of mortgage balance.

Thank you for your email dated 28th April.

Moody’s and Fitch have both rated the Society, along with 14 other mortgage banks and building societies. Two weeks ago Moody’s decided to take a much more pessimistic view of the UK housing market and to introduce a new way of testing bank and building society balance sheets. As a result, they changed their opinion on the 14 out of the 15 banks and building societies and in doing so changed our credit rating. We are disappointed and do not agree with their new opinion, but it will take time to change their minds. In the meantime, we await Moody’s publishing a revised text of their rating.

Given the change in this rating and the impact on a funding vehicle called a covered bond we, like all of the affected societies are in discussion with the FSA. We are not, and have not been asked to, be in discussion with the Bank of England. It may turn out that there is no impact on the covered bond and we are working with Moody’s on proposals for this.

Alongside the public credit rating given to the Society by Moody’s and Fitch, the Society has also received a private rating from the FSA, following which they have granted us an Institutional Certificate under the Government’s Credit Guarantee Scheme: this enables us to borrow if we need to in other ways from the Bank of England and from the wholesale markets with the benefit of a Government guarantee. If we find the renegotiation of the covered bond too complicated, we may use one of the other methods available under the Government’s Credit Guarantee Scheme or even repay the borrowing. The Society’s liquidity position is particularly strong following a successful ISA “season”.

N&P has not bought any mortgage books from GMAC, Lehman or other similar sources. We originate and underwrite all of our own lending and we have turned away many offers to buy mortgage books in the last 10 years because they were poor credit risks.

N&P does not lend money without seeking evidence of income (what is known as self-certified mortgages) and all mortgage loans require individual affordability assessments. We focus on whether the borrower can afford the mortgage before looking at the value of the property securing the loan.

The Society’s arrears are one-third of the industry average. Our arrears actually fell in March compared with the position at the end of February, including falls in arrears in buy-to-let lending and commercial lending. The following graph shows how our arrears for residential mortgages compares with the industry as a whole.

Source: Council of Mortgage Lenders.
Arrears measured as amount owed greater than 2.5% of mortgage balance.

The Society routinely reviews its capital position and our capital can withstand house price falls greater than the highly pessimistic 60% used by Moody’s in its recent stress testing. Our capital levels and business plan has also been stress tested in this way by the FSA and been passed. As a result, we can comfortably state that our members’ deposits are adequately protected by our capital strength.

N&P is a traditional Building Society. We have not changed our focus on this.

I hope that my reply helps to reassure you.

Our statements are printed and despatched by a local mailing house and have been for many years. We regularly review and monitor the service we are receiving for the price we pay, both with them and the other third parties involved such as Royal Mail. We assess the contract against cost, confidentiality and delivery criteria.

The confidentiality of our members’ financial affairs is extremely important to us and our arrangements with the mailing house are under formal contract which includes a significant legally binding confidentiality clause. We monitor their compliance with the contract terms by periodic visits.

The mailing house are subject to strict service delivery standards: typically the statement will be provided (by electronic means) to the mailing house on the 2nd working day of the month. This is required to be dispatched within 3 working days of them receiving the information so statements would typically enter the postal system on the 5th working day of the month and should arrive within 2 working days.