Newcastle Building Society risks losing £43m

Dec 20 2008 by Peter McCusker, The Journal

THE boss of the region’s largest independent building society has reassured its 450,000 members their money is safe after revealing it could lose up to £43m following the collapse of two Icelandic banks.

Newcastle Building Society chief executive Colin Seccombe said that taking the one-off hit was “bad news” for the society and that he was personally “disappointed” and “upset” by events.

The business, which last year saw profits rise nearly 16% to £8.1m, said it would go into the red this year because of the Icelandic investment, although it continues to trade profitably.

But Mr Seccombe moved quickly to reassure savers, who have £2.9bn deposited with the society, by initiating a fully-subscribed £10m recapitalisation to boost its already healthy capital reserves of £300m. He said: “We remain a very strong, safe, secure place for deposits and our savers need not have any concerns about the security of the money which has been placed with us.

“Despite taking this hit we are a business which is well capitalised and will continue to trade profitably.

“The problems we have encountered are completely different to those faced by Northern Rock. We have suffered a one-off hit; the Northern Rock had to be nationalised because it was unable to get working capital when the wholesale money markets froze.

“Sustaining this loss is bad news for the business and I cannot pretend anything other. It is a significant amount but it is very much a one-off.”

The Icelandic government took over its major banks in October when it emerged they did not have adequate funds to meet their liabilities, and depositors, which also included many North East councils, look set to lose billions of pounds.

Mr Seccombe said the worst-case scenario for the Newcastle was that it would lose the full £43m it had invested in two Icelandic banks, Kaupthing and Landsbanki.

However, he also revealed that the Newcastle had held on to “substantial” deposits from the two banks itself and was prepared to fight a legal battle with the banks’ administrators to retain these deposits.

James Ramsbotham, chief executive of the North East Chamber of Commerce, said: “The Newcastle Building Society is a strong and well-run financial institution based here in the North East.

“It is pleasing to see it has taken decisive action to deal with what was an unforeseen event. It is good to see it is on a sound footing and what is really important at times like this is that the North East gets behind its business institutions.”

Mr Seccombe stressed the issue would have no direct impact on staff at the 140-year old society.

But he said the Newcastle’s plans to add 250 employees to its current 1,300-strong workforce in the coming year may be shelved and that he would not know staffing needs until he had completed talks with companies for which it provides services.

The Newcastle has already lost work as a result of the collapse of Landsbanki, for which it carried out some back-office functions.

In response to the looming losses, the Newcastle yesterday boosted its balance sheet through a £10m placement of Permanent Interest Bearing Shares, which were snapped up immediately by institutional investors.

Page 2: Read Newcastle Building Society’s full statement